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Federal Court Authorizes John Doe Summons on Major Crypto Dealer – SFOX

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    In the latest series of actions to uncover information on taxpayers that may be utilizing cryptocurrency to avoid taxes, the government successfully sought an order authorizing a John Doe summons for popular cryptocurrency exchange service SFOX.

    The John Doe summons allows the government to comb through SFOX’s records for information about users that transacted a certain amount of value in cryptocurrency on the platform over a specific period of time. As a result, the government may be gathering information about your financial history without your awareness.

    For help identifying strategies and taking necessary steps now to avoid an unfortunate outcome, contact our experienced Dual Licensed Tax Attorneys and CPAs today by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or booking a reduced rate initial consultation online here.

    SFOX Will Be Forced to Turn Over Information on Thousands of Users

    On Aug. 15, 2022, a federal court in the Central District of California entered an order authorizing the IRS to serve a John Doe summons on SFOX, a cryptocurrency prime dealer headquartered in Los Angeles, California, seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency between 2016 and 2021 with or through SFOX.

    “Taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable,” said Deputy Assistant Attorney General David A. Hubbert of the Justice Department’s Tax Division. “The information sought by the summons approved today will help ensure that cryptocurrency owners follow the tax laws.”

    The court’s order grants the IRS permission to serve what is known as a “John Doe” summons on SFOX. There is no allegation in this suit that SFOX has engaged in any wrongdoing in connection with its digital currency business. Rather, the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown. This John Doe summons directs SFOX to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their cryptocurrency transactions.

    Government Will Continue to Use John Doe Summons Strategy Against Crypto Evaders

    The John Doe summons is a tactic employed by the federal government that has just recently become more popular than ever. Looked upon favorably by most courts, this type of summons does not need to name their targets by name. Instead, it is issued against an entity that is not expressly accused of any wrongdoing, requiring them to turn over information about a vast swathe of people who voluntarily use their services, filtered using broad identifiers. In this case, the filter is anyone who has made at least $20,000 in transactions over the past five years using the SFOX database.

    While cryptocurrency is still relatively young in its popularity, there are a limited number of entities, such as SFOX, that facilitate trades, making the use of a John Doe summons that much more effective.

    “The John Doe summons remains a highly valuable enforcement tool that the U.S. government will use again and again to catch tax cheats, and this is yet one more example of that,” said IRS Commissioner Chuck Rettig. “I urge all taxpayers to come into compliance with their filing and reporting responsibilities and avoid compromising themselves in schemes that may ultimately go badly for them.”

    John does summonses have already been issued to Circle, Coinbase, Kraken, Poloniex and others.

    Cryptocurrency Evasion is a Key Focus Area for Federal Tax Enforcement

    As cryptocurrency rose rapidly in popularity over the past few years, the federal government scrambled to solidify its tax assessment of the virtual tokens, as well as transactions that utilized them.

    Recently, the IRS issued guidance regarding the tax consequences of the use of virtual currencies in IRS Notice 2014-21, which provided that virtual currencies that can be converted into traditional currency are property for tax purposes. Therefore, a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

    Thus, cryptocurrency exchanges need to be reported, just like any other capital transaction. In the press release announcing the John Doe summons against SFOX, the Department of Justice and the IRS pointed out that the 2022 Form 1040 Income Tax Return features a question at the top of the form about virtual currency transactions.

    The government is rapidly adjusting its practices to account for virtual currency transactions so that it can justify its actions in going after those who fail to report them accordingly. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, the government suspects that taxpayers may be using them to hide taxable income from the IRS.

    In the court’s order, United States District Court Judge Otis D. Wright found that there is a reasonable basis for believing that individuals conducting at least $20,000 in cryptocurrency transactions may have failed to comply with federal tax laws. This provides the grounds for the John Doe Summons to go forward, and there is little reason why IRS investigators would struggle to initiate similar actions against other crypto trading platforms.

    Cryptocurrency is a new and promising area to invest in and seek profit for anyone savvy enough to navigate the market. However, those striking out on this endeavor must also bring the same savvy to reporting their income on their tax returns so that their efforts do not ultimately result in audits, investigations, or even criminal tax charges.

    The Tax Law Offices of David W. Klasing Can Help You Remain Compliant with Your Crypto Income

    To avoid any costly mistakes in reporting your cryptocurrency income on your tax returns, reach out to the dedicated Dual Licensed Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing. Schedule a reduced-rate case evaluation today by calling us at (800) 681-1295.

    How the IRS Operation Hidden Treasure Targets Crypto Coin Tax Evasion

    As is implied by the name of the initiative, Operation Hidden Treasure targets taxpayers who attempt to hide their cryptocurrency income from the IRS. Operation Hidden Treasure was announced by Damon Rowe, the Director of the Office of Fraud at the IRS, at a meeting at the Federal Bar Association that took place on March 5th, 2021.

    According to Damon Rowe, Operation Hidden Treasure is an effort that targets cryptocurrency holders who omit this form of income on their tax return. The IRS put together a task force that is trained in the tracking of various types of crypto income and has also tied together the civil and criminal branches of the IRS for Crypto Tax Fraud Enforcement.

    The IRS hopes to tackle methods of crypto tax evasion that may be used to hide crypto coins, such as structuring. Structuring is when a person will perform frequent financial transactions at less than $10,000 to evade certain cash tax reporting requirements. For example, making multiple transactions of $9,999 or splitting the payments evenly across dozens of transactions may evade cash reporting rules.

    The use of Shell Corporations to hide cryptocurrency gains is another prong of Operation Hidden Treasure’s investigations. In many cases, a shell corporation could be used to attempt to hide the identity of the owner of a company. This would make it easier for the company to engage in money laundering or other similar crimes as there is no person to hold responsible for the crime.

    The use of Crypto Blockchain Cloaking Technology is also being investigated by the IRS. Some cryptocurrency exchanges enable a taxpayer to trade for items or other crypto coins anonymously. The IRS expects its investigation will yield additional options on how to track down taxpayers utilizing anonymous transactions to evade reporting cryptocurrency taxable income.

    For advice on how to get back into compliance with reporting multiple years of unreported cryptocurrency income without facing criminal prosecution, talk to our dually licensed California Crypto Tax Attorneys and CPAs.

    How to Handle Unreported Crypto Coin to Avoid Tax Evasion Criminal Charges

    The general message that the IRS wants to convey to taxpayers with Operation Hidden Treasure is that, if necessary, they will find a way to detect your unreported cryptocurrency income and prosecute you for failure to report your crypto coins. Whether the unreported income was intentional, or a mistake is difficult to prove and the larger the amount of unreported income the less likely the IRS will be to believe your noncompliance was non willful or unintentional.

    The IRS has a program called a voluntary disclosure that comes with a nearly guaranteed pass on criminal tax prosecution if the terms of the program are strictly complied with by the taxpayer.


    As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported income on Cryptocurrency coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.

    It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process.  Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

    If you are concerned about reporting cryptocurrency to the IRS, consider the following tips that could help your situation.

    Avoid Talking to an Accountant

    Many taxpayers have the false belief that a business relationship with an accountant is privileged. Information about financial crimes reported to an accountant is not confidential because there is no accountant-client privilege. This means that an accountant could be forced to provide the government with evidence of your tax evasion. In some circumstances, the government may even coerce an accountant to testify against you in a criminal case.  They also have a conflict of interest with you where they may be tempted to throw you under the bus to protect their own reputation.

    Instead of hiring an accountant to fix your crypto noncompliance, you would be wise to work with a dually licensed California Tax Attorney and CPA like those at the Tax Law Offices of David W. Klasing. Only a law firm can offer you attorney-client privilege when it comes to relaying incriminating information about possible willful crypto coin tax reporting violations. As a result, you will be able to speak freely about all the cryptocurrency issues you are facing without worry that information will be leaked to the IRS or used against you in a court of law.

    Maintain Communication with the IRS

    If you own cryptocurrency and you have received a message from the IRS about your cryptocurrency holdings, ignoring this message is the last action that you want to take. Avoiding interaction with the IRS could lead to a tax audit or other serious consequences.  However, do not communicate with the IRS without consulting qualified legal counsel with a dually licensed Cryptocurrency Tax Attorney and CPA.

    After receiving any type of communication from the IRS regarding your tax situation, you would be wise to bring this information to your legal team. The Tax Law Offices of David W. Klasing could help you develop a legal strategy to deal with unreported cryptocurrency income. Let us help you get ahead of stiff civil and criminal penalties that is being pursued by the IRS through Operation Hidden Treasure.  Again, we can effectively remove the risk of criminal tax prosecution provided you are willing to knock on the IRS’s door before they come a knocking on yours.

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    Contact Us if You Are Worried About the IRS Targeting Crypto Coins in Operation Hidden Treasure or if your brokerage has received a John Doe Summons.

    If you are engaged in the investing or trading of cryptocurrency, and you want to know the details of Operation Hidden Treasure, contact our tax professionals today. The Tax Law Offices of David W. Klasing has worked on an extensive variety of cryptocurrency tax issues that commonly affect taxpayers. To make an appointment for a consultation, contact us at (800) 681-1295 or schedule ONLINE here.

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