January 29, 2023

Volume XIII, Number 29


January 27, 2023

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The IRS Is Mining for Crypto Account Holders

For years, the cryptocurrency wallets of U.S. taxpayers have existed in a reporting gray zone. However, as it becomes clear that crypto asset transactions are not slowing down, the Internal Revenue Service (IRS) has signaled its expanded focus on regulation and enforcement efforts in the cryptocurrency industry, specifically utilizing “John Doe” summons. The “John Doe” summons, a tool used to target unknown taxpayers, is a mechanism through which the IRS, with court approval, can compel information from a third party—such as a crypto exchange—concerning a taxpayer not identified by name in the summons. The IRS’s use of “John Doe” summons, which it is increasingly using to compel the production of information from popular cryptocurrency exchanges, continues to demonstrate the growing strength of the IRS’ arsenal of enforcement tools as it relates to cryptocurrency. As the cryptocurrency market continues to grow, so too will enforcement agencies’ desire to make sure it is not being used for nefarious purposes.

What’s Happened So Far

It is no secret that the cryptocurrency industry is in the IRS’s crosshairs. An IRS attorney stated just last week that the IRS plans to increase its use of “John Doe” summons with regard to cryptocurrency. Further, in March 2021, the IRS announced the launch of Operation Hidden Treasure, a new enforcement initiative for tax violations related to cryptocurrency. This year, federal courts authorized the IRS to issue two “John Doe” summons to popular cryptocurrency exchanges, Circle Internet Financial (Circle) and Payward Ventures (aka Kraken). These inquiries centered on platform users with at least $20,000 in crypto transactions. The IRS sought data ranging for the five-year period from 2016 through 2020. The documents the IRS sought from the exchanges included account registration records, Know-Your-Customer (KYC) due diligence, account related correspondence, anti-money laundering (AML) exception reports, records of account activity, and records of account funding.

The Circle and Kraken “John Doe” summonses are by no means the end of the line for IRS cryptocurrency enforcement. As these two inquiries show, the IRS is seeking extensive information related to those engaged in cryptocurrency transactions, and cryptocurrency exchanges will face onerous requirements to produce such information going forward. This increased information gathering by the IRS as part of its cryptocurrency enforcement efforts will likely lead to a greater scrutiny of cryptocurrency exchanges and others who provide or receive services for cryptocurrency.

The Compliance Viewpoint

Cryptocurrency industry participants should anticipate that the IRS might begin to scrutinize customers and business processes, and specifically focus on  AML and KYC compliance measures. Before the IRS comes knocking with a “John Doe” summons, a prepared organization would be proactive and start taking measures to protect itself, its business, and  its customers. Working to ensure that proper protocols are in place to safeguard against customers looking to exploit gaps in KYC measures will be helpful in keeping the scrutiny of the IRS’s enforcement efforts on customers and not exchange platforms.

© 2023 Bracewell LLPNational Law Review, Volume XI, Number 327

About this Author

Philip Bezanson, white collar criminal defense, securities, attorney, Bracewell
Managing Partner, Seattle

Philip J. Bezanson's practice focuses on white collar criminal defense, internal investigations, securities enforcement and regulatory matters.

Mr. Bezanson is a member of the Bracewell & Giuliani LLP team that has represented corporate and individual clients in recent high-profile and complex cases, including the Deepwater Horizon explosion, the George Washington Bridge lane closure and General Motors ignition switch investigations, "Pay to Play" cases in New York, New Mexico and Illinois, the stock options backdating cases, and a variety...

Anne M. Termine

Drawing on nearly 20 years of CFTC experience, Anne Termine represents stakeholders in the commodities, derivatives and cryptocurrency markets in connection with internal investigations, regulatory enforcement and litigation matters. She also helps clients with regulatory advocacy before various agencies and in developing practical compliance and other policies and procedures tailored to their individual business needs.

From October 2003 to August 2016, Anne was a chief trial attorney in the US Commodity Futures Trading Commission’s (CFTC) Division of Enforcement, where she...

Brittney Justice Litigation Attorney Bracewell

Brittney Justice represents clients across a range of industries in litigation and government enforcement and investigations in federal and state courts. She provides advice on diverse matters, including securities litigation, complex commercial disputes, environmental claims and government investigations. 

Prior to joining Bracewell, Brittney was a legal intern with Texas’ First Court of Appeals.