IRS Seeks Information via John Doe Summons Request on Bitcoin Users

32 Flares Filament.io 32 Flares ×

Last week in federal district court in Northern California the Department of Justice filed a petition seeking authority to obtain records the records of all customers who bought virtual currency from Coinbase, a virtual currency exchange company, from 2013 to 2015. The John Doe summons request came on the heels of a TIGTA report on the challenges associated with the growing use of virtual currency, which I discussed here in TIGTA Issues Warning on Compliance Issues Associated With Use of Virtual Currencies.

We have not previously discussed John Doe summons requests. Essentially, a John Doe summons is a summons that does not identify the person with respect to whose liability the summons is issued. The government has used it extensively in its efforts to uncover the identities of taxpayers hiding assets in previously undeclared offshore accounts. (We discuss the use of John Doe summonses in Saltzman and Book IRS Practice and Procedure Chapter 13.05[2], and readers who want more should review the chapter’s discussion).

read more...

Sections 7609(c)(3) and (f) authorize the Service to issue a John Doe summons pursuant to an investigation of a specific, unidentified person or ascertainable group or class of persons. The summons requires district court approval in an ex parte proceeding. Before granting the summons, in addition to the investigation requirement the DOJ on behalf of the Service must also show a reasonable basis to believe that that person or group or class of persons may fail or may have failed to comply with any provision of the internal revenue laws; and that the identity of the persons and the information sought in the summons is not readily obtainable from other sources.

When the IRS seeks the use of a John Doe summons, the IRM provides that the Service should be far along in its development of the issues relating to the request:

The Service should no longer be in the information-gathering or research stage of a project when it decides to seek court authorization to serve a John Doe summons. The project research should be sufficiently developed to enable the Service to identify a specific tax compliance problem. The Service should be prepared to investigate the tax liabilities of specific taxpayers based on the information received from the John Doe summons.

IRM 25.5.7.4.2 Necessary Purpose (Nov. 22, 2011).

To support the issuance of the John Doe summons request, the DOJ typically provides the district court declarations from IRS revenue agents who are in a position to provide information as to how the particular facts justify the issuance of the summons.

We have uploaded the declaration of the IRS Revenue Agent David Utzke that was filed in support of the John Doe summons request to seek the customer records. It makes for fascinating reading, detailing what IRS has learned to date on ways that US taxpayers are using the currency to (attempt to) disappear from the taxman and how the IRS in its constant game of a whack a mole is trying to figure out the ways that this technology will complicate IRS efforts to combat offshore evasion.

As the TIGTA report discussed, virtual currency usage complicates tax administration. Its use is growing (see paragraph 28 of the declaration where Revenue Agent Utzke estimates that the transaction value in dollars of bitcoin usage in 2015 exceeded $10 billion). I write this as I have just returned from a conference on how advances in technology and social knowledge can improve tax administration. Utzke’s declaration reveals what he has learned from investigating taxpayers who have used bitcoin as a way to hide income, including how some taxpayers shifted to bitcoin when IRS offshore efforts heated up a few years ago (see paragraph 32 for example). This first major public IRS effort to address the challenges of virtual currency reveals that with technological changes and advances come new ways that black-hatted taxpayers can game the system.

Update: For more on the John Doe summons request on Coinbase, see our Forbes blogging colleague Kelly Phillips Erb in IRS Wants Court Authority to Identify Bitcoin Users & Transactions

Jack Townsend at Federal Tax Crimes has an excellent and more detailed discussion of the summons request, including Coinbase’s likely opposition to the request, Jack’s initial take on the uphill battle the company faces, and the SOL impact of the John Doe summons request.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*