If you’ve received IRS Letter 672C, the response has four parts: note the deadline and control number on the letter, pull records for the income the IRS believes you left off, file an amended return (Form 1040-X) for each affected year, and mail your reply by certified mail before the deadline passes. Knowing how to respond to IRS Letter 672C matters because the letter is a pre-examination contact, not a final bill — you still control whether this ends with a voluntary correction or escalates into a formal audit.
What the Letter Actually Is
Letter 672C is the IRS telling you that third-party data doesn’t match what you reported. It is not a Notice of Deficiency, which formally proposes additional tax and starts your 90-day clock to petition Tax Court. It is not a CP2000, which shows line-by-line adjustments the IRS has already calculated. Letter 672C is more open-ended: the agency has flagged a problem and is asking you to fix it before it spends examination resources on your case.
The two most common triggers behind these letters are unreported digital asset transactions and undisclosed foreign financial accounts or assets. Both are areas where the IRS now receives extensive third-party data, so the older assumption that crypto swaps or overseas accounts stay invisible no longer holds.
Read the Letter and Calendar the Deadline
Find three things on the letter before anything else: the response deadline, the control number, and the phone number for the IRS unit handling your case. You’ll reference the control number on every document you send back so your response gets routed correctly.
If the deadline is tight, call that phone number before it expires and ask for more time. The IRS will generally grant an additional 30 days if you request the extension inside the original window. What you cannot do is let the deadline pass in silence. Silence is how a 672C turns into an examination, and eventually a statutory Notice of Deficiency.1Internal Revenue Service. Understanding Your IRS Notice or Letter
When you do respond, send everything by certified mail with return receipt requested. That gives you proof of when the IRS actually received your package if timeliness ever becomes an issue.
Figure Out What the IRS Thinks You Missed
The letter itself is often light on specifics. Your job is to reverse-engineer the mismatch by looking at the same data the IRS has.
Digital Assets
The IRS treats cryptocurrency and NFTs as property. Every sale, trade, or exchange is a taxable event, including crypto-to-crypto swaps where you never touched dollars.2Internal Revenue Service. Frequently Asked Questions on Digital Asset Transactions Brokers began reporting gross proceeds from digital asset transactions on Form 1099-DA in 2025, and starting with assets acquired after 2025, they also report your cost basis.3Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets If an exchange reported transactions to the IRS that never made it onto your return, that gap is what the 672C is likely about.
Foreign Accounts and Assets
Two separate reporting rules apply, and missing either one can prompt the letter.
The FBAR (FinCEN Form 114) is required if the combined value of all your foreign financial accounts exceeded $10,000 at any point during the year. It’s filed electronically with FinCEN, separately from your tax return.4Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
Form 8938, required under FATCA, has higher thresholds and travels with your Form 1040. For U.S. residents filing single or married filing separately, the thresholds are $50,000 on the last day of the year or $75,000 at any point during it. Joint filers use $100,000 year-end or $150,000 at any time. Taxpayers living abroad face higher thresholds still.5Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets The IRS receives foreign account data directly from other countries under FATCA information-exchange agreements.
Pull the Documentation You Need
For Crypto
Download complete transaction histories from every exchange and wallet you used during the years in question. For each transaction, you need the acquisition date, cost basis (what you paid), disposition date, and proceeds received. Gain or loss is proceeds minus adjusted basis.2Internal Revenue Service. Frequently Asked Questions on Digital Asset Transactions
Cost basis is where most crypto cases are won or lost. If you can’t document what you paid for an asset, the IRS may treat the entire sale as taxable gain. Wallet addresses, exchange records, and blockchain transaction IDs all help establish basis. Acquisition dates matter separately, because assets held more than a year qualify for long-term capital gains rates.
Report transactions on Form 8949 and summarize on Schedule D. For each digital asset, include the name or symbol, the exact number of units, and the transaction ID where available.6Internal Revenue Service. Instructions for Form 8949 (2025)
For Foreign Accounts
Pull bank and brokerage statements for every foreign account for each year at issue. You need the peak balance during the year (the FBAR trigger is maximum value, not year-end), and records of any interest, dividends, or capital gains produced. That income belongs on your Form 1040 whether or not you ever repatriated the money.
If you filed FBARs or Forms 8938 in prior years, dig up the copies so you can identify exactly which accounts went unreported. Cross-reference statements against your original returns to pinpoint the discrepancies.
File Amended Returns for Each Year
If the review confirms you underreported, file Form 1040-X for each affected year, one form per year.7Internal Revenue Service. Instructions for Form 1040-X (Rev. December 2025) Show the original figures, the changes, and the corrected numbers. Attach the supporting schedules: updated Form 8949 and Schedule D for crypto, updated Form 8938 for foreign assets when required. Pay any additional tax with the amended return, since interest runs from the original due date and keeps accruing until you pay.
Include a cover letter with your submission. Reference the Letter 672C control number, explain the corrections, and list the enclosed documents. That cover letter is what ties your amended returns to the open compliance inquiry instead of letting them drift into general processing.
Consider the Streamlined Procedures Before You File
If the unreported income involves foreign financial assets and your failure to report was not willful, stop before filing straight amended returns and look at the IRS Streamlined Filing Compliance Procedures. These are built for taxpayers who can certify that noncompliance came from negligence, inadvertence, mistake, or a good-faith misunderstanding of the law.8Internal Revenue Service. Streamlined Filing Compliance Procedures
Two tracks exist. If you live outside the U.S. and meet the foreign residency requirements, the Streamlined Foreign Offshore Procedures waive all penalties. If you live in the U.S., the Streamlined Domestic Offshore Procedures apply a 5% miscellaneous offshore penalty on the highest aggregate balance of the unreported accounts during the compliance period.9Internal Revenue Service. Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States Frequently Asked Questions and Answers Either way, you still owe the back taxes and interest.
The eligibility catch: once the IRS has initiated a civil examination of your returns for any year, streamlined is off the table.8Internal Revenue Service. Streamlined Filing Compliance Procedures Letter 672C is a pre-examination contact, so receiving it doesn’t automatically disqualify you. But the window narrows fast if the IRS escalates, which is another reason to move on this quickly. The streamlined route does not apply to purely domestic issues like unreported crypto with no foreign angle.
What You’re Exposed To If You Don’t Fix It
The penalty stack is the reason a voluntary correction usually beats waiting for an examination.
The everyday penalty is the accuracy-related penalty: 20% of the underpayment attributable to negligence or disregard of tax rules.10Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Forgotten crypto trades typically sit in this bucket.
If the IRS determines the omission was intentional, the civil fraud penalty is 75% of the underpayment attributable to fraud.11Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty The fraud penalty replaces the 20% accuracy penalty on the same dollars rather than stacking on top of it. The IRS carries the burden of proving fraud.
FBAR penalties are separate and additional. The statutory base amounts are $10,000 for non-willful violations and $100,000 (or 50% of the account balance, whichever is greater) for willful violations, adjusted annually for inflation.12Office of the Law Revision Counsel. 31 USC 5321 – Civil Penalties The 2025 inflation-adjusted maximums are $16,536 per non-willful violation and $165,353 for willful violations (or 50% of the account balance, whichever is greater).13eCFR. 31 CFR 1010.821 – Penalty Adjustment and Table After the Supreme Court’s 2023 decision in Bittner v. United States, non-willful FBAR penalties apply per annual report, not per account, so five unreported accounts in one year cap at one non-willful violation for that year.
Interest also accrues on unpaid tax from the original due date and compounds daily. For returns several years old, the interest alone can be significant.
Reasonable Cause If Penalties Still Come
Penalties are not automatic. No accuracy-related or fraud penalty applies to a portion of an underpayment if you can show reasonable cause and good faith.14Office of the Law Revision Counsel. 26 USC 6664 – Definitions and Special Rules Non-willful FBAR penalties have a parallel reasonable cause exception when the account balance was properly reported.12Office of the Law Revision Counsel. 31 USC 5321 – Civil Penalties
There’s no bright-line test for reasonable cause. Factors include reliance on professional tax advice, the complexity of the reporting rule, and evidence of honest effort to comply. A taxpayer who asked a CPA about foreign account reporting and got wrong advice is in a much stronger spot than one who ignored the rule. Save anything that shows good faith — emails to advisors, engagement letters, contemporaneous notes.
How Many Years the Letter Can Reach
The general assessment statute is three years from the date you filed.15Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection Several exceptions matter for 672C cases:
- Six years if you omitted more than 25% of your gross income, or if the omission exceeds $5,000 and relates to a foreign financial asset reportable under FATCA.
- No time limit if the return was fraudulent with intent to evade tax.
- No time limit for any year you never filed at all.
The foreign asset exception is why 672C letters often reference several years back. Even a modest omission of foreign-source income can pull open the six-year window.
When to Bring In a Representative
You can authorize a CPA, enrolled agent, or tax attorney to handle the entire response by filing Form 2848, Power of Attorney and Declaration of Representative.16Internal Revenue Service. About Form 2848, Power of Attorney and Declaration of Representative Once it’s on file, your representative can receive notices, respond to correspondence, negotiate, and pull your account transcripts. If cost is a barrier, the Taxpayer Advocate Service can point you to a Low Income Taxpayer Clinic.
For crypto cases with unclear cost basis or foreign accounts with FBAR exposure, representation usually pays for itself. Penalty exposure on offshore cases alone can dwarf the professional fees, and someone who works these cases regularly will know which voluntary disclosure options are still available and how to frame the facts to keep the response on the accuracy track rather than the fraud track.
You also keep the right to disagree with the IRS’s conclusions and to appeal most decisions to the Independent Office of Appeals before litigation. If your response doesn’t resolve the matter, that appeal is your next step.