The United States District Court, Northern District of California, partially affirmed a subpoena issued by the Internal Revenue Service (IRS) to Payward Ventures, Inc. and its subsidiaries, collectively known as “krakenKraken, a major online crypto exchange, has come under scrutiny for its compliance with tax regulations.

The court order comes after Kraken failed to comply with an IRS subpoena, prompting the United States to launch legal action to enforce it. The court’s decision to grant the petition in part and deny it in part marks a turning point in this ongoing case.

Known for its global reach, Kraken offers its digital currency exchange services to users in more than 190 countries. The platform provides a variety of account levels, including Starter, Express, Intermediate, and Pro, each requiring different levels of user verification. While Starter and Express accounts offer limited services and require lower levels of verification, Intermediate and Pro accounts offer a wider variety of transaction types and higher withdrawal limits, requiring additional user verification.

The IRS investigation into Kraken was triggered by concerns about cryptocurrency-related tax compliance issues. These concerns were highlighted in reports from 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 income and tax evasion.

In response to these concerns, the IRS has expanded its Electronic Payment Systems Initiative (EPSI) to address US taxpayers who use virtual currencies to avoid taxes. As part of this initiative, the IRS established a Virtual Currency Issues Team (VCIT) to study the issue and consider the compliance impact related to virtual currencies. The summons to Kraken is part of the tools used in this investigation.