Warning to all US taxpayers using cryptocurrency: “Crypto” does not mean your currency is secret – or protected – from the IRS | Newsletter | Legal news: Defense and investigations
On August 15, 2022, the federal court in the Central District of California authorized the IRS to serve a John Doe subpoena on SFOX, a cryptocurrency prime dealer headquartered in California. A John Doe subpoena is a device (eg, a subpoena) to collect information from a third party, where the IRS does not know the identity of the person they are seeking the information about. This is not the first time that the IRS has issued a John Doe subpoena on a crypto entity, but this is the first time that the IRS has specifically investigated and sought out taxpayers with high-value cryptocurrency transactions. This is also the first time that the IRS has targeted a cryptocurrency trading platform, highlighting IRS interest in underreported cryptocurrency transactions.
While there is no allegation that SFOX engaged in any wrongdoing, the John Doe subpoena demands that SFOX produce documents identifying US taxpayers who have used its services and other documents related to the taxpayers’ cryptocurrency transactions. The subpoena allows the IRS to obtain information on US taxpayers who conducted at least $20,000 in any year, in cryptocurrency transactions from 2016 to 2020, using SFOX.
This is not the first time a federal court has used a John Doe subpoena to extract information from non-parties about US taxpayers involved in cryptocurrency transactions. In 2016, a federal court authorized the IRS to serve a John Doe subpoena on a US-based cryptocurrency exchange. In 2021, two federal courts in California authorized the IRS to serve two John Doe subpoenas on two cryptocurrency exchanges and a digital wallet institution.
When the IRS investigates potential violations of the Internal Revenue Code by unknown persons, groups, or groups of persons, the IRS will seek a John Doe subpoena, which is authorized under Internal Revenue Code § 7609(f). With a regular summons, the tax authorities seek information about a specific taxpayer whose identity is known; In contrast, a John Doe subpoena allows the IRS to obtain information about any taxpayer within an “identifiable group or class of persons.” IRC § 7609(f)(1). The IRS must also have a “reasonable basis” to believe that such group or class of persons may have violated the Internal Revenue Code. IRC § 7609(f)(2).
John Doe subpoenas are not limited to cryptocurrency transactions. In 2008 and 2013, the IRS obtained John Doe subpoenas to Swiss-based banks to obtain information about US taxpayers who used Swiss bank accounts to evade US federal income taxes.
The IRS has made clear its intention to focus its efforts on obtaining information about those using cryptocurrency to prosecute violations of the Internal Revenue Code. If you have conducted cryptocurrency transactions and have not reported those transactions to the IRS, or have questions or concerns related to such transactions, please contact our team at Foley & Lardner before the IRS obtains your information and contacts you.
