Quick overview

An IRS notice alleging unreported crowdsourced income means the IRS has records (for example, platform reports or third‑party data) that don’t match your tax return. Don’t ignore it: timely, documented responses typically prevent escalation, reduce penalties, and preserve appeal rights. (See IRS guidance on notices and letters: https://www.irs.gov/individuals/understanding-your-irs-notice-or-letter)

Step‑by‑step response

  1. Read the letter carefully
  • Note the notice number, tax year(s) involved, the deadline to respond, and whether the IRS proposes additional tax, penalties, or interest.
  • Do not assume the IRS is correct; the letter starts a process.
  1. Verify identity and model notice
  • Confirm the letter is genuine (it will include an IRS notice number and contact information). If unsure, use IRS online resources or call the number printed on the notice—not a number from an email or text.
  1. Gather documentation
  • Crowdfunding platform transaction reports and payout statements.
  • Bank and merchant account statements showing deposits and refunds.
  • Campaign descriptions, reward/fulfillment records, and agreements showing whether funds were gifts, pre‑sales, refunds, or loans.
  • Records of platform fees and refunds (fees may reduce taxable gross receipts; see platform fee deduction guide below).
  1. Decide whether proceeds are taxable
  • Campaign funds are generally taxable unless they clearly qualify as non‑taxable gifts (see IRS Topic: Gifts) or reimbursements for expenses.
  • Funds that represent business income, prepayments for goods or services, or payments for equity are taxable to the recipient.
  • If you’re unsure, consult a CPA or tax attorney. In my practice I’ve found many cases resolve once a campaign’s purpose and recordkeeping are clarified.
  1. Respond in writing with evidence
  • If the IRS is wrong, send a clear, dated letter referencing the notice number and attach supporting documentation that proves the funds are non‑taxable (gifts, reimbursements) or were already reported under a different line item.
  • If you omitted income, file an amended return (Form 1040‑X) for the year(s) in question, include required schedules, and attach an explanation and supporting docs. (See: Amending a return: https://www.irs.gov/filing/amending-a-tax-return)
  • Mail copies (keep originals) and use certified mail or trackable delivery. Keep proof of mailing and copies for at least three years.
  1. If you owe tax, address payment and penalty options
  • Pay the tax due to stop further interest, or request an installment agreement if you can’t pay in full. (See IRS payment options.)
  • Ask about penalty abatement if you have reasonable cause (first‑time penalty abatement may apply in limited cases). For general penalties and interest, review IRS penalties guidance: https://www.irs.gov/payments/penalties
  1. Preserve appeal rights
  • If you disagree after the IRS response, you can appeal the determination through the IRS Office of Appeals. Follow the appeal instructions on the IRS notice.
  1. When to get help
  • Hire a CPA or tax attorney if the amounts are material, legal characterization is unclear, or the IRS threatens liens or levies.
  • Contact the Taxpayer Advocate Service if you face hardship or the IRS isn’t resolving the issue: https://www.taxpayeradvocate.irs.gov/

Common scenarios and how to treat them

  • Gifts vs. taxable receipts: Personal gifts generally aren’t taxable to the recipient, but crowd campaigns labeled as “support my project” may be prepayments or business receipts and therefore taxable (IRS Topic 557: Gifts).
  • Refunds and returns: Document refunds or returned pledges; they reduce gross income if properly shown in accounts.
  • Rewards and pre‑sales: If backers receive goods or services (even later), the amounts normally count as business income.
  • 1099‑K and platform reporting: Crowdfunding platforms and payment processors may issue information returns (e.g., Form 1099‑K). Use those forms to reconcile amounts but remember a 1099 is informational—showing it doesn’t automatically mean the amounts are taxable as stated.

Practical checklist to include with your response

  • Copy of IRS notice (do not send originals)
  • Brief cover letter referencing notice number and desired resolution
  • Platform transaction history and payout summaries
  • Bank statements matching deposits/withdrawals
  • Receipts for refunds, fees, or reimbursements
  • Copies of previously filed tax returns or amended return (Form 1040‑X) and calculations
  • Proof of mailing and contact information for your preparer

Timing and penalties (what to expect)

  • Interest accrues on unpaid tax from the original due date; penalties can include failure‑to‑pay and accuracy‑related penalties. Timely response and voluntary correction often reduce penalty exposure. See IRS penalties page for current rates.

Templates and tone

  • Be concise, factual, and non‑confrontational. Include clear references to dates and dollar amounts and attach corroborating documents.

Sample opening line for a mailed response:

Re: Notice [notice number], tax year [YYYY]. I have reviewed the platform records attached and disagree with the IRS’s proposed adjustment because [brief reason]. Please see attached documentation including platform transaction reports and bank statements.

Internal resources

Final notes and disclaimer

In my practice, clear records and an early, documented reply resolve most crowdfunding reporting inquiries. This article is educational and not a substitute for personalized tax advice. For case‑specific guidance, consult a licensed CPA or tax attorney and review current IRS guidance at https://www.irs.gov/.