A federal court in the District of Massachusetts authorized the IRS to serve a "John Doe" summons on a Boston-based "digital currency exchanger" seeking information about as yet unidentified U.S. taxpayers who, from 2016 to 2020, conducted at least $20,000 in cryptocurrency transactions.
According to the DOJ, the District Court Order allows the IRS to serve the John Doe summons in connection with an investigation of "an ascertainable group or class of persons" where the IRS reasonably believes that such group or class "failed to comply with any provision of any internal revenue laws." The petition does not allege the digital currency exchanger, Circle Internet Financial Inc. and related entities (including Poloniex LLC), engaged in wrongdoing. However, the Court found there is a reasonable basis for the IRS to believe that some of Circle's customers may have violated federal tax laws.
IRS Commissioner Chuck Rettig stated the summons will enable the IRS to identify individuals who are failing to report virtual currency transactions.
In 2014, the IRS issued guidance noting that virtual currencies that can be converted into traditional currency are property for tax purposes.
Commentary Jodi Avergun
This is not the first time that the IRS has used a John Doe subpoena to identify U.S. taxpayers who may have undeclared income resulting from virtual currency transactions. In 2017, the IRS issued a similar subpoena to Coinbase, then the largest virtual currency exchange. Coinbase sought to quash the subpoena, and after negotiations with the IRS and an evidentiary hearing, a court in the Northern District of California allowed the IRS to proceed with a modified subpoena.
The subpoena to Circle is not yet public, so it is unclear whether the IRS requested the narrowed categories of information it was permitted to obtain from Coinbase or a broader class. After obtaining permission to seek information from Circle, the IRS then sought a John Doe subpoena for records in the possession of Kraken, another virtual currency exchange. However, the judge in the Northern District of California rejected the IRS' request, finding the subpoena too broad, and directed it to submit a more narrowly tailored request.
The IRS has analyzed taxpayer records and compared them to the data from virtual currency exchanges, which suggest that far more taxpayers use virtual currency and earn income from it than are reporting virtual currency revenue on their tax returns. As a result, the IRS has continued to press forward on identifying hidden wealth - much as it did when it went after U.S. taxpayer income from undeclared Swiss bank accounts. That effort too began with a John Doe subpoena, and the results were staggering, netting hundreds of millions of dollars in the payment of back taxes, fines and penalties, and federal prosecutions - and the end of Swiss banking secrecy. A large number of American taxpayers with undisclosed Swiss accounts entered into voluntary disclosure agreements with the IRS which allowed many to avoid prosecution for tax evasion. This would be a good time for taxpayers with undisclosed revenue from virtual currency transactions to remember the Swiss bank cases and perhaps consider conferring with their tax advisors or counsel about remedies for any undeclared income. The IRS is clearly intent on policing virtual currency.
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