For the Defense - Vol. 6 Issue 3 - 38

those individuals who fail to file accurate tax
returns and pay their income tax. Taxpayers who
understate their taxable income by more than ten
percent (10%) or $5,000 will incur a substantial
understatement penalty unless the taxpayer can
show s/he acted with reasonable cause.10
The
penalty is equal to 20% of the net understatement
of tax (not income).11
The IRS imposes interest
on the penalty dating back to the date that the
return was due.12
If the IRS determines that the
taxpayer acted with fraud, the IRS imposes a 75%
penalty of the net understatement of tax.13
This
penalty is subject to the same interest provision.14
The IRS imposes a similar fraud penalty on unfiled
tax returns.15
Besides civil penalties, the IRS can recommend
that the Justice Department prosecute a taxpayer
for tax evasion, willful failure to file a return,
and willfully filing a false tax return. The head
of IRS's criminal investigation ( " CI " ) division has
stated that CI is focusing substantial resources
on the cryptocurrency area. To date, there have
been no known prosecutions involving strictly
unreported cryptocurrency income. However,
failure to correctly answer the question about
cryptocurrency on the 2020 Form 1040 could,
in and of itself, subject a taxpayer to criminal
liability.16
38 For The Defense l Vol. 6, Issue 3
The IRS Has Begun Taking Significant Enforcement
Steps
The IRS has taken some noteworthy proactive
measures to collect cryptocurrency trading
information. Notably, it issued several " John Doe "
summonses. A John Doe summons does not list
the name of the taxpayer under investigation
because the taxpayer's identity is unknown to the
IRS.17
Rather, it seeks information about a class of
individuals. The IRS uses the information collected
by a John Doe summons to consider whether to
commence an audit. The most well-known John
Doe summons was issued to UBS AG, resulting in
the bank handing over the names of approximately
4,000 U.S. accountholders.
The IRS has begun using John Doe summonses
to locate cryptocurrency accounts. In early 2018,
in response to a John Doe summons, Coinbase
provided information about 13,000 customers
who bought, sold, sent or received at least $20,000
worth of cryptocurrency between 2013 and 2015.18
After receiving information from Coinbase, the IRS
sent warning letters to taxpayers advising that the
Service believed that the taxpayer had unreported
cryptocurrency transactions.19

For the Defense - Vol. 6 Issue 3

Table of Contents for the Digital Edition of For the Defense - Vol. 6 Issue 3

Contents
For the Defense - Vol. 6 Issue 3 - 1
For the Defense - Vol. 6 Issue 3 - 2
For the Defense - Vol. 6 Issue 3 - Contents
For the Defense - Vol. 6 Issue 3 - 4
For the Defense - Vol. 6 Issue 3 - 5
For the Defense - Vol. 6 Issue 3 - 6
For the Defense - Vol. 6 Issue 3 - 7
For the Defense - Vol. 6 Issue 3 - 8
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For the Defense - Vol. 6 Issue 3 - 20
For the Defense - Vol. 6 Issue 3 - 21
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For the Defense - Vol. 6 Issue 3 - 25
For the Defense - Vol. 6 Issue 3 - 26
For the Defense - Vol. 6 Issue 3 - 27
For the Defense - Vol. 6 Issue 3 - 28
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For the Defense - Vol. 6 Issue 3 - 30
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For the Defense - Vol. 6 Issue 3 - 33
For the Defense - Vol. 6 Issue 3 - 34
For the Defense - Vol. 6 Issue 3 - 35
For the Defense - Vol. 6 Issue 3 - 36
For the Defense - Vol. 6 Issue 3 - 37
For the Defense - Vol. 6 Issue 3 - 38
For the Defense - Vol. 6 Issue 3 - 39
For the Defense - Vol. 6 Issue 3 - 40
For the Defense - Vol. 6 Issue 3 - 41
For the Defense - Vol. 6 Issue 3 - 42
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