By Megan L. Brackney and Jas Singh
Tax Notes State
October 2021
Abstract: In this article, Brackney and Singh explore the effect of the Taxpayer First Act’s procedural requirement that John Doe summonses be “narrowly tailored to information that pertains to the failure (or potential failure)” to comply with tax laws.
The IRS has prioritized enforcement of income tax reporting from transactions in cryptocurrency. In March the director of the IRS Office of Fraud Enforcement announced “Operation Hidden Treasure,” which was described as “all about finding, tracing, and attributing crypto to U.S. Taxpayers,” and includes additional training, enhanced use of data, partnering with private sector experts, and increased communication between the Office of Civil Fraud Enforcement and the Criminal Investigation division.
One tool available to help the IRS meet this goal of rooting out taxpayers who may not be properly reporting their cryptocurrency transactions is the John Doe summons. However, the IRS must now meet a heightened standard to obtain information about taxpayers through these summonses. In 2019 the Taxpayer First Act added a new procedural requirement to IRC section 7609(f) — that the John Doe summons be “narrowly tailored to information that pertains to the failure (or potential failure)” to comply with the tax laws. This article discusses the TFA’s requirement and its effect in two recent cases in which courts approved the issuance of John Doe summonses to cryptocurrency exchanges. It will also explore the requirement’s potential impact on the exchanges’ ability to challenge the summonses under the traditional Powell factors.
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