A federal court has granted the Internal Revenue Service (IRS) authority 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.
IRS Definition of a John Doe Summons
In the typical scenario, the IRS issue a summons to a third party to obtain information regarding a specific taxpayer whose identity is known. In contrast, a John Doe summons allows the IRS to obtain information from a third party without identifying a specific taxpayer. A Joe Doe summons identifies a specific group of taxpayers, in this case taxpayers that use digital currencies such as Bitcoin, to obtain those taxpayers’ identities. A John Doe summons is a powerful tool used to identify individuals that may be engaged in tax shelters or other schemes to evade taxes.
The IRS has recently used John Doe summons in investigating tax evasion by U.S. taxpayers using offshore accounts. It is now using the same strategy to collect information about U.S. taxpayers using virtual currencies.
“As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance,” said Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division. “Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”
If you are using Bitcoin, Coinbase or another virtual currency to avoid paying taxes, you should talk with a tax attorney about coming into compliance with the IRS before you face even larger penalty or possible criminal charges.