Court Authorizes IRS “John Doe” Information Demand about all US Taxpayer
On November 30, 2016, in the Federal Court for the Northern District of California, U.S. Magistrate Judge Jacqueline Scott Corley found that there is a reasonable basis for believing that virtual currency users may have failed to comply with federal tax laws. The ruling will now compel Coinbase to share records of their 5 million user base the IRS has sought.
”The IRS is specifically seeking records for Coinbase users who transferred convertible virtual currency at any time between December 31, 2013, and December 31, 2015, with “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 related correspondences.”
The scope and breadth of this are unprecedented even as it relates to John Doe summonses in the banking sector related to Bank Secrecy Act/Suspicious Activity Reporting compliance.
Coinbase could appeal the ruling, but it will face an uphill battle which they are very unlikely to win. According to the IRS Taxpayer Advocate Service branch, in the year ending May 2015, 96 percent of lawsuits appealing summons enforcement were successfully fought off by the Internal Revenue Service. The burden of proof and strict procedural requirements are very, very difficult to overcome.
You can read the statement from the Office of Public Affairs of the Department of Justice here.
EDIT Friday December 2, 2016
It would appear the order granted by U.S. Magistrate Judge Jacqueline Scott Corley, Federal Court for the Northern District of California, regarding the John Doe summonses, was an Ex Parte petition. This is an important distinction. According to legal-dictionary:
"An ex parte judicial proceeding is conducted for the benefit of only one party. Ex parte may also describe contact with a person represented by an attorney, outside the presence of the attorney. The term ex parte is used in a case name to signify that the suit was brought by the person whose name follows the term."
"Under the Fifth Amendment to the U.S. Constitution, "No person shall … be deprived of life, liberty, or property, without due process of law." A bedrock feature of due process is fair notice to parties who may be affected by legal proceedings. An ex parte judicial proceeding, conducted without notice to, and outside the presence of, affected parties, would appear to violate the Constitution. However, adequate notice of judicial proceedings to concerned parties may at times work irreparable harm to one or more of those parties. In such a case, the threatened party or parties may receive an ex parte court hearing to request temporary judicial relief without notice to, and outside the presence of, other persons affected by the hearing."
"A court order from an ex parte hearing is swiftly followed by a full hearing between the interested parties to the dispute. State and federal legislatures maintain laws allowing ex parte proceedings because such hearings balance the right to notice against the right to use the legal system to avert imminent and irreparable harm. Far from violating the Constitution, the ex parte proceeding is a lasting illustration of the elasticity of due process."
Coinbase did release a statement after the Ex Parte Petition was granted:
"We are aware of, and expected, the Court’s ex parte order today. We look forward to opposing the DOJ’s request in court after Coinbase is served with a subpoena. As we previously stated, we remain concerned with our U.S. customers’ legitimate privacy rights in the face of the government’s sweeping request."
References
Erb, Kelly Phillips. “Court Grants Authority to Demand Identities of Bitcoin Users at Coinbase.” Fortune. November 30, 2016. http://www.forbes.com/sites/kellyphillipserb/2016/11/30/court-grants-irs-authority-to-demand-identities-of-bitcoin-users-transactions-at-coinbase/#7e70f44f2fd8
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