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IRS Successfully Stifles Taxpayer's Effort for Judicial Review of IRS Cryptocurrency Guidance

By Anthony P. Daddino, P.C. on October 4, 2022
The IRS is a bit thin-skinned when it comes to the income taxation of cryptocurrency transactions. While it zealously advocates the legal soundness and correctness of its views, the IRS is just not ready for criticism – especially the judicial kind.

In Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn. 2022), the taxpayer brought a refund suit, claiming that his receipt of tokens received from his staking efforts (i.e., assistance rendered in the verification of blockchain transactions) was not taxable. The amount at issue? A whopping $4,000. In various guidance, the IRS had espoused its view that the receipt of tokens in exchanges for these types of services was income to the recipient

While the IRS had doubled, even tripled, down on its legal position, the IRS wasn’t quite ready for the possibility of disagreement. The IRS likes having its one-sided, self-promulgated guidance with which to brow-beat taxpayers. So the IRS sought to get rid of the case. Cleverly, the IRS paid the $4K refund after the taxpayer brought suit, with the goal of eliminating the controversy and mooting the case.

Score one for the IRS.

The taxpayer in Jarret put up a noble fight. He refused to cash the refund check and pressed the federal district court to retain jurisdiction of the case. But the court’s hands were tied by established precedent. Simply put, a refund is issued upon determination of an overpayment, and the taxpayer’s refusal of it had no legal bearing on whether there was a live case or controversy for the court to adjudicate. The IRS’ determination and issuance of the refund, the court found, rendered the case moot and subject to dismissal. While the district court agreed that the underlying issue was one of significant public importance, such reality did not provide an exception to the legal mootness of the case.

The IRS’ actions are disappointing, to say the least; and to say more, perhaps even cowardly. It’s time to shed some judicial light on the IRS’ tax positions and bring some accountability, and common sense, to the civil taxation of cryptocurrency transactions.

For a copy of the court’s September 30, 2022 decision, click HERE.

If you have any questions about this Blog post or any IRS or tax-related matter, feel free to contact me directly at (214) 749-2464 or adaddino@meadowscollier.com.