May 2021

Legal Update: IRS and DOJ Ramping Up Enforcement Against Cryptocurrency Owners


The U.S. Department of Justice (“DOJ”) recently filed two petitions to permit the Internal Revenue Service (“IRS”) to issue “John Doe” summonses to cryptocurrency exchanges Kraken and Circle to collect information on U.S. taxpayers who conducted at least the equivalent of $20,000 in cryptocurrency transactions with the exchanges in the years 2016 to 2020. This comes on the heels of the IRS’s most recent announcement about its new cryptocurrency enforcement initiative “Operation Hidden Treasure,” and the creation of the “IRS Fraud Enforcement Office,” to investigate virtual currency owners who are underreporting or not reporting crypto transactions.

What is a John Doe Summons?
A John Doe Summons is an IRS summons authorized by Internal Revenue Code Section 7609(f), which unlike other IRS summonses does not list the name of the taxpayer under investigation because the taxpayer is unknown to the IRS. A John Doe summons was famously and successfully used in 2008 to gather account information about U.S. persons who had undeclared Swiss bank accounts. The Swiss John Doe summons culminated in the IRS Offshore Disclosure Program that ended ten years after the summons was issued and after the IRS collected over $11.1 billion in taxes, interest and penalties.

The use of the John Doe Summons to enforce the tax laws relating to cryptocurrency is not new. In late 2016, on behalf of the IRS, the DOJ requested judicial permission to serve a John Doe summons on Coinbase, Inc. Coinbase is a California-based exchange dealing in cryptocurrency that operates a bitcoin wallet and exchange business, and recently celebrated its IPO. The Coinbase John Doe Summons sought information regarding U.S. persons who, at any time during 2013 to 2015 bought, sold, sent or received at least $20,000 of cryptocurrency in a year. Ultimately, after the IRS narrowed the scope of the Summons, the Court ordered Coinbase to turn over information for approximately 13,000 of its customers, including: names, addresses, taxpayer identification numbers, birthdates, records of account activity, and periodic statements or account or invoices.

John Doe Summonses to Kraken and Circle
On March 30, 2021, the DOJ filed a petition for leave to serve a John Doe Summons against Kraken seeking information similar to what it sought from Coinbase. The District Court has not ruled on the DOJ’s request, but a decision is imminent. On April 01, 2021, a Federal District Court in Massachusetts entered an order authorizing the IRS to serve a John Doe Summons on Circle. The John Doe Summons to Circle sought information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in crypto during the years 2016 to 2020.

What Should Taxpayers and Practitioners Understand About the IRS’s Cryptocurrency Enforcement Actions?
Simply put, the IRS is coming for cryptocurrency owners who are not properly reporting their gains or income, and are not paying their fair share of taxes. IRS Commissioner Chuck Rettig recently stated: “Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that the IRS is working to ensure that they are fully compliant in their use of virtual currency…The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions.  We will enforce the law where we find systemic noncompliance or fraud.”

Taxpayers who own virtual currency and have failed to properly report their transactions should consult a tax professional to determine what options are available to come into compliance and reduce their exposure to serious IRS issues. For taxpayers who engaged in cryptocurrency transactions, but did not properly report the transactions on their income tax returns, an amended return or a “voluntary disclosure” may offer a path to compliance that limits the likelihood of an IRS audit and potential penalties or criminal prosecution by DOJ. The IRS is targeting virtual currency exchanges, and a Taxpayer’s compliance options will be severely limited if a District Court approves a John Doe Summons against a Taxpayer’s respective cryptocurrency exchange. Taxpayers who are audited by the IRS or who become the subject of an IRS criminal investigation need an experienced tax professional to represent them in these proceedings.

The tax professionals with Sideman & Bancroft are uniquely qualified to help taxpayers, accountants, and enrolled agents navigate the IRS cryptocurrency enforcement efforts. Sideman & Bancroft offers clients unparalleled experience and depth in handling both civil and criminal tax-related cases. Our tax attorneys have established a national reputation for skillful resolution of complex tax disputes and are available to discuss cryptocurrency tax enforcement matters as well as other IRS enforcement issues. Please contact Steven Katz or Jay Weill  for more information.