Page 3 - The Enforcement and Impact of John Doe Summonses

TAX PRACTICE

the IRS engaging in a fishing expedition because a The court focused on whether the Coinbase
party with an interest in the investigation could summons served a legitimate purpose and sought
challenge the enforcement. Thus, the IRS does not relevant information. It first found that the
have to bring a petition under section 7609(f) “as legitimate purpose element was satisfied:
long as all the information sought is relevant to a Coinbase is the largest U.S. exchange of
legitimate investigation of the summoned bitcoin into dollars with at least 5.9 million
20
taxpayer.” The IRS cannot avoid section 7609(f) customers served and 6 billion in
by issuing a summons to a specific taxpayer as transactions while only 800 to 900
pretext for avoiding the John Doe summons taxpayers a year have electronically filed
requirements, but must show that it has a bona returns with a property description
fide interest in the summoned party’s tax related to bitcoin from 2013-2015. This
liability. 21
discrepancy creates an inference that more
The Coinbase Summons Coinbase users are trading bitcoin than
reporting gains on their tax returns. 24
The Coinbase summons was a John Doe
summons the district court issued in accordance The district court found that most of the
with section 7609(f). The summons initially records sought through the Coinbase summons © 2018 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
sought information “regarding United States were relevant because they would allow the IRS to
persons who, at any time during the period determine whether particular Coinbase users
January 1, 2013, through December 31, 2015, filed tax returns that accurately reflected their
conducted transactions in a convertible virtual virtual currency transactions. However, it said
22
currency as defined in IRS Notice 2014-21.” After some categories of records were irrelevant to that
the summons was issued, Coinbase and some purpose, including the requests for copies of
John Doe customers attempted to quash it, and identification documents, such as passports and
the government brought a summons enforcement driver’s licenses, and other documents concerning
action against Coinbase. The district court “know your customer” due diligence. The court
combined the proceedings and allowed the John thus refused to enforce those aspects of the
Does to intervene. summons, and ordered Coinbase to produce
“records of account activity including transaction
While the proceedings were ongoing, the IRS
narrowed its initial requests to information logs or other records identifying the date, amount,
regarding users with at least the equivalent of and type of transaction (purchase/sale/exchange),
$20,000 in any one transaction (buy, sell, send, or the post transaction balance, and the names of
receive) in any one year during 2013-2015 for counterparties to the transaction” for the
which Coinbase had not filed a Form 1099-K, or approximately 14,000 account holders covered by
25
whose identity was otherwise known to the IRS. the summons. In issuing this order, the court
The district court then decided the issue of rejected Coinbase’s claims that the IRS lacked a
whether it would enforce the narrowed Coinbase proper investigative purpose or that the summons
summons. 23 was an abuse of process.
If a Client Is the Subject of a John Doe Summons

The IRS’s success in the Coinbase summons
litigation may lead to more John Doe summonses
20 of virtual currency exchanges, since this certainly
Id. at 324.
21 is an area of interest for the IRS. Tax practitioners
See United States v. Gertner, 65 F.3d 963, 970-972 (1st Cir. 1995) (“If
the enforcement proceeding results in a determination that the IRS does who represent clients engaging in virtual
not in fact intend to investigate a named party, then the IRS cannot
obtain the data it seeks without observing the mandate of section
7609(f).”).
22
Coinbase, No. 3:17-cv-01431 (N.D. Cal. July 18, 2017), at *1. Notice
2014-21, 2014-16 IRB 938, states that virtual currencies are treated as
property for tax purposes, i.e., a taxpayer must recognize gain or loss on 24
the sale or exchange of a virtual currency. Id. at *3.
23 25
Coinbase, No. 3:17-cv-01431 (N.D. Cal. Nov. 28, 2017). Id. at *7.

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