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Clarifying the “John Doe” summons from the IRS on Coinbase

The financial world is evolving. This is not the first time the economy has shifted its focus. The focus has shifted in the past from one that depends on gold as currency to paper dollars to credit cards. The shift is now moving to the novel world of digital currency.

With every change in economic focus, a potential for tax evasion can arise. In this instance, the Internal Revenue Service (IRS) has voiced concern that digital currency users are not properly reporting income from online transactions. This question was most recently raised with a “John Doe” summons from the IRS on Coinbase.

What is Coinbase? Coinbase is a company that is used for transactions of digital currency like bitcoins.

What is a bitcoin? Bitcoin is a form of digital currency. Like other forms of currency, it is subject to taxation by the IRS. Additional information on bitcoins and taxation is available here.

What is a “John Doe” summons? This type of summons is unique because it does not go to a specific person. Instead, the summons goes to a group based on their activities. In this instance, the group is composed of Coinbase users.

What is the IRS hoping to gain from this summons? The IRS contends that the lack of bitcoin reporting on tax returns is suspicious. A recent publication by Forbes elaborates, noting that the combination of anonymity and a lack of 1099 Forms issued by a bank or other type of third-party paperwork increase the likelihood of underreporting income in these transactions.

Essentially, it appears that the IRS is hopeful that a number of the 500,000 users impacted by the summons will have failed to report any earnings connected to the use of digital currency. If successful, the summons could ultimately result in the issuance of tax bills to thousands of Coinbase users.

How likely is it that the IRS will be successful? Although the summons was granted by the Court, it is facing opposition within Congress. Congressional leaders sent a letter to the IRS Commissioner in an attempt to gather additional information about the summons.

The letter states that members of Congress are concerned about both the wide scope and potential impact of the summons. Ultimately, the group appears to be concerned that the IRS is being unreasonable in its efforts to rein in any attempts at tax evasion through use of digital currency.

Although it is difficult to determine if the summons will move forward successfully, it does provide some guidance on the IRS’ efforts to ensure that those using digital currency are meeting their tax obligations

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