IRS Using Unique Tool to Catch Alleged Crypto Cheats

All signs are pointing to a more aggressive posture by the IRS when it comes to investigating and prosecuting those who aren’t reporting their cryptocurrency transactions in accordance with federal rules. Kraken, the world’s fourth-largest crypto exchange, has been forced to turn over information on U.S. citizens involved in transactions totaling at least $20,000 from 2016-2020. The legal tool used by the IRS to obtain this information is called a John Doe summons.

What is a John Doe Summons?

This type of summons/subpoena is used when the IRS or another government agency suspects unlawful activity by a person or entity but is unable to pinpoint the exact identity of the alleged perpetrator. So, the government agency asks for information on a particular cohort (an “ascertainable group or class of persons”) to see if patterns emerge. If, in the recent case of Kraken users, the IRS notices a pattern of large transactions that don’t match tax records, further investigations are likely to follow. It’s worth noting that Kraken itself is not the subject of an IRS investigation, but its users appear to be subjects, if not targets.

Will This Recent IRS Action Affect You?

As outlined in the IRS’ John Doe summons that were approved by a Northern California federal court, the subpoena targets certain users of Kraken who performed $20,000 worth of transactions from 2016-2020. If this doesn’t describe you, the chances are low that you’ll be directly impacted by the summons. However, IRS actions can often be thought of as icebergs—what you actually see is representative of larger efforts underneath the surface.

It’s quite possible that other federal judges will consider this ruling if the IRS requests more John Doe summonses of other cryptocurrency users. In the Department of Justice press release announcing the Kraken summons, the IRS commissioner stated there was “no excuse” for the failure of U.S. taxpayers to fulfill their reporting obligations associated with cryptocurrency.

How Do You Know Whether or Not You’ve Correctly Reported Your Cryptocurrency?

In a nutshell, taxpayers are to treat cryptocurrency as property. There are some exceptions here, such as when a taxpayer receives cryptocurrency for services rendered (ordinary income). The front page of Form 1040 for 2020 asked whether taxpayers acquired any financial interests in cryptocurrency. You should have answered yes if you sold crypto in exchange for real currency, but you were not required to answer yes if you merely purchased crypto in exchange for real money.

If you now think that you did not satisfy cryptocurrency reporting requirements based on this blog’s previous sentence, it would be advantageous for you to speak with an effective and experienced tax resolution attorney. As evidenced by the John Doe summons for Kraken users, the IRS has less tolerance for taxpayers who are not properly reporting cryptocurrency.

Whether you have received a letter from the IRS about your not complying with reporting requirements or you are afraid a letter might be coming soon, our firm is ready to help you come up with a game plan to get your taxes back on track. If an audit is unavoidable for you, we can help develop a strategy that minimizes harm to you and your finances. Discuss your options today by scheduling a phone consultation with our team.