Digital Currency Under Attack By IRS

digital-currencyEveryone knows that the Internal Revenue Service can be invasive when they want to be. And if left to their own devices they can make life hell for anybody. An army of IRS lawyers can find sympathetic judges that will give them authority, making the illegal seem legal. They can take down Joe blow or the largest corporation. If you find that hard to believe, consider the ruling several weeks ago handed down by a liberal Northern California District Court judge. In that ruling, the judge has allowed the IRS to require Coinbase (a digital currency service) to submit all transaction records that took place between 2013 and 2015. The IRS said it was necessary because of possible tax fraud committed by U.S. residents who had engaged in business with or through California-based Coinbase.

What makes this ruling so onerous is that the IRS doesn’t even have a name or names of persons who have potentially committed tax fraud. This is a fishing expedition based on suppositions. Because the IRS does not have a specific person or group to go after, the Department of Justice made the request for a “John Doe” summon on behalf of the IRS. The summon basically identifies a group or individual based on their activities. In other words, large deposits or withdrawals could be an indication of illegal activity such as money laundering. It might also indicate large winnings from online gambling that are going unreported in an effort to forgo paying income tax. Because of the privacy digital currencies afford individuals, it is exactly the reason why governments abhor them.

In a very ambiguous request to the DOJ, the IRS wrote, “The taxpayers being investigated have not been or may not be complying with U.S. internal revenue laws requiring the reporting of taxable income from virtual currency transactions.”

Caroline D. Ciraolo, Principal Deputy Assistant Attorney General and head of the Justice Department’s Tax Division, said, “As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance. Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use—bitcoin or traditional dollars and cents—we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”

This legal action by the DOJ and the IRS doesn’t accuse Coinbase of any wrongdoing. The court said in its ruling that the summons will be used to obtain information about possible wrongdoing and will direct Coinbase to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their virtual currency transactions.

Now, there is push-back on this court ruling. On Dec. 14, 2016, Los Angeles-based attorney Jeffrey Berns, who also happens to be a Bitcoin user, filed a motion in court to dispute the legitimacy of the IRS effort to obtain the identity and full transaction history of Coinbase customers. In the filing, Berns argued that the John Doe summons “would constitute an abuse of process,” and that “the IRS has no legitimate purpose in seeking the requested documents. Nor does the IRS have a legitimate purpose for seeking the identification of Coinbase’s customers or all data and information concerning those customers for a three-year period. Even if the IRS had not engaged in abuse of process and was acting in good faith, there is no basis for seeking information from all of Coinbase’s customers, regardless of the size and volume of their virtual currency activity, and the categories of information sought by the IRS Summons are not related to the IRS’s stated goal of enforcing compliance with the tax code.”

Bern is requesting that the court reverse its previous approval or put in place a protective order to stop the IRS from continuing its investigation of Coinbase customers. Here at, we will continue to follow this story. From this reporter’s point of view, this is just another instance of an abuse of power by a heavy-handed government agency.

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