In a crypto audit, the most important records are often not yours. They belong to your exchanges, your bank, your payment apps, and sometimes the people you traded with. The IRS can go get them. But before an examiner contacts anyone about you, the law requires notice.

That notice is Letter 3164. If you have one, the IRS is telling you it intends to verify your story with someone else. Here is what the rule requires and how to use the time it gives you.

The statute: IRC 7602(c)

IRC 7602(c)(1) says an IRS officer or employee may not contact any person other than the taxpayer with respect to the determination or collection of the taxpayer’s tax liability unless the contact occurs during a period, not greater than one year, specified in a notice that:

  • informs the taxpayer that contacts with persons other than the taxpayer are intended to be made during that period, and
  • except as otherwise provided by the Secretary, is provided to the taxpayer not later than 45 days before the beginning of that period.

The statute adds that a notice may not be issued unless, at the time, the IRS intends to contact third parties during the period. That came from the 2019 Taxpayer First Act. Before it, the law required only “reasonable notice in advance.”

Letter 3164 and the 46th day

The Internal Revenue Manual implements the rule in IRM 25.27.1. It says employees may not contact a third party until the 46th day following the date of the notice. It names the notice: “The Letter 3164, Third Party Notice, is issued by Collection and Exam employees to notify taxpayers of potential TPCs.” It notes there are more than twenty versions, that the notice must include the tax periods at issue, and that it should only be issued when the employee intends to contact a third party.

The IRM also notes that effective August 15, 2019, Publication 1 no longer satisfies the advance notice requirement. You should get a specific letter.

If the IRS plans to keep contacting third parties beyond the one-year period, the IRM says employees should issue a refresher Letter 3164 no less than 46 days before the current period expires.

You can get the list of who was contacted

IRC 7602(c)(2) requires the IRS to periodically provide you a record of persons contacted during the period about your tax liability, and to provide that record on request.

Ask for it. In a crypto case, the list tells you which exchanges, banks or counterparties the examiner went to, and therefore which records the examiner now has that you may not have seen.

The exceptions

IRC 7602(c)(3) says the notice rule does not apply to any contact you authorized, if the IRS determines for good cause that notice would jeopardize collection or may involve reprisal against any person, or with respect to any pending criminal investigation.

The criminal investigation exception is worth noticing. In a civil audit you get Letter 3164. In a criminal investigation, the rule does not apply.

The jeopardy and reprisal exceptions require an IRS determination for good cause, and they are tied to specific risks: that notice would jeopardize collection, or that it may involve reprisal against someone. For most crypto taxpayers, the practical takeaway is simple: in an ordinary civil examination, expect the letter before the contacts begin.

Who counts as a third party in a crypto case

Anyone other than you. In crypto examinations that commonly means centralized exchanges, payment apps, banks that funded or received exchange transfers, employers or clients who paid you in crypto, and sometimes counterparties to large peer-to-peer trades. It can also mean your former return preparer.

Each of those contacts produces something the examiner did not get from you. Exchange statements show trades and transfers. Bank records show dollars moving on and off the platform. A client’s records show crypto paid to you as compensation. A preparer can describe what you told them and what you did not.

That last one deserves a pause. Reliance on a preparer is one way to show reasonable cause for penalties, but it only works if you gave the preparer complete information. A preparer contact will test that. See reasonable cause in crypto cases.

Option one: give the examiner the records first

The IRM says that in most cases, “it is preferable for the employee to first try to obtain the information directly from the taxpayer and/or representative or obtain taxpayer approval to contact third parties using Form 12180, Third Party Contact Authorization Form.” See IRM 25.27.1. It also says those are not legal requirements.

That gives you a practical opening. If the examiner wants your exchange history, you can usually get it to them faster, with a reconciliation and an explanation attached, than the exchange can. A response to the Information Document Request that is complete and organized often makes the third-party contact unnecessary.

Option two: authorize targeted contacts

Sometimes you cannot get the records yourself. The exchange closed your account, the platform shut down, or the history is too old to export. In that case, authorizing a specific contact with Form 12180 can be the cleanest way to get the data in front of the examiner. You control the scope of what you authorize.

Talk with your representative before signing anything. A narrow authorization for a specific record is different from an open-ended one.

There is a practical trade-off here. Authorizing a contact speeds things up and lets you shape what is requested. Declining means the IRS waits out the notice period and then makes its own requests, on its own terms. Neither choice is wrong in every case. The right one depends on what the third party’s records will show and whether you have already seen them.

What exchanges and banks can be asked for

A third-party contact is not necessarily a summons. Many contacts are informal requests. When the IRS needs compulsion, IRC 7602(a)(2) authorizes it to summon any person having possession, custody or care of books of account relating to the taxpayer, or any other person the IRS deems proper. Third-party summonses then come with their own notice and quash rights under IRC 7609(a) and (b), which do not apply to John Doe summonses. See how John Doe summonses work.

Either way, the records an exchange holds about your account are, under the First Circuit’s reasoning in Harper v. Werfel, the exchange’s business records, not yours to shield.

What a Letter 3164 tells you about your audit

It tells you the examiner is not satisfied with what you have provided, or wants independent verification. It tells you which tax periods are in play. And it gives you at least 45 days before contacts begin.

Use the time. Reconcile your exchange data to your returns. Identify any account or wallet you have not disclosed to the examiner, and decide with counsel how to address it. A third party’s records showing an account you never mentioned is a much bigger problem than the account itself. The IRS fraud handbook lists “false statements about the location/use of digital assets to return preparers and/or compliance employees” as an indicator of fraud. See IRM 25.1.2.11.1.

The bottom line

Letter 3164 is the IRS telling you it is about to check your work with someone else. Make sure your work survives the check. If it will not, that is the moment to get help, not after the exchange has answered.

And keep the letter. The periods it lists, and the date it was issued, define when contacts can occur. If you later learn that a third party was contacted outside that window, or before the 46th day, that is a procedural issue your representative will want to raise.