A crypto exchange platform must supply the IRS with summonsed identifying and transaction information about certain customers in connection with the agency’s investigation into potential noncompliance of digital asset holders, a court authorized despite imposing limitations through a narrowed scope.
An order issued June 30 by the U.S. District Court for the Northern District of California in United States v. Payward Ventures Inc. (2023 WL 4303653; No. 23-mc-80029-JCS) granted the IRS’ February 3 petition to enforce a summons served to Payward subsidiary Kraken, a cryptocurrency service provider. IRS Supervisory Revenue Karen Cincotta of the Service’s Offshore Compliance Initiative (OCI) sought legal recourse after alleging Kraken failed to comply with the 2021 summons for user identification and transaction activity information about customers with transactions worth the equivalent of at least $20,000 in any year during the period January 1, 2016, though December 31, 2020.
The court’s order compels Kraken to provide names, dates of birth, taxpayer identification numbers, physical addresses, telephone numbers, email addresses, and certain transaction records for customers meeting those criteria. However, it found that the IRS’ request for all records and ledgers relating to such transactions was overly broad.
“The Government has not explained why this additional information is necessary,” read the order authored by U.S. Magistrate Judge Joseph Spero. “Neither has it challenged the accuracy or completeness of Kraken’s transactional ledgers.”
Despite narrowing the scope of the summons, the order mostly maintains the IRS established its grounds and reasonings for seeking the summonsed information.
“Since 2005, the IRS’s Electronic Payment Systems Initiative (“EPSI”) has focused on developing projects, methodologies, and techniques for identifying U.S. taxpayers who use electronic funds transfer and payment systems for tax avoidance purposes,” Agent Cincotta wrote in her February petition. “In September 2013, OCI expanded the scope of the EPSI to address U.S. taxpayers who use virtual currencies for tax avoidance purposes, recognizing that some U.S. taxpayers use such currencies to expatriate and repatriate funds to and from offshore accounts.”
Cincotta went on to explain that the IRS has been particularly focused on cryptocurrency accounts used as vehicles for tax evasion purposes, based on reports from the Government Accountability Office and the Treasury Inspector General for Tax Administration, as well as the IRS’ prior experience summonsing similar information from crypto exchange Coinbase (both the government and Kraken used the Coinbase example to further their own arguments, but Spero said that case wasn’t being accurately represented by either side.)
More generally, Cincotta argued that “when less identifying information is gathered, particularly a taxpayer ID number, the risk of individuals providing false or fictitious information is even greater and taxpayers who create false identities are more likely to evade their taxes.”
Kraken is headquartered in San Francisco. Since its founding in 2011, Kraken operates in nearly 200 countries and supports trading for 159 cryptocurrencies. It is estimated that Kraken has four million customers, with as many as 50,000 signing up per day at the end of 2017. About $140 billion has been traded on Kraken since its inception, according to Cincotta.
“The IRS expects the summoned records will produce leads to help it identify U.S. taxpayers that have transacted in cryptocurrency at the specified floor level through Kraken at any time during the period specified in the John Doe summons and who may have failed to report such transactions in compliance with internal revenue laws,” read the petition.
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