"John Doe 4" has been granted the right to intervene in an ongoing court case between the Internal Revenue Service (IRS) and Coinbase, a company which facilitates transactions of digital currencies like Bitcoin and Ethereum. That gives the anonymous Coinbase customer the ability to contest the IRS' efforts to identify and obtain Coinbase customer information. The Judge's Order found that "John Doe 4" made a "sufficient showing of abuse of process to support intervention as of right."
The original matter began in November of 2016 with a request filed on behalf of the IRS to serve a "John Doe" summons on all United States Coinbase customers who transferred Bitcoin, a convertible virtual currency, from 2013 to 2015. 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. The IRS argued that the "John Doe" summons was necessary because they had found evidence of noncompliance and underreporting among Coinbase customers - the agency just couldn't identify the exact identities and scale of the problem without more information.
(You can read more on taxation of cryptocurrencies like Bitcoin here.)
The initial request was granted and in response, Coinbase customer and attorney Jeffrey K. Berns, the Managing Partner of Berns Weiss LLP, filed a motion to set aside the ruling and prevent the summons from being issued. He did so as an "intervenor" meaning that he was asking the court to allow him to participate in the legal process even though he had not been specifically named in the original summons.
The IRS fired back with a motion asking the court to deny Berns the right to intervene. The IRS argued, in part, that since Berns had "outed" himself as a Coinbase customer, he was no longer subject to the summons, making Berns' motion moot. Eventually, Berns withdrew his motion to intervene, and in March of 2017, the IRS filed a new action seeking to enforce the summons on Coinbase.
In May of 2017, Berns Weiss LLP tried again, this time filing a motion on behalf of two more Coinbase customers seeking to intervene. The customers, who asked the court that they be allowed to remain anonymous, sought to quash the "John Doe" summons.
Why all of the efforts to stop the summons? Customers - and privacy rights champions - have expressed concern about the sheer breadth of the request. The IRS initially claimed that it needed the "account/wallet/vault registration" information for all U.S. Coinbase users trading in Bitcoin, "including the complete user profile, history of changes to the user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account." That was just one request. The IRS was initially seeking all records, including third party information, related to Bitcoin transactions conducted by U.S. Coinbase customers.
The request was enough to catch the attention of those in Congress. In May, House Ways and Means Committee Chairman Kevin Brady (R-TX), Senate Finance Committee Chairman Orrin G. Hatch (R-UT), and House Ways and Means Oversight Subcommittee Chairman Vern Buchanan (R-FL) sent a letter to IRS Commissioner John Koskinen requesting additional information on the summons. In the letter, the Congressional officials expressed concern about the basis, scope, and impact of the original summons, which could have affected as many as 500,000 active Coinbase users.
The IRS eventually narrowed the scope of its request. Now, the IRS is seeking information for Coinbase users with at least the equivalent of $20,000 in any one transaction type (buy, sell, send or receive) in any one year during the 2013-2015 period. The IRS has also agreed not to seek records for users for which Coinbase filed forms 1099-K during this period or for users whose identity is known to the IRS.
With those changes, the records belonging to John Does 1 and 2 are no longer covered by the summons which means that they cannot intervene. John Doe 3 was unable to determine if his records are covered by the narrowed summons, so the court denied his motion to intervene but did so without prejudice. That means that John Doe 3 could make a new request to intervene if he later determines that he would be affected by the narrowed summons. However, John Doe 4 could demonstrate to the court that his Coinbase records are covered by the narrowed summons. As a result, the court granted his motion to intervene.
The court also made it clear that it was none too happy with the IRS' request, declaring that "The IRS offers no explanation as to how the IRS can legitimately use most of these millions of records on hundreds of thousands of users." The court agrees that there could be a reporting gap between those trading in Bitcoin and those who are reporting those transactions to IRS but notes "[u]nder that reasoning the IRS could request bank records for every United States customer from every bank branch in the United States because it is well known that tax liabilities in general are under reported and such records might turn up tax liabilities." The court went on to throw a little shade at the agency finding that "[i]t is thus no surprise that the IRS cannot cite a single case that supports such broad discretion to obtain the records of every bank-account holding American."
The IRS did not offer comment, citing pending litigation.
You may be wondering why all of the intervention is necessary. Isn't Coinbase already arguing against the summons? Is it necessary to allow John Doe 4 to contest the summons, too? Yes and yes. The court found Coinbase has a financial interest in the matter as a company: it's looking to make sure that the summons "does not negatively impact its financial profits or its valuation." But John Doe 4? He has a personal interest in the matter. Since those interests are different, the court found that it wouldn't be overreach or duplicative to allow John Doe 4 to argue against the summons at the same time that Coinbase was arguing against the summons.
With that, the matter will continue to be fought in court. The IRS will ask the court to allow it to enforce the narrowed summons and efforts will be made by Coinbase - and now by John Doe 4 - to stop them.
