Two Recent Tax Crimes Cases Involving Bitcoin (1/19/25; 2/9/25)

See the additional items below added on 2/9/25.

In my immediately preceding post (2 days ago) on the indictment of Tom Goldstein, I mentioned that among the allegations were allegations that Goldstein had not properly reported his cryptocurrency transactions. I said that I would post some other recent items involving cryptocurrency. These recent items involve Bitcoin, perhaps the most prominent type of cryptocurrency. Goldstein’s indictment does not specify the type of cryptocurrency he allegedly used.

Ahlgren 

In United States v. Ahlgren ((W.D. TX No. 1:24-cr-00031) [CL has two docket sheets here and here with some documents available by checking both sheets], the defendant allegedly failed to report major income from Bitcoin transactions and allegedly certain other cryptocurrency including Bitcoin Cash, Bitcoin Gold, Etherium [Ethereum], and Litecoin. Ahlgren was indicted on seven counts of filing false tax returns and structuring deposits to evade currency transaction reporting requirements. Ahlgren was detained pending trial. (See Dkt. Entry 15 dated 4/9/2024 titled Order of Detention Pending Trial, here; Dkt Entry 22 dated 4/25/24 titled Government’s Advisory to the Court Regarding Detention Remand, here; and Dkt Entry 24 dated 4/22/24 and titled Order, here) Pretrial Detention is unusual in tax crimes cases.

Ahlgren thereafter pled guilty to one count of tax perjury, § 7206(1), and sentencing judgment was accordingly entered. (See Dkt Entry 45 dated 12/13/24 titled Judgment in A Criminal Case, here.) The count of conviction under the plea was a single count with a maximum three-year sentence. The Court sentenced Ahlgren to 24 months incarceration which would permit, with good time credit, a sentence served of less than 24 months. The Court imposed restitution of $1,095,031 which presumably is the unpaid criminal tax loss. Although restitution is not normally imposed in tax cases, it can be imposed if agreed in the plea agreement. This restitution is the amount that the IRS can assess without further ado under the restitution-based assessment (“RBA”) procedures. See §§ 6201(a)(4) & 6213(b)(5). The IRS may further audit Ahlgren's tax liabilities and assert more tax but will have to proceed under the deficiency procedures.

Further, shortly after sentencing, the Court entered a restraining order (See Dkt. Entry 50 dated 1/6/25 titled Restraining Order, here) requiring Ahlgren to

Excellent Article on IRS CI Special Agent and Cryptocurrency (10/2/24)

I post today on an excellent article—Geraldine Brooks, The Cyber Sleuth (WAPO 10/1/24), here. This is one article in a WAPO series on “Who is Government?” where seven writers are said to “go in search of the essential public servant.” The articles in the series with author of each article are:

•  The Canary: Michael Lewis on the Department of Labor
• The Sentinel: Casey Cep on the Department of Veterans Affairs
• The Searchers: Dave Eggers on NASA’s Jet Propulsion Lab
• The Number: John Lanchester on the Bureau of Labor Statistics
• The Cyber Sleuth: Geraldine Brooks on the Internal Revenue Service
• The Equalizer: Sarah Vowell on the National Archives
• The Rookie: W. Kamau Bell on the Department of Justice

Each article in the series (so far) is outstanding. It is appropriate that Michael Lewis starts with the first installment because of his book, The Fifth Risk, which has been described as “a love letter to federal workers -- and a dig at Trump’s ‘willful ignorance’.” See WAPO book review here. Lewis tells a great story of the bureaucracy—the deep state, if you will—and how much the bureaucrats do for the country, keeping the country on an even keel in turbulent times (particularly the first (and hopefully the only) Trump administration where chaos reigned as Trump haphazardly filled the ranks of political appointees to the agencies).

The Cyber Sleuth installment deals with Jarod Koopman, an IRS “Cyber Sleuth.” Koopman is an example of IRS employees and government employees generally who bring dedication and unique skill to the mission of the IRS, an agency that Congress chronically underfunds seemingly to hamper the IRS’s ability to do the tasks Congress assigned it to do. The article says:

Until last year, the staff who work inside had watched their budget get cut for a decade. Their staffing numbers had reached lows not seen since the 1970s, even as the U.S. population swelled and the quantity of tax returns soared. There was no money to update failing technology, or even the software that ran it. The result was a pileup of paper returns that colonized corridors and cafeterias, and an American public vexed by poor service.

That, of course, was the goal: anti-tax activist Grover Norquist’s famous shrink-it-till-you-can-sink-it strategy. So the civil servants who had been valiantly struggling to serve more people with fewer resources found themselves unappreciated — even despised.

And perhaps most despised are the 3 percent of IRS personnel involved in criminal investigation, who have become piñatas for the agency’s critics. Fox News’s Brian Kilmeade characterized agents such as Koopman as dangerous threats who could “hunt down and kill middle-class taxpayers,” while Rep. Lauren Boebert (R-Colo.) accused them of “committing armed robbery on Americans.” Republicans even attached a rider to a spending bill limiting the number of bullets the IRS can buy. “A weapon is rarely discharged by one of our agents,” says a frustrated Werfel. “But you can’t send an agent into a criminal enterprise unarmed, so they have to train, and there’s a minimum inventory required for that.” 

IRS Continues Efforts to Crack Cryptocurrency (9/15/20)

The IRS is offering to pay private contractors who can ““reliably produce useful results on a variety of real-world CI cryptocurrency investigations involving Monero and/or Lightning.”  Kelly Phillips Erb, IRS Will Pay Up To $625,000 If You Can Crack Monero, Other Privacy Coins (Forbes 9/14/20), here.  I don’t expect readers of this blog to jump at the opportunity, but readers of this blog should be aware of this and related developments that constrict taxpayers’ ability to hide untaxed income in cryptocurrency.  

Key excerpts:

The IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

Cryptocurrency Compliance Efforts

A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (Schedule 1 is used to report income or adjustments to income that can't be entered directly on the front page of form 1040). And in 2020, the IRS noted that it will post a cryptocurrency question right on the front page of your Form 1040.

In 2019, the IRS also announced that it was sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

* * * *

About Privacy Coins

IRS Solicitation for Outside Expertise in CryptoCurrency Audits (5/31/20)

There are reports that the IRS has sent out a “Statement of Work” soliciting assisting from contractors to help with audits involving potential cryptocurrency transactions.  See Guinevere Morre, Got Cryptocurrency? Get Ready For An IRS Audi (Forbest Editors’ Pick 5/29/20), here; and IRS Soliciting Contractors to Help Audit Crypto Tax Returns (CryptoTrader.tax blog), here(with a copy of the Statement of Work).

The introduction says:

The Internal Revenue Service (IRS) requires consulting services to support a taxpayer examination involving virtual currency. In particular, the IRS requires consulting services to calculate taxpayers' gains or losses as a result of their transactions involving virtual currency. Specific requirements are outlined below.

 The Statement of Work process is described here.

The use and trading in cryptocurrency offers great opportunity for tax avoidance and evasion, so it is not surprising that, given the IRS cryptocurrency push, it would seek outside expertise to assist.

IRS Sending Letters to Taxpayers with Potential Taxable Virtual Currency Transactions (7/26/19)

In IR-2019-132, here, the IRS announced that it is "sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly."  By the end of August, the notice says, more than 10,000 taxpayers will receive the letters.

The Notice further says:

"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS Commissioner Chuck Rettig. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."

The Notice concludes with this:

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Virtual Currency Held in Foreign Accounts Not FBAR Reportable (6/27/18; 7/2/18)

I am not an expert on virtual currency or reporting requirements for virtual currency.  One issue is whether virtual currency or holding virtual currency on a foreign third-party exchange was reportable on the FBAR, FinCEN Form 114.

I link here a report from the AICPA Virtual Currency Task Force which obtained some input from the IRS on the issue.  Kirk Phillips, Virtual currency not FBAR reportable (at least for now) (Journal of Accountancy 6/19/19), here.

FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. 

The report caveats that only FBAR reporting is addressed.  Reporting on Form 8938, Statement of Specified Foreign Financial Assets, is not addressed.

Updates:

• James Creech (Guest Blogger), Virtual Currency, FBAR, and the Ripple Effect (ProcedurallyTaxing Blog 7/2/19), here.

Coinbase Will Comply with JDS on Approximately 13,000 Customers for Bitcoin Transactions (2/26/18)

I have reported before about the IRS John Doe Summons issued to Coinbase, a digital currency exchange.  See Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17), here.  According to Coinbase's web site titled "IRS Notification," here, Coinbase has notified approximately 13,000 customers that, pursuant to the Court judgment, here, Coinbase expects to comply with the JDS.

The Coinbase web page has the contents of the letter notification.  Key points of the notification are:

1. Conbase expects to comply within 21 days of the notification (February 23, 2018).
2. Potentially affected customers may want to seek advice of counsel.
3. Regarding the effect of the delay in compliance from the original issuance:

In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.

Section 6501, here, is the civil statutes of limitation, and Section 6531, here, is the criminal statute of limitations.  Pursuant to Section 7609(e)(2), here, the suspension is from: (i) the date which is 6 months after the service of such summons, until (ii) "the final resolution of such response."  Assuming that the expected Coinbase response on or around mid-March fully resolves the scope of the summons as ordered by the Court, the period of the suspension will be about 280 days.  If, however, that response does not fully resolve the summons, then the statute will continue running until there is full compliance.  So far as I am aware, there is no public announcement as to when there is full compliance to conclude the suspension period.  However, the IRS calculation of the suspension period should be disclosed in any audit where the IRS relies on the suspension period and may also be obtained informally if a publicly released document otherwise refers to it or a document from an audit is circulated among practitioners.  (See the FTC Blog link for 1/26/15.)

For earlier posts on the suspension of the statutes of limitation for noncompliance with summonses, see (presented in reverse chronological order):

• IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here.
• Suspension of Statute of Limitations From the UBS John Doe Summons (Federal Tax Crimes Blog 1/26/14), here.
• Suspension of the Statute of Limitations from the UBS John Doe Summons (Federal Tax Crimes Blog 8/11/12), here.

IRS CI Focuses on Crytpocurrencies and Related Tax Evasion Schemes (2/9/18)

David Voreacos, IRS Cops Are Scouring Crypto Accounts to Build Tax Evasion Cases (Bloomberg 2/8/18), here.  Excerpts:

The U.S. Internal Revenue Service *  * * has assigned elite criminal agents to investigate whether Bitcoin and other cryptocurrencies are being used to cheat the taxman. 

A new team of 10 investigators is focusing on international crimes. In addition to following undeclared assets that are flowing out of Swiss banks after a crackdown, it will also build cases against tax evaders who use cryptocurrency. The promise of anonymity that has drawn money launderers and drug dealers to virtual coins is also attracting tax cheats, the IRS has said. 

* * * * 

“It’s possible to use Bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion,” Fort [CI Chief] said. 

* * * * 

Fort said his unit is focusing on how users convert cash to cryptocurrency and back. “We know that you want to get your money out at some point,” he said. 

In addition to individuals who evade taxes, Fort’s agents are looking at unlicensed exchanges in the U.S. and overseas. They are working with other criminal agents around the U.S. and stationed abroad. 

The Criminal Investigation Division gained expertise in tracking cryptocurrency by working on hundreds of identity-theft cases. The division has shrunk in recent years as Congress has reduced funding, resulting in a loss of 21 percent of agents since 2011.\ 

As a result, the division is forming specialized teams with expertise to develop high-impact cases. Aside from cryptocurrency and the flow of funds out of Switzerland, the international team will focus on tax crimes involving expatriates and cases arising out of the Foreign Account Tax Compliance Act.

The Rise of Cryptocurrencies for Tax Avoidance/Evasion (1/29/18)

A good article on Cryptocurrencies and Taxes.  Rob Urban, Governments Worry That Cryptocurrencies Could Be the ‘Next Swiss Bank Account’ (BloombergMarkets 1/29/18), here.  Excerpts:

Authorities around the world worry that cryptocurrencies could become tax havens. 

* * * * 

British Prime Minister Theresa May and Indian Prime Minister Narendra Modi are among the world leaders who’ve expressed alarm at the rise of virtual cash to move money offshore. The U.S. Congress held hearings this month, and Treasury Secretary Steven Mnuchin called on the world’s 20 biggest economies to work together to make sure cryptocurrencies don’t “become the next Swiss bank account.” The concern comes after a successful international crackdown on tax havens in traditional banking. 

“Every country is scrambling to come up with an answer,” said Drake, who serves on the boards of 25 public and private companies. “There needs to be a regulated structure that won’t kill the industry.” 

* * * *

There’s demand for fresh ways to hide assets after U.S. and European regulators clamped down on traditional banks. They’ve ramped up enforcement of “know-your-customer” and anti-money-laundering rules and forced offshore financial institutions to disclose client information. The campaign prompted many mainstream financial firms to limit customers’ access to Switzerland’s secretive banking system. That’s made it harder to hide funds from the government, courts, spouses or other prying eyes back home. 

Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17)

I have previously written on the IRS's John Doe Summons to Coinbase, a leading Bitcoin firm.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here. In United States v. Coinbase, Inc. 2017 U.S. Dist. LEXIS 196306 (N.D. Cal. 11/28/2017), here, the U.S. Magistrate Judge ordered compliance with respect to most but not all of the information requested by the Government in a narrowed scope for the summons.  The Magistrate Judge's judgment is here; the docket entries as of today is here.

The Court did the standard summons analysis under the Powell standards.

The Court's key holdings, based on its conclusions as to relevance to IRS's legitimate need for information and documents, are in the following excerpts:

The Court agrees that the Coinbase account holder's identity and transaction records will permit the Government to investigate whether the holder had taxable gains that were not properly declared. But the Government seeks more than that information; it also seeks account opening records, copies of passports or driver's licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder. The Government claims to need these records to verify an account holder's identity and determine if the holder used others to make transactions on the account holder's behalf. However, at this stage, where the Government is seeking records on over 10,000 account holders, these requests seek information than is "broader than necessary." See Bisceglia, 420 U.S. at 151. The first question for the IRS is whether an account holder had a taxable gain. If the account holder did not, then correspondence between Coinbase and a user is not even potentially relevant. Similarly, while the Government needs an account holder's name, date of birth, taxpayer identification and address to determine if a taxable gain was reported, it only needs additional identity information such as copies of passports and driver' licenses or "Know Your Customer" due diligence if there is potentially a taxable gain and if there is some doubt as to the taxpayer's identity. If there is not, these additional records will not shed any light on a legitimate investigation. 

At oral argument the Government explained that it included such broad swaths of records in its summons so that it will not need to return to court to ask for them if and when needed. The Court is unpersuaded. Especially where, as here, the Government seeks records for thousands of account holders through a John Doe summons, the courts must ensure that the Government is not collecting thousands and thousands of personal records unnecessarily. Moreover, if the Government later determines that it needs more detailed records on a taxpayer, it can issue the summons directly to the taxpayer or to Coinbase with notice to a named user—a process preferable to a John Doe summons. 

The Court therefore finds that the relevant documents as identified in Request 1 are: (1) the taxpayer ID number, (2) name, (3) date of birth, and (4) address. The remaining items in Request 1 are not relevant at this stage: account opening records, copies of passports or driver's licenses, all wallet addresses, and all public keys for all accounts/wallets/vaults. 

The Court also finds that transaction history, as identified in Requests 4 and 6, is relevant to the Government's legitimate purpose. Coinbase must produce records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction. The remaining information sought by Request 4 is not relevant at this time: requests or instructions to send or receive bitcoin and information identifying the users of such accounts where counterparties transact through their own Coinbase accounts/wallets/vaults and their contact information. 

The Court likewise finds the following documents are not necessary to achieve the Government's legitimate purpose at this stage: 

• Request 2: Records of Know-Your-Customer diligence,
• Request 3: Agreements or instructions granting a third-party access, control, or transaction approval authority, and
• Request 5: Correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault opening, closing, or transaction activity. 

These records may become necessary for a specific account holder once the IRS reviews the relevant records; but for many or even most of the account holders they may never be relevant and thus the Court will not order their production. Accordingly, the 

Government's Petition to Enforce Requests 1, 4 and 6 is GRANTED as set forth above; in all other respects the Petition to Enforce is DENIED.

Based on this analysis, the Court's order is:

Coinbase is ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:
(1) the taxpayer ID number,
(2) name,
(3) birth date,
(3) address,
(4) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
(5) all periodic statements of account or invoices (or the equivalent).
In all other respects the Petition to Enforce is DENIED. The Court GRANTS John Doe 4's request for judicial notice.

A good article is Joel Rosenblatt, Coinbase Loses Bid to Block U.S. Tax Probe of Bitcoin Gains (Bloomberg Technology 11/29/17), here.  Key excerpts from that article are:

The company said it’s glad that the government and the court narrowed the scope of the summons.

“Coinbase started this process more than 12 months ago, and while today’s result is not the complete victory we hoped for, it does represent a substantial and unprecedented victory for the industry and the hundreds of thousands of customers that would have been unfairly targeted if it weren’t for our action,” the company said in a statement posted on its blog. 

Last year, analysts said similar demands could be made of other digital-currency companies if the IRS widens its investigation. 

“The government has sensed a windfall -- any company that has a plethora of wealthy users might be in the sights,” Charles Hayter, chief executive officer of market tracker CryptoCompare, said in an email. “If there is tax to be paid the government is going to go after it if it makes an example” or a return on investment.

JAT Comments:

Offshore Evasion: IRS Summons Setback Does Not Mean Game Lost (12/8/16)

I recently blogged about the decision in United States v. Greenfield, 831 F.3d 106 (2d Cir. 8/1/16), here, about failed summons enforcement for offshore account records.  Important CA2 Opinion on Foregone Conclusion Required To Overcome Fifth Amendment Act of Production Assertion to Summons Production of Foreign Documents, Including Bank Records (Federal Tax Crimes Blog 8/1/16), here.  Procedurally Taxing offers a great blog showing more audit and need context.  Dave Breen, Grinches, Liechtenstein Royal Princes, Bankers, Toymakers (and Offshore Evasion): A Holiday Summons Tale (Procedurally Taxing 12/8/16), here.  

Among other things Dave notes the difficulty the IRS has in going back to older years.  Indeed, the failed IRS attempt in Greenfield resulted from a too tenuous extrapolation from 2001 to 2013.  But, while Greenfield may have achieved at least a temporary victory, the rest of the universe of offshore evaders should not rest too easy.  The IRS will continue its efforts to discover the offshore noncompliance.  Some taxpayers will win the lottery; some will not.  Dave concludes:

Conclusion 

But before you settle your brains for a long winter’s nap, think about this.  Even though Steven may have sunk IRS’s Battleship, today IRS is not in any immediate Trouble.  In fact, it is already working on a new Mousetrap.  On November 30, 2016 IRS received permission to issue a John Doe summons to Coinbase, Inc., a virtual currency exchanger headquartered in San Francisco, California, that Les discussed last month in his post IRS Seeks Information via John Doe Summons Request on Bitcoin Users.   

The moral of the story?  Uno’s?  I suspect many clients with assets hidden offshore will still take a big Risk by not coming in under IRS’s voluntary disclosure program, but you don’t have to be a Mastermind to see that many of them will ultimately be Sorry.  But, I guess that’s The Game of Life.  Happy Holidays!

Bitcoins Update (10/11/14)

I will summarize key points I found interesting from an article I just read on the tax treatment of Bitcoin and the IRS's response to it.  David D. Stewart, ABA Meeting: IRS Preps Bitcoin Investigators as Treatment Questions Remain, 2014 TNT 184-9 (9/23/14), no link available.  The article summarizes discussion at an ABA Tax Section meeting of the Civil and Criminal Tax Penalties Committee on 9/20.

1.  Use of bitcoin is not inherently illegal.  However, using bitcoin to skirt the U.S. tax law is illegal.  It's use can also be illegal under other laws such as money laundering.

2.  According to Bryan Skarlatos of Kostelantetz & Fink, Bitcoin is not as anonymous as cash, although in some cases its use may be more convenient.

3.  According to an IRS representative, "the government is getting more sophisticated in tracking transactions in which the currencies are used improperly."  The principal focus of the investigations is money laundering, but the IRS is gearing up for criminal tax investigations.

4.  The article reports on how the government traces:

"Sparkman noted that because bitcoin transactions are recorded in the public block chains, investigators have been able to trace them back all the way to their origins. She said that the one difficulty that remains is in breaking the passwords used to protect the private encryption keys that grant control over the coins themselves, but that it can be done, or the government may gain access through a cooperative party."

5.  The IRS/Treasury is getting suspicious activity reports on bitcoin activity.

6.  The substantive treatment is that bitcoins are treated as property rather than as currency.

7.  One participant said that, for underlying substantive tax treatment, the gain from realization of bitcoins would be taxable but the losses would not be deductible because bitcoin acquisitions are not entered for profit.

8.  On Bitcoin custodians:

"Bitcoin custodians that hold accounts are money transmitters under federal law, while foreign custodians could be foreign financial institutions. Asked whether virtual currency intermediaries should be subject to FATCA requirements, Keyso said the government is aware of the issue but does not yet have a "published position" on the question.

9.  On use of bitcoins as cash payments for CTRs/Forms 8300:  Uncertain.