The IRS is in the process of trying to force Bitcoin exchange Coinbase to give up the identities of its clients, in a quest, the IRS says, to find tax cheats.
I reported on this IRS attack earlier this month, and explained the IRS's attitude toward taxing bitcoin profits back in 2014. (It considers the alt-coin legally property, not currency, but you still owe taxes on any profits made by selling bitcoin.)
A motion to quash the IRS's subpoena against Coinbase was filed this week in U.S. District Court for the Northern District of California in the name of the anonymous John Does the IRS is trying to track down, by Coinbase customer Jeffrey K. Berns.
Berns wants the IRS stopped, the motion says:
on the grounds that the IRS has no legitimate purpose in seeking the requested documents from Coinbase concerning its users, enforcement of the IRS Summons would constitute an abuse of process as the IRS does not currently have the ability to enforce compliance with its 2014 virtual currency guidance, and the categories of requested documents are so overbroad such that the IRS Summons would require the disclosure of a substantial amount of information and documents that are not relevant to the IRS's stated purpose in issuing the IRS Summons….
The motion, filed by lawyers with the firm Berns Weiss LLP, relies on some precedent:
More than 40 years ago, the Supreme Court stated that the duty of the District Court with respect to an IRS summons was "to see that a legitimate investigation was being conducted and that the summons was no broader than necessary to achieve its purpose." United States v. Bisceglia….
The Supreme Court expounded on the District Court's role by stating, "[o]nce a summons is challenged it must be scrutinized by a court to determine whether it seeks information relevant to a legitimate investigative purpose and is not meant 'to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.'"
The summons at issue here was not sought by the IRS with respect to any "particular investigation," and the IRS has made no attempt to narrow the information covered by the summons to reflect its stated goal of confirming compliance with the tax laws. Instead, based on three isolated incidents and scant other facts, the IRS seeks that Coinbase identify over 1 million American citizens that have transacted in virtual currency and to provide data on every single transaction by those 1 million clients over a 3-year period.
The IRS Summons is certainly not what the Supreme Court envisioned. Further, the breadth of the summons, which seeks substantial personal information that is not at all relevant to tax compliance issues, and which could expose these clients to significant risk of having their identity and funds stolen by hackers who have succeeded previously in hacking the federal government, including the IRS, numerous times, makes it easy to conclude that the IRS is engaging in abuse of process.
Berns' lawyers note that Coinbase is also trying to fight the IRS, but that its customers have an independent interest in the matter, obviously.
The motion makes much of the fact that, despite ample proof in a public comment period that many citizens find the IRS's existing rules regarding virtual currencies confusing, that:
Despite the demonstrable need for clarifying virtual currency tax guidance, the IRS has opted not to issue a single word of virtual currency guidance since promulgating admittedly insufficient guidance more than two years ago. Having been unable, or unwilling, to issue such new guidance, it is hard to believe that the IRS has now issued the IRS Summons for a legitimate investigatory purpose. After all, if the IRS admits that it has not properly informed taxpayers of the virtual currency taxation rules, how could it now reasonably seek to review the records of over one million taxpayers for virtual currency tax compliance purposes?
The motion further argues that the IRS is fishing for information far beyond that needed for simple tax law enforcement, and stresses the IRS's bad record of safeguarding sensitive citizen information.
"The IRS's desire to obtain personal information unrelated to tax compliance from over one million America citizens who are Coinbase users clearly reflects bad faith and an abuse of process," the motion says. "This Court should not allow the IRS to access sensitive personal data under the pretext of monitoring tax compliance. It is hard to conceive of a good faith motive for the IRS to seek personal information that has nothing to do with tax compliance."
If Berns cannot get the IRS subpoena quashed or a protective order, he at least wants to be able to engage in limited discovery against the IRS to investigate his belief they are acting in bad faith.
A hearing on the motion is scheduled for January 19, 2017.