The United States District Court, Northern District of California, has partially upheld a summons issued by the Internal Revenue Service (IRS) to Payward Ventures, Inc. and its subsidiaries, collectively known as “Kraken“. Kraken, a prominent online crypto exchange, has been under scrutiny for its compliance with tax regulations.
The court order comes after Kraken failed to comply with an IRS summons, leading to the United States initiating legal action to enforce it. The court’s decision to grant the petition in part and deny it in part marks a crucial juncture in this ongoing case.
Kraken, known for its global reach, offers its digital currency exchange services to users in over 190 countries. The platform provides a variety of account levels, including Starter, Express, Intermediate, and Pro, each requiring different levels of user verification. While the Starter and Express accounts offer limited services and require lower levels of verification, the Intermediate and Pro accounts offer a wider variety of transaction types and higher withdrawal limits, necessitating additional user verification.
The IRS investigation into Kraken was triggered by concerns over tax compliance issues related to cryptocurrency. These concerns were highlighted in reports by the Government Accountability Office (GAO) in 2013 and the Treasury Inspector General for Tax Administration (TIGTA) in 2016. The reports identified several tax compliance risks associated with virtual currencies, including underreporting of income and tax evasion.
In response to these concerns, the IRS expanded its Electronic Payment Systems Initiative (EPSI) to address U.S. taxpayers who use virtual currencies for tax avoidance purposes. As part of this initiative, the IRS established a Virtual Currency Issue Team (VCIT) to study the issue and consider the compliance impact related to virtual currencies. The summons to Kraken is part of the tools being used in this investigation.