FTX Faces Setback as IRS' $24 Billion Tax Claim Hampers User Fund Recovery Efforts

A recent The Block report states that FTX is entangled in a prolonged legal battle with the Internal Revenue Service (IRS) over a substantial tax claim, as revealed in a recent filing to a Delaware bankruptcy court. FTX's legal team is urging the IRS to provide substantiation for its claim, which stands at a staggering $24 billion. This dispute, spanning several months, revolves around the IRS's insistence on this considerable tax amount owed by FTX and its affiliated entities.

FTX vehemently denies any liability to the IRS, asserting that it has not generated profits or distributed dividends throughout its brief three-year existence. The lawyers representing FTX argue that the exchange never accrued earnings anywhere near the magnitude required to support the IRS's substantial tax demand. On the contrary, FTX claims to have incurred substantial losses during its operational tenure.

In a scathing critique of the IRS's stance, FTX's legal team contends that the only potential recovery source for the IRS is to divert funds away from the victims. They maintain that there is no factual basis for asserting any tax claim against FTX, and the IRS's reliance on its own processes serves only to impede the distribution of funds to those genuinely affected by the situation.

The initial IRS claim stood at a staggering $44 billion, which was later adjusted to $43 billion in September before eventually being revised down to the current figure of $24 billion in November. The claimed amount comprises income taxes, employment taxes, and associated penalties allegedly owed by FTX and its affiliates spanning the years 2018 to 2022.

Despite FTX's robust opposition, the IRS argues that its estimations are well-founded and enjoys the presumption of correctness. The burden of proof, according to the IRS, lies with FTX to disprove the legitimacy of the claim. FTX characterizes the IRS's statements as akin to an "Alice in Wonderland argument."

The ongoing audit further complicates the matter, and the final figure remains uncertain as the IRS continues its examination. FTX deems the $24 billion claim as "absurd and meritless." Both FTX and its accounting firm, EY, have cooperated extensively with the IRS, responding to over 2,300 information requests and providing almost all requested documents, with the remainder scheduled for submission by January 15, 2024.

In response to this protracted legal tussle, FTX is urging the approval of a proposed schedule to prevent indefinite delays in distributing funds to affected parties. A crucial hearing on the FTX bankruptcy case is slated for Wednesday, December 13, marking the latest chapter in this ongoing legal saga that began with FTX filing for bankruptcy in November of the preceding year.

Resources:

The Block