IRS Wants Court Authority To Identify Bitcoin Users & Transactions At Coinbase

Dear Coinbase,

Please send us your customer list.


Okay, maybe it wasn’t quite that sweet, but it was definitely that broad. Last week, the Department of Justice (DOJ) filed paperwork in federal court (California Northern District Court, Case No. 3:16-cv-06658-JSC) requesting the identities of United States Coinbase customers who transferred convertible virtual currency at any time between December 31, 2013, and December 31, 2015. Coinbase, which is headquartered in San Francisco, California, is a company which facilitates transactions of digital currencies like bitcoin and Ethereum.

The request was made by the DOJ on behalf of the Internal Revenue Service (IRS); the IRS is seeking the authority to serve the “John Doe” summons on Coinbase.

A “John Doe” summons can only be served by the IRS after a federal court gives approval. By statute, a “John Doe” summons is an order that does not specifically identify the person but rather identifies a person or ascertainable group or class by their activities. Examples include investors in a particular tax shelter or account holders at a defined financial institution: the IRS has made use of the procedure when seeking information about offshore accounts related to the UBS investigationPaypal accounts, and various credit card companies.

It’s controversial, clearly, because of the potential privacy issues – as part of the summons process, no notice is required to be given to the potentially affected parties (meaning the taxpayers who are being investigated). To curb the potential for abuse, the IRS’ procedure manual makes it clear that the request should be to further a specific purpose and not to conduct a “fishing expedition.” In other words, there must be a reasonable basis for believing that the person or persons involved “may fail or may have failed to comply with any provision of the tax laws.” Additionally, the information and identities sought to be obtained from summoned records must not be readily available from other sources.


That’s exactly what the DOJ argued:


The request was triggered after the IRS found instances of tax evasion involving Coinbase customers. 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.

How big could the request be? Try massive. As part of the request, the feds note that as of December 2015, “Coinbase was the fourth largest exchanger globally of bitcoin into U.S. dollars and the largest exchanger in the U.S. of bitcoin into U.S. dollars.” On its website, Coinbase claims that it has 4.8 million users trading over $5 billion in virtual currencies making it “the world’s most popular way to buy and sell bitcoin and ethereum” (it’s worth noting that Coinbase did not start accepting Ethereal, or ethers, until 2016, so it is not included in the summons).

According to court documents, as of January 2016, more than 100,000 merchants globally accept bitcoin payments including Overstock, Home Depot, Microsoft, Amazon, and Expedia; that number is expected to increase to 150,000 by fall of 2016. Utzke calculated the 2015 annualized transaction value of bitcoin in the U.S. to be $10,116,817,608.



Those numbers aren’t showing up on tax returns, claims the IRS. That’s why they are asking Coinbase to turn over records for users who show “any U.S. address, U.S. telephone number, U.S. e-mail domain, or U.S. bank account.” Requested records include but are not limited to user profiles, user preferences, user security settings and history, user payment methods, and other information related to the funding sources for the account/wallet/vault. And that’s just for starters. IRS is also seeking all records of account/wallet/vault activity including but not limited to records identifying the date, amount, and type of transaction, names or other identifiers of parties to the transaction; requests or instructions to send or receive bitcoin; and all correspondence.

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