More IRS Subpoenas for Crypto Exchange Account Holders



The United States Internal Revenue Service has been vigorously pursuing crypto for more than five years, and the pace is increasing. A few decades ago, the IRS was looking for offshore accounts, and that effort was one of the most successful in the history of the IRS. Now it is crypto what the IRS is after, and there is no suggestion that the IRS intends to fail. The IRS wants crypto tax data at scale, from asking for crypto on every tax return to the latest Hidden Treasure initiative and more.

The collective efforts of the IRS are impressive and it is unlikely that the IRS will end anytime soon. They also go to court and go after the exchanges that have customer data. First, there was Coinbase, and now a federal court in Massachusetts has introduced an injunction authorizing the IRS to issue a “John Doe Subpoena” against Circle Internet Financial Inc. to serve. Notably, the subpoena effort also goes to its predecessors, subsidiaries, divisions and affiliates, including Poloniex LLC, which Circle purchased in 2018. The pattern is similar to what occurred with Coinbase. The purpose of the IRS is to obtain information on U.S. taxpayers who managed at least $ 20,000 worth of cryptocurrency transactions between 2016 and 2020. IRS Commissioner Chuck Rettig said:

“John Doe’s subpoena is one step towards enabling the IRS to identify those who are not properly reporting their virtual currency transactions.”

Judge Richard Stearns of the U.S. District Court appears to agree with the IRS and the Department of Justice that taxpayers could hide taxable income from the IRS using crypto.

He found that “there is a reasonable basis to believe that cryptocurrency users may not have complied with federal tax laws.” There may be more lawsuit, but for now, the judge’s order gives the IRS permission to file a John Doe subpoena on Circle. According to the court order, the subpoena requests information relating to the “IRS investigation of a verifiable group or class of persons” that the IRS has a reasonable basis for believing that “may not have complied with any provision. of internal income laws. “

This isn’t the first John Doe subpoena from the IRS, or even the first for crypto. The IRS is calling for efforts on crypto client data started with Coinbase, which has led a California federal court to issue an injunction authorizing the IRS to file a John Doe subpoena on Coinbase Inc. (Payward Ventures Inc.).

The scope of Kraken’s writ of summons is comparable. That is, it seeks information on users who hit $ 20,000 in transactions between 2016 and 2020. The court has already responded, saying that the government’s request is “too broad” and that it should resubmit the request with limited scope. But if history is any guide, the IRS may end up getting some information. Just look what happened to Coinbase, where the subpoena battles were compromised. Coinbase litigated the case for a while, but Coinbase and the government eventually reached a deal for a more limited class of information that Coinbase would have had to hand over.

The IRS, John Doe Summons and Privacy

Any subpoena from the IRS must be taken seriously. A John Doe subpoena may seem more like a fishing expedition that could easily be considered an exaggeration. With a regular subpoena, the IRS looks for information about a specific taxpayer, a person whose identity the IRS knows. In contrast, a John Doe subpoena is about getting people’s names and details from just a description. This allows the IRS to get the names of all taxpayers in a particular group. A John Doe subpoena is ideal for pursuing account holders at a financial institution. In particular, it was a John Doe subpoena that literally blew the lid off the hushed world of Swiss banking in 2008. That was when a judge allowed the IRS to issue a John Doe subpoena to the Union Bank of Switzerland, or UBS, for information on U.S. taxpayers using Swiss accounts.

Swiss law prohibits banks from disclosing the identity of account holders, but the rest is a thing of the past. More than a few observers have noted that with that subpoena, the IRS launched its more than $ 50 billion offshore sweep. The IRS tells its own examiners to use a John Doe subpoena only after trying other routes. According to the IRS manual, “It may be possible to obtain taxpayer identity without using a John Doe subpoena, but success can lead to success.”

After tracking down US taxpayers with UBS accounts, the IRS did the same with HSBC in India and Citibank and Bank of America in Belize. And while it will take the IRS time to gather and process all the information it can get, rest assured that the IRS will use the information it obtains to good effect. Remember, digital currency is an ongoing area of ​​focus for an IRS criminal investigation.

The IRS and Cryptocurrency

It wasn’t until 2018 that the IRS announced a digital currency compliance campaign to address tax avoidance related to the use of digital currency through outreach and investigations of taxpayers. The IRS says it remains actively involved in addressing non-compliance and digital currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations. For some time now, the IRS has also been hunting user identities with software.

Related: Report only part of your crypto addresses? The IRS needs to know

It’s been seven long since the IRS announced in Notice 2014-21 that digital currency is proprietary for federal tax purposes. That early notice provides guidance on how general federal tax principles apply to digital currency transactions. Taxpayers who fail to properly declare income tax on digital currency transactions are liable for taxes, penalties, and interest, if applicable. And in some cases, taxpayers can be prosecuted.

Related: Cryptocurrency reporting errors can be expensive and even criminal

As with the 10,000 warning letters the IRS issued to crypto holders some time ago, these recent developments from John Doe should be a wake-up call even to people who have never dealt with any of these exchanges. If you’re not trying to report taxes the way the IRS wants, not using one of these targeted exchanges doesn’t mean you’re free. Moreover, basic reporting is not that difficult. Adjusting tax returns to request large tax refunds is a well-known audit trigger, but changing to report additional income and pay additional tax is usually much less the case.

In addition, it can prevent much bigger problems. Be careful when changing returns. All returns must be signed under pain of perjury. If you know you have some reporting errors or omissions, consider filing corrective claims for the past few years and also paying taxes without being prompted. The IRS is generally much more forgiving if a taxpayer makes corrective filings before being audited or investigated.

This article is for general information purposes and is not intended and should not be construed as legal advice.

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

Robert W. Wood is a tax attorney who represents clients around the world from Wood LLP’s San Francisco office, where he is a managing partner. He is the author of numerous tax books and regularly writes about taxes for Forbes, Tax Notes and other publications.