Bitcoin Exchange 'Extremely Concerned' With IRS Effort to Identify Users – Wall Street Journal (blog)

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The largest bitcoin exchange firm in the country is balking at a proposed?summons from the Internal Revenue Service seeking all U.S. customer records over a three-year period.

Lawyers for the?IRS last week filed court papers?seeking a judicial order to serve a so-called ?John Doe? summons on San Francisco-based Bitcoin platform Coinbase Inc.?The government?s request, part of a bitcoin tax-evasion probe, seeks to identify?all Coinbase users in the U.S.?who ?conducted transactions in a convertible virtual currency? from 2013 to 2015.

Justice Department attorneys in a court filling?wrote that?an IRS agent had ?identified and interviewed three taxpayers who had used virtual currencies as a means of evading taxes? and that two of these taxpayers were corporate entities that ?had wallet accounts at Coinbase and attempted to conceal bitcoin transactions as technology expenses on their tax returns.?

A ?John Doe? summons is a special form of summons to look for tax evaders that allows the IRS to obtain information about all taxpayers in a group or class of people, even if the agency doesn?t know their identities. The IRS has deployed the tactic in its recent crackdown on undeclared offshore accounts.

Before it can serve such a summons, the IRS must first get court approval.

Coinbase has responded with a statement on its website:

Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers? records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.

Although Coinbase?s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government?s request. Our customers? privacy rights are important to us and our legal team is in the process of examining the government?s petition. In its current form, we will oppose the government?s petition in court.

According to Forbes.com tax blogger Kelly Phillips Erb:

In his declaration to the court in support of the summons, IRS Senior Revenue Agent David Utzke noted that his investigations included two taxpayers with annual revenues in the millions who ?admitted disguising the amount they spent purchasing the bitcoins as deductions for technology expenses on their tax returns.? Those corporate taxpayers had wallet accounts at Coinbase. Unlike other kinds of financial transactions, there is currently no third-party information which requires separate reporting for bitcoin (think of third-party reporting like the forms 1099 issued by your bank). This, says IRS, means that the ?likelihood of underreporting is significant.?

The likelihood of underreporting combined with the anonymity of virtual currency means that the IRS needs more data to complete its investigation. It also explains why the ?John Doe? summons is so broad.

?We want to work with law enforcement ? that?s generally our policy,? Coinbase?s head legal counsel, Juan Suarez, said Friday,?according to a New York Times report. ?But we can?t tolerate sweeping fishing expeditions.?

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