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The IRS begins to reach out to crypto exchanges

On Behalf of | Mar 10, 2022 | Internal Revenue Service

A member of the Internal Revenue Service’s (IRS) assistant division and national fraud counsel teams announced her department’s intention to increase their remittance of “John Doe” letters to cryptocurrency companies soon. The IRS has previously sent these letters to some crypto exchange companies, including Circle, Kracken and Coinbase, on their hunt for tax evaders last year.

The IRS representative announced their employer’s latest attempts to round up delinquent taxpayers at a cryptocurrency regulatory conference on March 2. However, this isn’t the first time the IRS has launched similar efforts. The U.S. District Court for the Northern District of California approved the remittance of similar summonses in May 2021. This is when the aforementioned crypto exchanges first received these John Doe letters.

How does the remittance of John Doe letters impact you as a taxpayer?

The IRS regularly performs audits of both individuals’ and businesses’ tax returns. One of these audits resulted in letters being sent out to individual taxpayers in 2019 and 2020. In those letters, the IRS notified select taxpayers that they’re aware that they may have underreported their cryptocurrency balances in previous years when filing their tax returns. 

The latest John Doe letter campaign last year and the one slated to occur again this year will shift attention to cryptocurrency exchanges. The IRS hopes to get these exchanges to turn over information about potential delinquent taxpayers, including their transactions and balances. This insight will allow the IRS to better hone in on individuals they believe to be tax evaders.

Why is the IRS upping its pursuit of cryptocurrency holders?

The IRS representative who spoke at the recent conference noted that the revenue agency’s pursuit of cryptocurrency holders isn’t anything new. They instead noted that their agency has long been focused on crypto tax compliance as part of the audit process. 

However, they admit that increased spending on internal training and other detection efforts has occurred within the past few years. Also, workers are finally getting up to speed on a backlog of returns filed. The IRS contends that many of those involve digital currencies.

The IRS representative warned that the IRS currently has many cryptocurrency cases that they’re currently pursuing. They noted that the stages of these cases vary. Some are in the infancy stages requiring the remittance of a John Doe letter, whereas others are in collections or on appeal. Other matters are awaiting criminal prosecution by the U.S. Attorney’s Office. 

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