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IRS Narrows “John Doe” Summons On Coinbase, In A Win For Users




Under heavy pressure from Congress, Coinbase, and Coinbase users, the Government limited the scope of its summons on Coinbase and narrowed the types of information sought in its investigation.

On July 6, 2017, the Government filed a notice narrowing both the class of taxpayers and the types of information sought pursuant to an IRS summons issued on Coinbase. The move likely comes as a response to legal maneuvering on behalf of both Coinbase and its users, and to pressure by Congress questioning the need for the broad request of information. By narrowing the types of information sought and users affected, thousands of Coinbase users can be assured their privacy will still be protected.

Notably, the Government narrowed the scope of the summons to only Coinbase users with at least $20,000 in any one type of transaction (buying, selling, sending, or receiving) in any single year between 2013 and 2015. This means that Coinbase will not have to produce records for a US trader who engaged in (for example) $15,000 in each of those transaction categories in any year. Attorneys at Berns Weiss, on behalf of two Coinbase users, had argued that “the summons could have contained a certain dollar threshold or volume of transactions.”

Further, the summons no longer includes users who only bought and held bitcoin without ever selling it during that period (a limitation that Berns Weiss also pointed out in their court-filed papers). Moreover, the IRS is limiting the types of information it is requesting, no longer seeking certain types of communication records, bank transfer records, and personal information. This represents a drastic reduction in the information sought under the original summons, which asked for all records of all users during those years.

The IRS has faced pressure for what some have called an “unprecedented summons.” The saga began last November, when a court permitted the IRS to issue a “John Doe summons” on Coinbase seeking a wide array of records, including account information, trading history, personal information, communications records, and virtually every other record relating to every US Coinbase user between 2013 and 2015. In December, Coinbase user Jeffrey Berns filed a motion to intervene to challenge the summons; but in response, the IRS dropped its request as it pertained to Mr. Berns because he had identified himself as a Coinbase user. After Coinbase refused to comply with the request, the Government filed a petition to enforce the summons in March 2017. Subsequently, in May, two Coinbase users, represented by the law firm Berns Weiss LLP, filed a motion seeking to intervene in the action and to challenge the enforcement of the summons. On June 29, the Court held a hearing on the users’ intervention motion and is expected to make a ruling.

Members of Congress have also questioned the scope of the IRS summons on Coinbase. On May 17, 2017, Congressmen Kevin Brady, Orrin G. Hatch, and Vern Buchanan sent a letter to IRS Commissioner John Koskinen expressing grave concerns regarding the IRS’s motives in pursuing the IRS summons.

“[W]e strongly question whether the IRS has actually established a reasonable basis to support the mass production of records for half of a million people, the vast majority of whom appear to not be conducting the volume of transactions needed to report them to the IRS. Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals.”

Additionally, on June 2, 2017, Congressmen Jared Polis and David Schweikert “urge[d] the Internal Revenue Service (IRS) to issue additional guidance on the tax consequences and basic tax reporting requirements for transactions using virtual currencies.”

The Government’s decision to narrow the summons is significant because if unchallenged, the original summons may have created precedent for there being no limit to the John Doe summons investigative mechanism. While John Doe summonses are an established investigative technique traditionally used to in fighting money laundering and specific tax evasion activities – e.g., to seek the records of any bank account holders who sent funds to a known off-shore tax shelter – there has been no other case where the IRS used a John Doe summons to seek virtually all records regarding all customers of an institution.

In an ETHNews exclusive, Lee A. Weiss, a partner at Berns Weiss, expressed that he is excited with the outcome but is still committed to fighting for Coinbase users’ rights should the Government continue to try to enforce the summons:

“We are gratified that our pursuit of this matter has caused the Government to narrow the scope of the information it is seeking concerning Coinbase customers. However, we still firmly believe that this is an improper use of the IRS John Doe summons procedure. Therefore, our clients will continue to challenge the Government’s petition to enforce the IRS summons.”

The case is by no means over, but for now, many cryptotraders who were concerned about their records being turned over to the IRS will have some peace of mind. ETHNews will continue to follow this story as it develops.

Jeffrey Berns is the Managing Partner of Berns Weiss LLP and is also CEO of Berns Inc, parent company to ETHNews.

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