IRS wants more official John Doe records from cryptocurrency exchanges

An Internal Revenue Service (IRS) official said Wednesday that crypto exchanges can “expect more” in terms of wide information demands, similar to previous efforts involving Coinbase, Kraken, and Circle.

Carolyn Schenck, the IRS’s national fraud counsel and assistant division counsel, made the statements. They were made at a panel discussion on cryptocurrency regulation organised by Tax Issues on March 2.

Schenk provided a summary of the IRS‘s cryptocurrency environment during her opening comments, stating that “[w]e have cases at every level of the pipeline, from letter treatment through inspection to appeals to criminal referrals to active criminal prosecution.”

Schenck discussed a few well-publicized IRS actions, including as the sending of letters to individuals suspected of failing to properly disclose their crypto-related tax liabilities. The IRS sent such letters in 2019 and 2020, respectively, and Schenck said that the IRS “may continue to employ them in the future.”

Perhaps most significantly, Schenck said that the IRS may use so-called John Doe letters to collect data from cryptocurrency exchanges. The IRS has issued similar demands to Coinbase, Kraken, and Circle; in these instances, the exchanges are not suspected of wrongdoing, but rather the IRS is seeking for prospective tax fraudsters.

“Expect more from the IRS in this area in terms of John Doe summonses,” Schenck said. Additionally, Schenck said that the IRS’s procedures are being concentrated on crypto tax compliance:

“Every investigation and collection case includes a question about whether a taxpayer participates in digital asset transactions.”

The IRS requested increased cash last year to expand its crypto-related capabilities, including for internal training and employment. As The Block noted, pandemic-related personnel shortages have resulted in a large backlog of tax returns, which may affect people who filed returns including crypto data.

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