IRS Plans to Hunt Down Crypto Users Who Avoid Paying Taxes

In Brief

• IRS issues a John Doe summons to a New York bank, requesting transaction records of partner's clients.
• Letters issued by the IRS following a previous summons took years to receive a response.
• The IRS is set to receive $46 billion from the federal government for enforcement under the new Inflation Reduction Act.

The U.S. Internal Revenue Service has secured a court order to obtain transaction records of U.S. taxpayers suspected of crypto tax evasion.

The order will allow the IRS to issue a so-called “John Doe” summons to New York-based M.Y. Safra Bank to provide transaction records of customers of SFOX, a crypto brokerage that used the bank’s services. Such a summons does not imply that M.Y. Safra Bank is guilty of wrongdoing but is intended to help the IRS weed out deficient tax compliance practices.

According to U.S. Attorney Damian Williams, “Taxpayers are required to truthfully report their tax liabilities on their returns, and liabilities that arise from cryptocurrency transactions are not exempt. The government is committed to using all of the tools at its disposal, including John Doe summonses, to identify taxpayers who have understated their tax liabilities by not reporting cryptocurrency transactions, and to make sure that everyone pays their fair share.”

Since 2019, the IRS has asked users to disclose any crypto-related tax activity on the front page of their tax returns.

Experts weigh in on the likelihood of success
The bank partnered with SFOX to allow the crypto broker’s customers to open cash-deposit bank accounts requiring Know-Your-Customer procedures. From their accounts, customers could trade cryptocurrencies on SFOX. SFOX has approximately 175,000 customers who have transacted over $12 billion since 2015. The IRS will jointly use the bank’s information and other records to determine whether users complied with relevant crypto tax laws.

Crypto tax specialist Matt Metras of MDM Financial Services in New York said of the summons, “I’m curious to see what happens with all this data they’re collecting.” According to Metras, it took years for the IRS to receive a response to letters it issued following a prior summons.

So far, the government agency has identified that ten U.S. taxpayers who were clients of SFOX failed to report their crypto transactions.

But some parties still require clarity on how to answer the crypto question on the tax return. According to Yu-Ting Wang, vice chairperson of a digital asset task force at the Association of International Professional Accountants, it is not clear how taxpayers should answer the crypto tax question. The body has requested clarity from the IRS for 2022 tax returns.

Crypto tax crackdown as IRS set for $80 billion in funding
At a legislative level, the IRS will receive $80 billion from the federal government under the new Inflation Reduction Act, $46 billion of which will be used for enforcement, which could include tracking down cryptocurrency tax evasion. Under federal law, cryptocurrencies are regarded as property for tax purposes.

The IRS could also beef up its crypto crackdown through the Infrastructure Bill, set to be enacted in 2023, that asks crypto brokers to report the identity of clients and their transaction activity.

This latest summons is being handled by the IRS’s Tax and Bankruptcy Unit, with Assistant U.S. Attorney Jean-David Barnea handling the case.

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