Are You Ready for a Crypto ‘Kraken Audit’ by IRS, What Next?

Are You Prepared for a Crypto ‘Kraken Audit’ 

Unfortunately for users on the Kraken Crypto Exchange, a District Court in California ruled against Kraken and in favor of the Internal Revenue Service regarding the right of the IRS to request user information from Kraken. In further pursuit of the IRS’ cryptocurrency non-compliance seek and destroy mission, the U.S. Government/Internal Revenue Service was victorious in requiring Kraken to provide user information for more than 42,000 users who generated income while operating on the Kraken Exchange. A copy of the summons can be found online. For Kraken Users who did not properly report income in prior years, they may want to consider their different options and get into compliance before the IRS audits them and pursues hefty fines and penalties. This is especially true for for investors who use Kraken abroad and maintain crypto-only foreign exchange but are still US persons for tax purposes.

Let’s take a look at the information recently updated by Kraken:

Why is my Personal Information Being Shared with the IRS?

• • • “The IRS issued a summons to Kraken demanding that we produce a range of records and data relating to our U.S. clients. Since one of our guiding principles has always been maintaining our clients’ security and privacy, we objected to the IRS’s demands and fought the summons in court.

    • After a lengthy litigation process, Kraken convinced the court to substantially reduce the number of clients affected and the amount of client data it would have to produce. However, the court ordered Kraken to produce profile information and transaction histories for clients who exceeded $20,000 USD in transactions during any single year from 2016 to 2020.*

      • *Accounts covered by the court order were determined by the sum of deposits, withdrawals, and trades conducted by the account. This means that even if you did not make any trades, but your deposits and withdrawals totaled more than $20,000 USD, your information will be shared.”

What Information is Being Shared?

• • • “The court order requires us to produce the following information for accounts covered by the order:

      • • Name

        • Date of birth

        • Tax ID

        • Address

        • Contact information

        • Transaction history for 2016 to 2020

    • Kraken will not share information with the IRS beyond what it is required to provide under the court order.”

When Will My Information be Shared with the IRS?

• • • Kraken expects to share the information required by the court’s order in early November 2023.

What Can Taxpayers Do to Prepare?

With Kraken providing the names and other information of more than 42,000 users to the Internal Revenue Service, taxpayers need to be aware that they may be audited and placed under examination by the IRS. For taxpayers who are aware that they may have missed reporting income and possibly failed to meet the international reporting requirements, they may consider being proactive in order to get into compliance by either the voluntary disclosure program, streamline procedures, delinquency procedures, or reasonable cause.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file report their income and/or file the FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.