An Increase in Cryptocurrency Enforcement?
As the value of cryptocurrencies continues to soar, it seems likely that compliance efforts on the part of the IRS will really begin to ramp up in 2021. In the past few years, the IRS has issued John Doe summonses to ascertain the identity of people that hold Cryptocurrencies. The John Doe summonses to Coinbase in 2018 was one of the most well known but there have been others. IRC § 7609 grants the IRS the authority to issue summonses and subpart (f) of that code section contains certain additional requirements namely that:
- the summons relates to the investigation of a particular person or ascertainable group or class of persons,
- there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
- the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources. IRC § 7609(f); see also IRM 25.5.7 (containing IRS procedures for the issuance of John Doe summonses).
These summonses are used to identify US taxpayers that may have bought and sold cryptocurrencies and failed to property report gains attributable to that property. Since 2014 the IRS has been making efforts to educate taxpayers on the tax treatment of cryptocurrencies. For example, Notice 2014-21 specified that these assets should be treated as property while Rev. Rul. 2019-24 addressed the tax treatment of “hard forks” and other situations that were cropping up on the virtual exchanges.
In the past few months, the US government has leveled charges against both John McAfee, founder of the security software company with the same name, and Amir Bruno Elmaani, founder of cryptocurrency called Oyster Pearl, in unrelated incidents surrounding cryptocurrencies and potential tax evasion. The signs all point to one thing, US agencies have done their homework and are now starting to act on perceived abuses in the cryptocurrency arena. 2021 is the year that taxpayers and their advisors should pay special attention to the guidance coming from the IRS. And for taxpayers that are concerned about potential criminal exposure, voluntary disclosure may be an option that is worth strongly considering. Stay tuned next week for our post discussing voluntary disclosure.