After months of legal conflict between the IRS, Coinbase, and Berns Weiss LLP partner Jeffrey Berns over the tax agency’s effort to obtain customer records from digital currency exchange Coinbase, a new motion to quash the IRS John Doe summons was filed on May 15,2017. Berns Weiss LLP filed the motion to invalidate the summons on behalf of two Coinbase customers identified within the document as “John Doe 1” and “John Doe 2.”
The anonymity of the two customers is designed to prevent the IRS from doing what it tried to do in an earlier motion filed by Jeffrey Berns. In its response to that filing, the IRS argued that Berns’ complaints were mooted by the fact that he self-identified as a Coinbase customer simply by filing the motion. As a result, the tax agency argued that his customer information was now no longer subject to the summons.
This most recent motion asks that the court intervene to quash the summons, provide a protective order, or at least schedule an evidentiary hearing that allows for discovery. The motion explains that the customers’ reason for filing the document involves a desire to safeguard the interests of all of the exchange’s customers:
“Movants-Proposed Intervenors John Does 1 and 2, Coinbase customers whose accounts are covered by the IRS Summons, are not filing this motion to prevent the IRS from seeking records regarding their accounts due to a concern that they have violated any tax laws with respect to virtual currency transactions. Instead, Movants’ intent is to protect the interests of all of Coinbase’s customers who are subject to this overbroad summons, even though the IRS has made no showing that any of them have engaged in suspect tax-avoidance conduct. Movants recognize that Coinbase plans to oppose the Government’s petition to enforce the summons and fully supports those efforts. However, as it is customers’, and not Coinbase’s, privacy interests that are at stake, intervention is appropriate to ensure that Coinbase’s customers are fully protected.”
The motion also argues that the IRS’ reasons for seeking the summons are illegitimate. It notes that the agency has had plenty of time to issue appropriate regulations to manage any tax implications associated with digital currency use, and has thus far failed to take any concrete steps to resolve its own deficiencies in this area of tax compliance. In fact, a September 2016 report from the Treasury Inspector General for Tax Administration asserted that the IRS needed to focus its efforts on providing the sort of guidance taxpayers need to effectively comply with the tax laws of the country. The motion alleges that the agency has failed to even attempt to follow that advice:
“Despite the demonstrable need for clarifying virtual currency tax guidance, the IRS has opted not to issue a single word of virtual currency guidance since promulgating admittedly insufficient guidance more than two years ago. Having been unable, or unwilling, to issue such new guidance, it is hard to believe that the IRS has now issued the IRS Summons for a legitimate investigatory purpose. After all, if the IRS admits that it has not properly informed taxpayers of the virtual currency taxation rules, how could it now reasonably seek to review the records of over one million taxpayers for virtual currency tax compliance purposes?”
In a comment quoted by Forbes, Berns Weiss partner Lee Weiss said, "We look forward to the opportunity to finally litigate the merits of the IRS Summons and for the Court to consider the grave privacy and financial risks to which Coinbase’s customers will be exposed if the summons is enforced in its current form."