Virtual Currency Update: Large FinCEN Civil Penalty Assessments and an Update Regarding IRS Coinbase Summons

$110m Civil Penalty Levied Against Russian Cryptocurrency Exchanger

Last week, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced that they had assessed a civil penalty of over $110m against the Russian virtual currency exchanger, BTC-e. Additionally, FinCEN assessed a $12m civil penalty against BTC’e’s founder Alexander Vinnick. Vinnick was also charged with 21 federal counts, including money laundering and running an unlicensed money services business.

Under the Bank Secrecy Act, FinCEN has the authority to oversee money services businesses and although the operation of an enterprise dealing exclusively with virtual currency does not fall under the purview of FinCEN, operating a business that converts virtual currency into legal tender (a “transmitter”) is. The civil penalty assessments against BTC-e are a result of BTC-e’s alleged failure to implement anti-money laundering measures as well as its failure to register as a money services business.

Although FinCEN is not particularly out to find taxpayers who are dealing in cryptocurrencies or virtual currencies, they are targeting businesses that service transactions involving them. When criminal investigations are being conducted against companies like BTC-e, large amounts of information that can be used to identify non-compliant U.S. taxpayers with investment in cryptocurrency that have gone un-reported for tax purposes are at the government’s fingertips.

Updates to the Coinbase John Doe Summons

We have reported on the drawn out legal battle between the IRS, cryptocurrency dealer Coinbase, and Coinbase users in the past. Last year, the IRS issued a John Doe summons seeking identifying information and transaction histories from Coinbase users. This move was likely a response to a statistic that only a small fraction of those transacting in cryptocurrency were reporting income upon its disposition. Coinbase refused to comply with the summons and the IRS took the issue to court in an enforcement hearing. Anonymous Coinbase users have attempted to join the litigation, arguing that they will suffer injury if the summons is enforced.

Last month in a hearing in the matter, the IRS informed U.S. Magistrate Judge Jacqueline Scott Corley that the IRS would be reducing the amount of information requested as a part of the John Doe summons to only information needed to determine if income has been omitted on Coinbase customers’ tax returns. Judge Corley said that it would be “extraordinary” to think that an illegal request wouldn’t create an injury to a Coinbase user after DOJ attorney Amy Matchison argued that Congress did not intend for anonymous John Doe summons targets to have the right to challenge such actions in court. Coinbase attorneys said that they intend to file a brief in opposition to the modified summons.

The tax and accounting professionals at the Tax Law Offices of David W. Klasing have experience in assisting taxpayers with unanswered questions about cryptocurrency compliance. Whether you are dealing in Bitcoin or the target of an IRS audit with cryptocurrency issues, our team of zealous advocates can provide targeted assistance and assist with the creation and implementation of a sound case strategy. Don’t let the threat of an eggshell audit or IRS criminal tax investigation keep you up at night. We have extensive experience in dealing with both.

Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation by phone at 949 681-3502 or online.  The solution to your dilemma is most likely a domestic / foreign voluntary disclosure if you have not been contacted by the taxing authorities and or eggshell audit / criminal tax investigation representation and defense strategy if you have.

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Warning signs an audit has gone criminal
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What is an effective tax defense in an IRS eggshell tax audit?
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So you cheated on your taxes and you are under a tax audit
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Why should I hire a tax attorney to represent me in a tax audit?
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