United States Magistrate Judge Jacqueline Corley issued an order this week allowing an anonymous Bitcoin user to challenge the IRS summons compelling Coinbase to provide account information and transaction records for hundreds of thousands of its Bitcoin customers. In the order, the judge rejected the government’s effort to prevent ‘John Doe 4’ from intervening in the matter and seemed to signal at least some reservations about the broad nature of the agency’s demands.
The order provides an overview of the case history, and explains how John Doe 4 was substituted in place of the original two John Does who had first sought to intervene. That substitution took place after the IRS scaled back its request to ensure that those would-be intervenors would not be covered by the summons. The parties to the action then “asked the Court to decide the motion to intervene as if it had been brought by Doe 4 in the first instance.”
Corley found that John Doe 4 has a protectable interest in the action, and had made a “sufficient showing of abuse of process to support intervention as of right” – with the latter finding largely focusing on the unprecedented scope of the IRS summons. She referenced the agency’s own contention that there is a “substantial gap between the number of people transacting in virtual currency (for which tax consequences might attach) and those that are reporting such transactions.” According to Corley,
“Under 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. It 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 tax agency had also apparently tried to argue that the John Doe in question was simply attempting to remain anonymous. Judge Corley noted that “the IRS has consented to its proceeding as a John Doe” and then reminded the agency that the John Doe in question had been willing to abandon anonymity – but only if the government would agree to not use that revealed identity as an excuse to “withdraw the summons as to its records and thus moot its interest in this proceeding.”
The IRS had refused that offer, which suggests that the agency almost certainly intended to pursue the same strategy it used against Berns Weiss attorney Jeffrey Berns earlier this year.
Coinbase has not yet formally challenged the IRS summons, despite earlier comments suggesting the company would take some sort of action in the near future.