US IRS investigates taxpayers for avoidance involving digital currency transactions
Tuesday, 22 November, 2016
The US Internal Revenue Service (IRS) has issued a petition in a California court to access a bitcoin exchange’s data as part of an investigation into a group of unnamed taxpayers the agency suspects of avoiding or failing to pay tax on transactions involving digital currencies.
John Doe Summons
According to attorneys for the government, the 'John Doe' summons relates to the investigation of an ascertainable group or class of US taxpayers who conducted transactions in a convertible virtual currency between December 31, 2013 and December 31, 2015. This summons therefore requires the company, Coinbase, to disclose all US customers' records in that period.
"Protecting Customer Privacy"
Initially Coinbase reportedly stated that it was "weighing the filing" and "seeking to respond in a way that maintains user privacy." The company has now issued a response stating that it will oppose the government's petition in court. It stated that its "general practice is to cooperate with properly targeted law enforcement inquiries" but is extremely concerned with the "indiscriminate breadth" of this request.
Using virtual currency to "avoid scrutiny"
As Coinbase states, the US government has not alleged any wrongdoing on the part of the company but has requested the client information based on arguments that taxpayers may use virtual currency to avoid paying taxes.
Indeed, an IRS agent quoted in CoinDesk mentions three instances in which the target of an investigation had "ultimately confessed to using digital currency in a bid to avoid scrutiny". A taxpayer, for example, had used offshore accounts for years to maintain their funds and "[...] instead of repatriating his income from an ATM in the form of cash, […] diverted his income to a bank which works with a virtual currency exchanger to convert his income to virtual currency. Once converted to virtual currency, [the taxpayer's] income was placed into a virtual currency account until [the taxpayer] used it to purchase goods and services." This income, however, was not reported to the IRS.
Two other cases "involved 'corporate entities with annual revenues of several million dollars', each of which involved the use of a Coinbase account."