UPDATE | September 7, 2017: The hearing on the United States' Petition to Enforce IRS Summons is scheduled for October 5, 2017 at 11:00 a.m., before Magistrate Judge Jacqueline Scott Corley.
On September 1, 2017, the US Government filed responses in the ongoing legal skirmish over an Internal Revenue Service (IRS) summons to Coinbase for its customer records.
On March 16, 2017, the federal government petitioned the District Court for the Northern District of California to enforce an IRS summons issued to Coinbase for its records of customers who traded virtual currencies between January 1, 2013, and December 31, 2015. On July 18, 2017, the Court permitted a Coinbase customer, identified as John Doe 4, to intervene in the proceeding. On July 27, 2017, Coinbase and John Doe 4 filed their briefs opposing the enforcement petition. Amicus curiae briefs opposing the IRS summons were also filed by the Competitive Enterprise Institute (CEI), Coin Center, and the Digital Currency & Ledger Defense Coalition (DCLDC).
In response to Coinbase’s Opposition, the Government gives additional background on its ongoing investigation of cryptocurrencies, citing a 2013 report by the US Government Accountability Office that says:
“some taxpayers may use virtual economies and currencies as a way to evade taxes. Because transactions can be difficult to trace and many virtual economies and currencies offer some level of anonymity, taxpayers may use them to hide taxable income.”
The Government goes on to state that it had targeted Coinbase for a John Doe summons in June 2014, becauase of its popularity and growth. According to a declaration by an IRS senior revenue agent, “The IRS reviewed Coinbase’s website and publicly available information to develop a greater sense of Coinbase’s business. Based on Coinbase’s public representations, the IRS believed that Coinbase was offering buy/sell trading functionality in 32 countries, maintaining over 4.9 million wallets with wallet services available in 190 countries, serving 3.2 million customers, with $2.5 billion exchanged in bitcoin.”
The IRS agent goes on to detail the scope of information the IRS is currently seeking from Coinbase, namely wallet addresses or public keys, and historical logs. In July, the Government had narrowed the scope of records sought based on information it learned after issuing the summons in December 2016. According to the agent, "If the Coinbase user and account activity level had been what the IRS expected based on Coinbase’s public information gathered prior to the issuance of the summons, the IRS would not have narrowed the requests it is now seeking for enforcement."
In responding to John Doe 4’s opposition, the Government maintains that the John Doe summons is an important investigative tool that is overwhelmingly approved by courts. The Government also claims that its fishing expedition is not improper, and that John Doe 4 misread a 2016 report by the US Treasury Inspector General for Tax Administration. The Government also disavows that the summons was issued to further a political agenda.
In the Government’s response to CEI, the Government claims "Coinbase’s users clearly have no constitutionally protected reasonable expectation of privacy in their account information held by Coinbase," and that CEI’s First Amendment argument "lacks merit" because CEI fails to explain how "the receipt, purchase, sale, or sending of bitcoin could possibly be 'constitutionally protected speech.'"
In responding to Coin Center’s and DCLDC’s briefs, the Government maintains that "Enforcing the summons would not stifle bitcoin with heavy or unduly regulation," and that arguments to the contrary are "misguided."
ETHNews will continue to provide coverage as developments emerge.