By Caroline Rule and Daniel Q. Flesch
The Journal of Tax Practice & Procedure
Summer 2021 Issue
At a Federal Bar Association conference in March of this year, Damon Rowe—Director of the Office of Fraud Enforcement at the IRS—announced a new initiative. Operation Hidden Treasure consists of a special joint-effort to track down unreported cryptocurrency. The campaign combines the skills of the IRS’s civil fraud unit with the muscle and savvy of its criminal investigation division. The IRS plans to train its employees on the complexities of the world of virtual currency (i.e., cryptocurrency), with agents working alongside representatives of the European Union Agency for Law Enforcement Cooperation (Europol), in order to coordinate a response that accounts for the international nature of border-hopping virtual assets.
A month after the IRS announced its new program, the Service’s attack on cryptocurrency tax or reporting evasion advanced another step. In April, a court in the District of Massachusetts gave the IRS the go-ahead to issue a John Doe summons—a summons seeking information about an ascertainable class of unknown individuals who may have failed to comply with the internal revenue law—to Boston-based Circle International Financial Inc. (“Circle”), a company which specializes in payments technology related to cryptocurrencies. A month later, in May, a court in the Northern District of California authorized the IRS to serve a John Doe summons on Payward Ventures Inc. d/b/a Kraken (“Kraken”), a cryptocurrency exchange and bank whose headquarters are in San Francisco.
The recent whirlwind of coast-to coast activity in the realm of cryptocurrency enforcement did not emerge out of the blue; the IRS has been mulling ways to attack digital currency tax evasion since 2014, when it released Notice 2014-21. Over the past decade, the Service has been taking notes and laying traps, and it is now primed to go after cryptocurrency tax evaders.
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