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IRS Forced to Limit its Bitcoin Summons

IRS Blinks In Coinstar Row

Faced with growing opposition to its Coinstar John Doe summons, the IRS agreed to limit its scope, mostly by limiting the summons to Bitcoin accounts over $20,000.

The original summons, which was directed at all crypto currency holders with Coinstar accounts between 2013 and 2015, would have affected over a million current and former members. IRS lawyers trimmed back other parts of the summons as well, eliminating the demand for passwords and other detailed account information, nixing a request for third party powers of attorney, and limiting correspondence requests to those items pertaining to account transactions.

It remains to be seen if the Coinstar account holders will drop their lawsuit or if they will be emboldened to push for more limits.

Why the IRS Backed Off

Your father’s IRS never backed away from a fight. Fifteen years ago, the Service would have appeared at the Coinstar hearing with a posse of lawyers, made a few Clint Eastwood-esque legal arguments, demanded all the information requested in the original summons, and added on a few extra dollars in penalties for wasting their time.

Although the Service’s budget actually increased a little in 2016, the IRS still had to cut between 2,000 and 3,000 employees, bringing the total job loss to 17,000 workers since 2010. Granted, most of these layoffs did not affect the Agency’s enforcement arm, which is still largely intact. But, as Commissioner Koskinen recently reiterated, the Agency must “do less with less,” and this mandate affects “both enforcement and taxpayer service.”

In short, the IRS simply does not have the resources to fight these matters like it used to. So, these cases are a little easier to work with than they used to be, especially with regard to the dreaded Section 6662 substantial underpayment penalties. More on that below.

Negotiating with the IRS

To take advantage of the new litigation environment, it’s important to create legal obstacles to make the case more difficult to litigate. One way to accomplish this objective is to have an attorney, as opposed to an accountant, help prepare your returns. Attorney-client conversations are privileged, and accountant-customer conversations are discoverable.

Furthermore, an attorney has a much better grasp of the settlement value of your tax debt, considering such items as the amount owed, the complexity of litigation, and the inherent risks therein.

Avoiding Penalties

“An ounce of prevention is worth a pound of cure,” as the old saying goes. So, although your chances are better than they were a few years ago if you take on the Service in tax court, a better approach is to avoid the matter altogether.

One approach I’ve used successfully in the past is to reduce the IRS claim from Section 6662 “substantial” underpayment to Section 6655 “simple” underpayment.

Under existing guidelines, taxpayers must have a reasonable basis for claimed deductions that reduce their estimated tax liability and therefore their exposure to Section 6662 penalties. “Reasonable basis” is basically one step above the “not frivolous” standard, which some lawyers call the straight face test (i.e. if you can argue the position in front of the judge while keeping a straight face, it is not a frivolous argument).

These guidelines appeared in 1999, back when the IRS was still the big bad wolf. Since that’s no longer true, the threshold may have drifted more to the not frivolous level, at least pragmatically. Of course, just how much give the IRS has is very much a case-by-case determination.

 

 

 

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.