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Will I Be Audited by the IRS if I Use Coinbase to Buy, Sell, or Store Bitcoins?

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    The cryptocurrency or virtual currency “Bitcoin” has exploded in value since its debut, skyrocketing from fractions of a cent in 2010, when it was traded for the first time, to roughly $600 by 2016. Bitcoin’s worth is now increasing at a steeper rate than ever, with the value of a single Bitcoin climbing from roughly $11,840 on December 5 to $15,656.78 on December 8: an approximate increase of $3,817 over a mere three-day period. With the value of – and public interest in – Bitcoin and virtual currencies surging, the Internal Revenue Service (IRS) is turning an eye toward stricter regulation, and with it, tougher enforcement of compliance with Bitcoin tax requirements. The Service has already taken measures to obtain information about select Bitcoin users, securing court approval to serve a “John Doe” summons on major cryptocurrency exchange Coinbase. The issuance of the summons suggests that a wave of Bitcoin audits is in the works. If you use Coinbase to “mine,” sell, purchase, or invest in Bitcoin, take heed: you may be on the IRS’ list, and should consult with a Bitcoin tax attorney immediately.

    IRS Obtains Records of 14,000 Cryptocurrency Users Through Coinbase John Doe Summons

    and storing digital currency,” namely Bitcoin and lesser-known virtual currencies Litecoin and Ethereum. However, that “security” is increasingly at risk. According to a Department of Justice (DOJ) press release, “A federal court in the Northern District of California entered an order today authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015. The IRS is seeking the records of Americans who engaged in business with or through Coinbase, a virtual currency exchanger headquartered in San Francisco, California.”

    Coinbase, which fought the summons, obtained several concessions from the Court. In a blog post published November 29, Director of Communications David Farmer announced a “partial victory” for the company, writing, “Although the Court did not completely quash the government summons compelling disclosure of certain customers’ records from the period 2013-2015 as we requested… more than 480,000 customers’ records were preserved from disclosure. This is a 97% reduction in the number of customers impacted by this summons.”

    Farmer added, “Second, the quantity of data we must produce for the approximately 14,000 customers who remain in scope has been significantly reduced. In narrowing the scope of the summons, we are pleased that the Court acknowledged the privacy rights at stake in this matter.”

    While Coinbase has had, as Farmer notes, some success in protecting user privacy, the summons still opens a door to increased IRS scrutiny of approximately 14,000 individuals. For now, those individuals’ identities are still unknown, creating the need specifically for a John Doe summons. These summonses, and the circumstances surrounding their use, are succinctly explained in the IRS handbook of Special Procedures for John Doe Summonses, or Internal Revenue Manual (IRM) 25.5.7, which provides the following:

    “1. Under IRC 7609 (c)(3) and 7609 (f), a John Doe summons is a summons that does not identify the person with respect to whose liability the summons is issued. The Internal Revenue Code authorizes the Service to issue a John Doe summons pursuant to an investigation of a specific, unidentified person or ascertainable group or class of persons.

    1. With a normal summons, the IRS seeks information about a specific taxpayer whose identity is known. In contrast, a John Doe summons allows the IRS to get the names and requested information and documents concerning all taxpayers in a certain group. A John Doe summons can be a useful tool when trying to obtain information like a list of investors in a certain tax shelter, owners of tax-exempt bonds, or account holders at a financial institution.”

    It’s difficult to mistake the cautionary tone of the DOJ’s message to cryptocurrency users: “As the use of virtual currencies has grown exponentially,” said Principal Deputy Assistant Attorney General Caroline D. Ciraolo, “some have raised questions about tax compliance. Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – [B]itcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”

    Bitcoin Tax Attorneys Providing IRS Audit Representation

    Are all Coinbase users being audited or investigated? No. On the contrary, most Coinbase users will not be affected, according to Farmer. However, for those among the approximately 14,000 individuals who are now on the government’s radar, an IRS audit could be just around the corner.

    If you are a Bitcoin miner, investor, or seller, or if you use Bitcoin or other cryptocurrencies to make purchases, save for retirement, or pay your employees, you could be targeted for an audit, which could result in a finding that leads to the imposition of costly penalties. The best way to protect yourself and minimize the damage is to immediately contact a knowledgeable cryptocurrency tax attorney who has extensive experience handling tax controversies in this developing and complex area of tax law. Moreover, you should be advised that you may have obligations to report foreign income, such as filing an FBAR and complying with FATCA requirements, depending on where the server or exchange you use is located.

    It may be possible to avoid penalties, but it is imperative that you act quickly to review your options. To book a reduced-rate consultation with an experienced IRS tax audit lawyer serving California residents, out-of-state taxpayers, and citizens abroad, contact the Tax Law Office of David W. Klasing, or call our California tax lawyers today at (800) 681-1295.

    Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

    Here is a link to our YouTube channel: click here!

    Foreign income and information non-compliance

    Here is a link to our practice video on warning signs than an audit has gone criminal.

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    So, you cheated on your taxes and you are under a tax audit…

    Why should I hire a tax attorney to represent me in a tax audit?


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