FTX challenges IRS’s $24 billion tax claim in bankruptcy court

In an ongoing legal tussle with the Internal Revenue Service (IRS), lawyers for the bankrupt cryptocurrency exchange FTX have challenged the tax authority’s hefty claim for back taxes. The recent developments signal an escalation in the months-long dispute between FTX and the IRS, with significant implications for the company’s creditors and the broader crypto market.

Challenging the IRS’s tax claim

In a new submission to a Delaware bankruptcy court, FTX’s legal team questioned the IRS’s assertion that the exchange owes up to $24 billion in back taxes. This figure, according to the attorneys, far exceeds the exchange’s financial capabilities during its operational years. FTX, operational for only three years, did not distribute dividends or earnings, with its lawyers stating the company “never earned anything anywhere near amounts that could support the IRS claims for $24 billion in taxes.” Instead, FTX experienced substantial financial losses, making the IRS’s claim, as the lawyers argued, “absurd and meritless.”

The legal team further argued that fulfilling the IRS’s demand could potentially reduce recoveries for the victims of the bankruptcy. They emphasized the need for a fair resolution that prioritizes compensating those impacted by the exchange’s collapse.

A fluctuating tax bill and FTX’s response

The IRS’s claim against FTX has seen significant fluctuations. Initially, the agency filed for approximately $44 billion in April, later adjusting this amount to $43 billion and then to $24 billion. The current claim encompasses income taxes, employment taxes, and penalties from 2018 to 2022. However, this figure is not final as the IRS continues its audit.

FTX and EY, an accounting firm, have cooperated extensively with the IRS, responding to over 2,300 information requests and providing most of the requested documents. Some additional documents are expected to be furnished by January 15, 2024. The IRS maintains that its tax estimations are presumptively correct, placing the burden of proof on FTX to demonstrate otherwise.

Upcoming Court Hearing

FTX’s filing emphasizes the need to establish a schedule for resolving these disputes to avoid further delays in compensating the bankruptcy’s victims. The next court hearing on the FTX bankruptcy case is set for Wednesday, December 13.

The case against FTX gained prominence following its bankruptcy filing in November last year and the subsequent conviction of its former CEO, Sam Bankman-Fried, for defrauding users and investors. The outcome of this legal battle with the IRS will be pivotal in determining how the remaining assets of FTX will be distributed.