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Court authorizes IRS to seek customer records from crypto firm Circle

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The Internal Revenue Service (IRS) is seeking customer records from crypto firm Circle to check U.S. residents are meeting their tax obligations.

According to a Thursday statement from the Department of Justice, the tax watchdog plans to serve a John Doe summons to circle and its affiliates. The statement explicitly named Poloniex, which Circle acquired in 2018 and spun out the following year

Per the statement, the IRS is "seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Circle, a digital currency exchanger headquartered in Boston."

A John Doe summons doesn't list the name of those being investigated and empowers the IRS to request information about taxpayers it hasn't yet identified. It allows the IRS to obtain the names and information of taxpayers who fall in a certain group, like a list of investors, that could potentially be in violation of tax law. It requires a federal judge to sign off.

In this case, U.S. Judge Richard G. Stearns gave the green light. He found "there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws," according to the DOJ statement.

To be clear, the IRS is not accusing Circle of any wrongdoing. The action is specifically aimed at identifying U.S. residents who are failing to fulfill tax obligations related to cryptocurency, according to the IRS and DOJ.

“The John Doe summons is a step to enable the IRS to uncover those who are failing to properly report their virtual currency transactions. We will enforce the law where we find systemic noncompliance or fraud," said IRS Commissioner Chuck Rettig in a statement.

The IRS summons asks Circle and affiliated firms, including Poloniex, to provide information in relation to an investigation of those who "may have to comply with any provision of any internal revenue laws." This includes records identifying U.S. taxpayers and information about their crypto transactions. 

The IRS took similar action against Coinbase in 2016, which led to a year-long court fight before the exchange finally produced thousands of customer records. 

The tax regulator has further shown its commitment to cracking down on crypto evasion in the past year, asking taxpayers if they've engaged in any taxable crypto transactions at the top of the 1040 form. In 2020, it sent multiple rounds of letters to crypto holders reminding them to report their taxable transactions.

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