More IRS summonses for crypto exchange account holders
The United States Internal Revenue Service has been hunting crypto vigorously for more than five years now, and the pace is getting faster. A couple of decades ago, the IRS was after offshore accounts, and that effort was among the most successful in the IRS’ history. Now, it’s crypto the IRS is after, and there’s no suggestion that the IRS intends to fail. The IRS wants crypto tax data in a big way, from asking about crypto on each tax return to its latest Hidden Treasure initiative and more.
The collective efforts of the IRS are impressive, and it is unlikely that the IRS will stop anytime soon. They are going to court as well, going after the exchanges that have customer data. First, there was Coinbase, and now, a federal court in Massachusetts has entered an order authorizing the IRS to serve a “John Doe summons” on Circle Internet Financial Inc. Notably, the summons effort also goes after Circle’s predecessors, subsidiaries, divisions and affiliates, including Poloniex LLC, which Circle purchased in 2018. The pattern is similar to what occurred with Coinbase. The IRS’ goal is to obtain information about U.S. taxpayers who managed at least $20,000 worth of transactions in cryptocurrency between 2016 and 2020. IRS Commissioner Chuck Rettig said:
“The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions.”
U.S. District Court Judge Richard Stearns seems to agree with the IRS and Justice Department that taxpayers could be hiding taxable income from the IRS using crypto.
He found that “There is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws.” There may well be more litigation, but for now, the judge’s order grants the IRS permission to serve a John Doe summons on Circle. According to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has a reasonable basis to believe “may have failed to comply with any provision of any internal revenue laws.”
This isn’t the IRS’s first John Doe summons, or even the first one for crypto. The IRS summons efforts for crypto customer data started with Coinbase, leading to a federal court in California entering an order authorizing the IRS to serve a John Doe summons on Coinbase Inc. Apart from Circle, another IRS summons dispute is now underway in California with Kraken (Payward Ventures Inc).
The scope of the Kraken summons request is similar. That is, it is seeking information on users who reached $20,000 in transactions from 2016 to 2020. The court has already responded, saying the government’s request is “overbroad” and that it will have to refile the request with a narrowed scope. But if history is any guide, the IRS may end up getting some information. Just look what happened with Coinbase, where court battles over the summons ended up 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’ve had to turn over.
The IRS, John Doe summons and privacy
Any summons from the IRS should be taken seriously. However, a John Doe summons might seem more like a fishing expedition that could easily be seen as overbroad. With a normal summons, the IRS seeks information about a specific taxpayer, a person whose identity the IRS knows. In contrast, a John Doe summons is about getting names and details of people from only a description. It allows the IRS to get the names of all taxpayers in a certain group. A John Doe summons is ideal for pursuing account holders at a financial institution. Notably, it was a John Doe summons 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 summons to the Union Bank of Switzerland, or UBS, for…
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