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IRS and DOJ to Force Circle Internet Financial Inc. & Poloniex LLC to Divulge Taxpayers’ Cryptocurrency Transactions

The Internal Revenue Service has identified cryptocurrency trading as a potential for tax fraud and abuse. To discover unreported profits from cryptocurrency, the IRS obtained an order authorizing it to serve a John Doe Summons on Circle Internet Financial Inc. and Poloniex LLC, requiring the companies to turn over information about U.S. taxpayers who conducted at least $20,000 in cryptocurrency transactions during the years 2016 to 2020.

John Doe Summonses Used to Identify Those Trading in Cryptocurrency

The IRS routinely serves summonses upon financial institutions such as banks, stock brokerage, and commodities dealers. The routine summons issued by the IRS identifies an account holder and requires the financial institution to provide all records concerning the customer. The IRS seeks this information to ensure that taxpayers are properly reporting income.

It is difficult for the IRS to identify those who have made a profit in cryptocurrency because it does not receive a report identifying profits earned through trading as it would if the individual were trading securities or commodities with a licensed U.S. broker – or bank.

The IRS uses a John Doe Summons to overcome the problem of not knowing who is trading in cryptocurrency. The IRS is aware of companies such as Circle Internet Financial Inc. and its affiliate Poloniex LLC. The John Doe Summons directs a company to identify all U.S. customers and provide details concerning cryptocurrency transactions.

The summons, approved by a U.S. District Court, requires the production of all U.S. customers’ identities if the customer had transactions of at least $20,000 in cryptocurrency during the years 2016 to 2020. The individuals’ identities and digital currency transactions in cryptocurrency will be given to the IRS.

John Doe Summonses have been successfully used by the IRS to obtain the identity of Americans with unreported offshore bank accounts. Successful criminal prosecutions were brought by the Department of Justice as a result of the effectiveness of John Doe Summonses in obtaining information from offshore financial institutions that many believed were beyond the reach of the IRS.

Unreported Cryptocurrency Transactions Can Lead to IRS Audits and Criminal Investigations

The potential for a civil IRS audit and/or criminal investigation is real and should be considered by anyone who has engaged in cryptocurrency transactions and realized income that has not been disclosed on U.S. income tax returns. As the IRS and Department of Justice put more effort into identifying undisclosed income from cryptocurrency transactions, civil audits, civil penalties, and criminal prosecutions will increase.

It is the long-standing tradition of both the IRS and the Department of Justice to force compliance with tax laws by using criminal prosecutions. A criminal prosecution followed by time in prison serves as a strong motivator for people to comply with the law.

Consulting with an Attorney Is Critical

It is important that anyone who has unreported income from transactions in cryptocurrency consult with an attorney who is experienced in defending taxpayers under IRS audit, criminal investigation, or criminally charged.

There is often an extended period of time between the issuance of a John Doe Summons and when the IRS is able to gather the information about the taxpayer and the transactions generating unreported income. It takes even longer for the IRS to review the data and decide whether to proceed civilly or criminally or both. By consulting with a defense attorney experienced in criminal tax cases, it is possible to avoid criminal prosecution.

It has been our experience that a person may not learn of a federal tax evasion criminal investigation until an IRS criminal investigator comes to their door and asks to talk. This is a common tactic used to allow the investigator to interview the target of the investigation before an attorney steps in to protect the rights of the taxpayer.

Another common way the IRS begins an investigation is by sending a notice of civil audit to the taxpayer with a request for a meeting and production of documents. The civil agent will be prepared for this meeting and will have discussed the potential for fraud with his or her supervisor. We have seen that this interview with a civil auditor is fraught with danger and may result in the civil agent referring the case to IRS Criminal Investigation.

If you have unreported cryptocurrency income or are being investigated for or have been charged with a tax crime, contact the Law Offices of Horwitz & Citro, P.A. at (407) 901-5852 for legal representation from a team with over 45 years combined experience.