On August 15, 2022, the federal courtroom within the Central District of California licensed the IRS to serve a John Doe summons on SFOX, a cryptocurrency prime vendor headquartered in California. A John Doe summons is a tool (e.g., a subpoena) to collect data from a 3rd celebration, the place the IRS doesn’t know the id of the particular person about whom they’re looking for the knowledge. This isn’t the primary time the IRS has issued a John Doe summons on a crypto-entity, however that is the primary time the IRS has particularly investigated and sought out taxpayers with high-value cryptocurrency transactions. That is additionally marks the primary time the IRS has focused a cryptocurrency buying and selling platform, highlighting the IRS’s curiosity in underreported cryptocurrency transactions.
Though there isn’t any allegation that SFOX is engaged in any wrongdoing, the John Doe summons requires SFOX to supply information figuring out U.S. taxpayers who’ve used its providers and every other paperwork regarding the taxpayers’ cryptocurrency transactions. The summons permits the IRS to acquire details about U.S. taxpayers who performed not less than $20,000 in any yr, in cryptocurrency transactions from 2016 to 2020, utilizing SFOX.
This isn’t the primary time a federal courtroom has used a John Doe summons to extract data from non-parties about U.S. taxpayers concerned in cryptocurrency transactions. In 2016, a federal courtroom licensed the IRS to serve a John Doe summons on a U.S.-based cryptocurrency change. In 2021, two federal courts in California licensed the IRS to serve two John Doe summons on two cryptocurrency exchanges and one digital pockets establishment.
When the IRS investigates potential violations of inner income legislation by unknown individuals, teams, or courses of individuals, the IRS will search a John Doe summons, which is permitted below Inside Income Code § 7609(f). With a standard summons, the IRS seeks details about a particular taxpayer whose id is thought; in distinction, a John Doe summons permits the IRS to acquire details about any taxpayer inside an “ascertainable group or class of individuals.” I.R.C. § 7609(f)(1). The IRS additionally will need to have a “affordable foundation” for believing such group or class of individuals could have violated the interior income legislation. I.R.C. § 7609(f)(2).
John Doe summonses should not restricted to cryptocurrency transactions. In 2008 and 2013, the IRS obtained John Doe summonses on Swiss-based banks to acquire details about U.S. taxpayers who used Swiss financial institution accounts to evade U.S. federal revenue taxes.
The IRS has made clear its intent on focusing its efforts on acquiring data on these utilizing cryptocurrency to prosecute violations of the interior income legal guidelines.
© 2022 Foley & Lardner LLPNationwide Legislation Overview, Quantity XII, Quantity 229