If anyone at the Internal Revenue Service thought that the agency’s quest to force Coinbase to give up its customer records was a battle that would be fought only in the courts, a new development this week may have them questioning that assumption. A May 17 letter from three Congressional Republicans to IRS commissioner John Koskinen indicates that some in Congress may be prepared to flex their oversight muscle to protect taxpayers from the IRS’ unprecedented John Doe Summons.
The letter's three co-signers include Utah Senator Orrin Hatch, Texas Representative Kevin Brady, and Florida Representative Vern Buchanan. The document appears to call into question the reasoning behind the IRS effort to obtain personal information and account activity records for hundreds of thousands of Coinbase customers based on little more than a suspicion that some of them may be underreporting their digital currency earnings.
The letter begins by asserting the Congress’ jurisdiction over revenue issues at the federal level, and lawmakers’ responsibility to exercise oversight in “emerging areas of tax administration, including digital currencies.” The authors also directly address the Coinbase summons:
“We write today to request information about the IRS's digital currency strategy as well as recent events surrounding the IRS's summons to Coinbase, a digital asset exchange company.”
From there, the body of the letter expresses a general tone of skepticism about the IRS request for a summons, as well as the agency’s motivations for seeking the Coinbase customer records. The lawmakers also address the agency’s multi-year failure to seriously address the tax issues surrounding this emerging technology – including a failure to further develop its cryptocurrency tax strategy even after the Treasury Inspector General for Tax Administration recommended an update to those policies last year.
One question raised by the letter has yet to be answered to anyone’s satisfaction, and it involves the very laws that govern IRS conduct where these types of legal summons are concerned. As the lawmakers note, the Internal Revenue Code mandates that a John Doe Summons only be issued when the government can establish that the summons applies to an “ascertainable class of persons, whose identity is unknown, and with respect to whom the IRS has a ‘reasonable basis’ for the belief that the individuals have failed to comply with tax laws.” The authors clearly have doubts about whether the IRS has met that base threshold for seeking the summons:
“[W]e strongly question whether the IRS has actually established a reasonable basis to support the mass production of records for half of a million people, the vast majority of whom appear to not be conducting the volume of transactions needed to report them to the IRS. Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals. The IRS's actions in this case also set a dangerous precedent for companies facilitating virtual currency transactions that could be subject to a similar summons.”
The letter concludes by calling upon Koskinen to brief the staff of the two relevant oversight committees – the Senate Committee on Finance and the House Committee on Ways and Means - by June 7, 2017. It also instructs the commissioner to provide answers to questions about the IRS’s cryptocurrency tax strategy, its attempts to engage in outreach to the industry, and the agency's justification for seeking all Coinbase customer records.