The IRS Believes Bitcoin Users are Evading Taxes, Tests Boundaries of John Doe Summons Procedure

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The IRS Believes Bitcoin Users are Evading Taxes, Tests Boundaries of John Doe Summons Procedure

The IRS recently filed a petition with a federal district court in the Northern District of California requesting leave to serve a “John Doe” summons on Coinbase, Inc., a U.S.-based Bitcoin exchange.  The summons would require Coinbase to turn over all of its records related to every convertible virtual currency transaction from 2013-2015—that information would include the names of owners, account balances, records of activity and listings of transactions.  The scope of the request is massive, as Coinbase boasts some 4.9 million users trading in virtual currencies.  According to the filings, the IRS believes that bitcoin users are deliberately using virtual currencies to evade taxes.  Coinbase will challenge the summons.

A so-called John Doe summons can only be served after the IRS gets approval from a federal district court. The Service has the authority to issue such a summons with a district court’s ex parte blessing under 26 U.S.C. § 7609, 7602, without specifically identifying the target only if it can show that:

  • (1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,
  • (2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
  • (3) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

The John Doe summons is unique in that the it does not identify the particular person or persons that the government is seeking information on.  Instead, the government identifies a person, group, or class based on their activities.

The government has heavily relied upon the procedure in recent years to investigate U.S. taxpayers’ offshore accounts.  But the use of John Doe summonses raises serious privacy and Fourth Amendment concerns. This case will provide a good test for where exactly the line may be.

For some of my prior entries on bitcoin taxation, see here.