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Parallels in Bitcoin and Swiss bank investigations

About a decade ago, the IRS launched its investigation into offshore accounts with a John Doe summons of UBS. This year, it used a similar John Doe summons to request more information from Coinbase.

These are certain requirements for these types of summons, which we will address in this blog. But what seems certain is that account holder information is about to start flowing to the IRS. The agency is ordering more training for field Criminal Investigation Agents suggesting the increased focus could lead to criminal tax charges.

The gains are impressive at 1,731 percent for bitcoin and 7,291 percent for litecoin this year, according to Fortune. This means some traders and investors could face some significant civil penalties in addition to possible criminal charges.

Increasing attention

The IRS has been watching the issue of virtual currency since as far back as 2007. In 2013, the Government Accountability Office said that the IRS needed to increase its efforts to address digital currency. The next year, the agency issued a notice that these currencies are property and taxed on capital gains.

It was not until earlier this year that the IRS really kicked an investigation into gear with its focus on one of the largest exchange, Coinbase. Its concerns stem from the “reporting gap.” Between 2012 and 2015, very few taxpayers reported bitcoin, Ethereum or litecoin transactions on their tax returns (800 – 900 per year) when more than 14,000 users had individual transactions over $20,000.

Coinbase fought the summons for the better part of this year. They were able to show that the initial request for information on 8.9 million transactions was too broad. The narrowed focus of the summons is the largest transactions and it will affect 14,355 account holders.

The exchange argued that the IRS lacked a proper investigative purpose and was in essence on a fishing expedition. The court rejected this argument finding a legitimate purpose of enforcing tax laws against those who profited from mining or trading in virtual currency. The exchange was also unable to show an abuse of process or provide sufficient support for its allegations of bad faith.

What happens now?

The parallel with the offshore account investigation had lead some to question whether the IRS might offer some sort of amnesty program. The Offshore Voluntary Disclosure Programs and Streamlined programs for offshore account holders might provide a template. If these programs were offered, it might be a way to return to compliance and avoid criminal prosecution.

If you have mined or invested in bitcoin or any other virtual currency, it is crucial to speak with an experienced tax attorney. Find out what you need to do to resolve any issues before you hear from the IRS and have more limited options. 

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