Of all the crypto bankruptcies in the past year, FTX’s Chapter 11 proceeding is the only one in which a Justice Department attorney has been appointed to represent the Internal Revenue Service.
Deputy Attorney General David Hubbert subpoenaed Justice Department trial attorney Elizabeth Bruce (replacing attorney Warren Benson, who was appointed in December) to appear in FTX’s bankruptcy proceedings on Thursday.
There is no indication of any specific IRS interest in the case. Call the IRS press office Decode declined to comment. It’s also unclear whether the agency plans to pursue its own litigation against the bankrupt crypto exchange. But the fact that it’s involved at all is telling, especially given the IRS’s initial interest in customer data from major crypto exchanges like Coinbase and Kraken.
FTX, founded by former CEO Sam Bankman-Fried, filed for bankruptcy on Nov. 11. In the days leading up to its voluntary filing, the company saw billions in assets pulled from its crypto trading platform, which was nearly acquired by rival Binance. and then froze withdrawals in a last ditch effort to stay afloat.
It was a sudden and spectacular decline that caught the attention of US regulators and law enforcement. Sam Bankman-Fried was arrested and charged with eight financial crimes. Members of her inner circle, Caroline Ellison and Gary Wang, have already pleaded guilty and are cooperating with prosecutors as Bankman-Fried awaits trial.
Meanwhile, the FDIC, Federal Reserve and Office of the Comptroller released a joint statement two weeks ago warning that crypto is not “safe and sound.” The White House has stepped up its call for regulation (while raising questions about meetings between Bankman-Fried and President Joe Biden).
As for the IRS, Miles Fuller, director of government solutions at TaxBit, said Decode that the agency appears to have more than a passing interest in the case.
Typically, when debtors file for bankruptcy, those cases are assigned to the IRS bankruptcy unit, he said. The division follows the case and, if the IRS becomes a creditor in the proceeding, they file a proof of claim without involving attorneys.
He would know. Before joining TaxBit last year, Fuller spent 15 years as an attorney with the IRS.
“If there was something very administrative that just needed to be handled, the Department of Justice’s tax division is like, ‘Yeah, we don’t care.’ We’ll let you guys handle it,” Fuller said. “But for any really significant tax or high-level tax issue, they say, ‘No, no, we want to do it.’
TaxBit, a tax software and crypto accounting company, raised $130 million last year at a $1.3 billion valuation. That made it one of the rare startup unicorns in the middle of a not-so-great year for much of the crypto industry.
Fuller said that’s possible, but it’s clear the IRS is trying to get its hands on a customer list that FTX was allowed to keep secret for another three months. If that was the interest of the agency, then it would not be completely unprecedented. The IRS has issued John Doe subpoenas seeking information about potential tax evaders to crypto companies Coinbase, Kraken, Circle and SFOX.
Fuller suggested the IRS could also provide guidance on how customers who lost money in FTX or other crypto meltdowns can claim their assets as a loss without waiting for the full bankruptcy process. The agency created a rule for victims of theft and Ponzi schemes in 2009 after the Bernie Madoff case.
Lisa Zarlenga, a tax attorney and partner at Steptoe & Johnson in D.C., said she’s not very optimistic about the IRS making adjustments for FTX victims.
“You’re probably still in limbo because you have to wait for the bankruptcy to end. You can recover something and it’s still not really a done deal. They were not really harmed,” he said Decode. “Some people have talked about taking a loss from opting out, but can you even opt out of a crypto account?”
He got the idea that most clients prefer to wait and see what they can get out of bankruptcy, even if it means giving up any immediate benefits. As for the IRS sending a Justice Department attorney to represent him in the case, he said his initial thought was that the agency was lining up to file its own lawsuit. Why? FTX, or one of its 130 entities, may owe the government, he said.