IRS Granted “John Doe” Summons By Montana Court to Ascertain Taxpayer Information about Prepaid Debit Cards

On November 18, 2016, the Internal Revenue Service filed and was subsequently granted an Ex-Parte Petition in the California Northern District Court to serve Coinbase with a “John Doe” summons,

"…specifically seeking records for Coinbase users who transferred convertible virtual currency at any time between December 31, 2013, and December 31, 2015, with 'any U.S. address, U.S. telephone number, U.S. e-mail domain, or U.S. bank account.' Requested records include but are not limited to user profiles, user preferences, user security settings and history, user payment methods, and other information related to the funding sources for the account/wallet/vault. And that’s just for starters. IRS is also seeking all records of account/wallet/vault activity including but not limited to records identifying the date, amount, and type of transaction, names or other identifiers of parties to the transaction; requests or instructions to send or receive Bitcoin; and all related correspondences.”

The scope and breadth of this demand are breathtaking. It would appear the Internal Revenue Service has decided to go a step further in the use of "John Doe" summonses to crack down on tax evasion.

On January 26, 2017, Accounting Today reported a federal court in Montana granted the Internal Revenue Service authority to serve Sovereign Management & Legal, LTD a "John Doe" summons targeting US Taxpayers who may hold offshore accounts which have access to prepaid debit cards. It is their position these prepaid debit cards and foreign accounts would allow the US Taxpayer to participate in tax evasion through a foreign entity and permit repatriation of those funds to the US through the prepaid debit cards.

“The Justice Department previously obtained a similar order from a federal court in New York, authorizing eight separate John Doe summonses on bank and other entities for information related to SML and its customers in the U.S.”

How Does this Apply to Crypto Speculators and Enthusiasts?

As I stated in an earlier article US Tax Considerations – IRS Warned by TIGTA to Focus on Illegal Use of Virtual Currency | IRS Demands Coinbase Records, after being raked over the coals by TIGTA for failing to collect $9 billion in income tax and for failing to provide guidance and crack down on tax evasion practices using cryptocurrencies, it is evident both crypto and offshore tax evasion crackdown is a priority for the Internal Revenue Service.

Several prepaid debit card services are provided by innovative companies within the crypto (specifically Bitcoin) space. A short list from a Google search shows a list of providers which include: Spectrocoin Prepaid Visa Debit Cards, BitPay Prepaid VISA Card, Xapo Prepaid VISA Debit Card (based in Switzerland), Coinbase/Shift Prepaid Debit Card (currently litigating a “John Doe” summons) and Bitwala Prepaid Visa Debit Card (based in Germany). I don't think it would be much of a stretch to consider prepaid Visa cards in the cryptoverse are on the list for the IRS. Draconian fines and penalties for failing to file an FBAR for qualifying foreign accounts and reporting foreign bank holdings on your 1040 can be severe.

Be certain to keep good records and stay in compliance with your reporting obligations.