IRS Gets New Authority to Investigate “Unknown Taxpayers”

The U.S. tax authority, the Internal Revenue Service (IRS), announced last week that it had received approval from a U.S. District Court Judge to issue a “John Doe” tax summons, effectively granting it the authority to investigate unidentified crypto taxpayers.

Chasing John Doe

According to an official statement, IRS Commissioner Charles Rettig, U.S. Attorney Damian Williams and Deputy Assistant Attorney General David Hubbert confirmed that the IRS had received the summons. This new approval compels specific companies to submit information about individuals and companies that have failed to report and file taxes on their crypto transactions.

IRS obtains court order authorizing summons for records relating to U.S. taxpayers who failed to report and pay taxes on cryptocurrency transactions https://t.co/uCZyR78aRZ

— US Attorney SDNY (@SDNYnews) September 22, 2022

The summons will force M.Y. Safra Bank – a New York-based banking institution – to provide transaction information relating to SFOX, a digital asset broker with over 175,000 customers, to share relevant information that could help with investigations and tax enforcement. Both parties had partnered to offer cash deposit accounts backed by the Federal Deposit Insurance Commission (FDIC) back in 2029. Now, the IRS is looking to get the transaction records of users who made cryptocurrency transactions worth over $20,000 in any year from 2016 to 2021.

Although crypto users are required by law to report their gains or losses on their holdings, the IRS believes there has been a notable lack of compliance for taxpayers via their crypto holdings in recent years. Williams, in particular, stated that the government is now looking to use all available tools to identify potential taxpayers and ensure that they comply with the laws of the land.

At the same time, Commissioner Rettig explained that the authorization of a John Doe summons supports the IRS’ efforts to ensure that any taxpayer who engages in crypto activity pays their fair share of taxes.

While this appears to be a minor action so far, many tax and legal experts believe it could be the first shot in what could be a lengthy tax investigation of crypto brokers in the country. By all indications, SFOX is a small crypto exchange. The broker is based in El Segundo, California and has been in business since 2014, with 175,000 customers and a total transaction volume of $15 billion. The volume is quite small compared to major players like Kraken and Coinbase.

However, according to tax attorney Andrew Gordon, this approval should also put big exchanges on edge, as it signifies that the IRS could be coming for them next. The tax authority has been looking to expand its oversight of the crypto sector for years, and it appears to be getting the necessary approvals.

The IRS Is Coming

This John Doe summons is just the latest in what appears to be a systemic strengthening of the IRS in its mission to bring tax compliance to its native crypto sector. Earlier this month, the tax authority was reported to be hiring as many as 87,000 new agents to beef up its enforcement arm. The Biden administration later debunked this news.

Notwithstanding, the Biden administration signed the Inflation Reduction Act into law in August, which earmarks as much as $78 billion in new funding for the IRS alone. And with a new war chest, the tax authority will be looking to upscale.

However, the funds earmarked by the Inflation Reduction Act will be phased into the IRS over a decade. Regardless, there’s no doubt that the IRS is about to get much stronger – and crypto taxes are already top on its mind.

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