Last month, the United States Internal Revenue Service (IRS) sent approximately 10,000 letters to cryptocurrency holders regarding their crypto holdings. The IRS has begun sending letters to taxpayers with digital currency transactions that potentially failed to report income and pay the resulting tax from digital currency transactions or did not report their transactions properly.

Those who already received letter 6173, titled “Reporting Virtual Currency Transactions” on July 16 now have less than a week to reply to the IRS. The most serious of the trio of letters that were disseminated (sent alongside letters 6174 and 6174-A), 6173 requires immediate action.

If recipients do not respond to this letter in time, their tax accounts will be audited by the IRS. Recipients are required to respond to this letter within 30 days of the date listed on the letter and requires all crypto transactions between the years of 2013 to 2017 be reported. Reports must include transactions between wallets and exchanges.

Related: How Crypto Is Taxed in the US: A Taxpayer’s Dilemma

Recipients of letter 6173 have the following options:

If you failed to report for one year or all years from 2013-2017

Submit delinquent returns as soon as possible. File the delinquent returns with an explanation of the reason for the failure. If your failure to report was not due to delinquency or evasion, you need to provide an explanation to exhibit good faith. Then, the IRS may not pursue legal actions. However, if the cause is not reasonable in the eyes of the IRS, you may be subject to civil or criminal penalties.

If you filed incorrect reports for one year or all years from 2013-2017

If you did not report your full activity, including all transactions from all blockchains and exchanges since 2013, then you have filed an incorrect report. Due to a lack of knowledge regarding crypto tax practices, many who reported in the early years of crypto did not submit an accurate report. If you belong to this group, now is your chance to rectify errors. File an amended return on incorrect calculations from 2013-2017 by submitting IRS tax Form 1040X.

If you believe you have accurately and completely filed your reports with the IRS

Submit an affidavit stating that you have filed the entire history of currency operations, including the means taken to ensure compliance with IRS requirements. Within the affidavit, be sure to report that your filing is “true, correct and complete,” as it must meet all three criteria. Additionally, you must submit all copies of previous reports.

What is true, correct and complete?

Full activity report. The IRS requires tax compliance and reporting for cryptocurrency traders and investors across all their accounts. The report must include all activities — wallets, blockchain and exchange information — for the relevant years. You can use a system that assists you to get a full report of all your transactions since day one. Today, some systems, based on blockchain, use distributed ledger technology to trace your entire history of currency activity from day one and provides alerts on incomplete information for retrieval, plus addresses that may have been forgotten. In what is essentially a turnkey tax solution for crypto, it can run the full gamut of related activities — including wallets, exchanges, initial coin offerings, etc. — and even goes so far as to issue one comprehensive report on the relevant years of activity for each year separately. Correct old mistakes. Many had previously only reported when they had bought into or out of fiat. This is indeed relevant, as are transactions of crypto to purchase goods, other crypto assets and even stablecoins like Tether (USDT). Make sure your calculation is right. While the specific identification method identifies the exact Bitcoin that you sold and calculates your tax liability on the sale of the actual Bitcoin based on the blockchain evidence, the first-in-first-out (FIFO) method does not take real-time user activity into consideration. To calculate in FIFO method, make a list of all purchases and a list of all sales. Then, match them. Take the first one in the purchase list and calculate the tax results as if you sold it at the price on the date from the first sale on the sales list. This can sometimes result in over taxation, especially if you bought your first Bitcoin (BTC) in the early years. In order to calculate using the specific identification method, you need to identify (by using evidence from the blockchain) the purchase dates and sales date of all Bitcoin that came in and out of your wallet for the same tax year. Then, you match the purchase and sale dates and prices of the same Bitcoin using blockchain data and finally, calculate the tax liability. If you don't know how to do this, you can use a calculation platform.

Regardless of the letter you received and the steps you are advised to take, it is recommended that you consult with a tax professional to assist in compiling an accurate and comprehensive report.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.