Recent reports have provided new insight into the Internal Revenue Service’s concerns about Bitcoin tax evasion, and appear to indicate that only a small portion of Bitcoin users ever bother to report their profits and losses in their annual filings with the agency. The revelations came as the IRS formally filed a lawsuit in federal court to force the Coinbase exchange to obey the agency’s John Doe Summons requiring the release of exchange customer information.
The IRS has also authorized one of its agents, David Utzke, to provide the court with an affidavit that helps to put the agency’s investigation of digital currency-related tax avoidance into perspective. According to that filing, Utzke was responsible for performing a digital analysis of the agency’s tax records – which number in the hundreds of millions – to search for Bitcoin-related asset descriptions on Form 8949. That form is used for capital gain and loss reporting of the type Bitcoin users could experience as a result of their ownership of the currency.
Utzke’s affidavit suggests that, for the three-year period covered by the IRS summons, the number of returns that included reports of Bitcoin activity ranged from between 800 to 900 per year. As Utzke described the situation:
“The IRS searched the MTRDB for Form 8949 data for tax years 2013 through 2015. I received the results of those searches. Those results reflect that in 2013, 807 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin; in 2014, 893 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin; and in 2015, 802 individuals reported a transaction on Form 8949 using a property description likely related to bitcoin.”
It is that absence of Bitcoin reporting that has led the IRS to conclude that there is a strong possibility that tax avoidance is occurring, prompting the John Doe Summons. The agency reportedly believes that tens of thousands of Bitcoin users may have failed to declare their Bitcoin earnings.
To date, Coinbase continues to defy the summons, and the exchange’s lawyer has insisted that resistance to the “indiscriminate and over broad scope of the government’s summons” will continue. There are also reports that both sides have continued to discuss the issue, though the IRS has yet to offer a more narrowly-tailored solution.