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

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

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:

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.