Jeffrey Berns, an attorney representing Coinbase in its legal fight against the Internal Revenue Service summons to provide customer information, recently filed a response to the “John Doe” summons, asking the court to quash the summons in its entirety, order a limited hearing and discovery into government’s good faith, or reconsider its decision to grant the IRS petition.
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Berns’ motion calls the IRS summons “unprecedented use” of the IRS John Doe summons procedure.
Coinbase has said it is committed to customer privacy and opposes the government’s efforts to gain customer information. Coinbase does not have to take any action unless and until the government begins a proceeding to enforce the summons.
Berns: Government Acted In Bad Faith
Berns, in his motion, said the court can conclude the government acted in bad faith in pursuing the IRS summons or that additional inquiry into its motives is needed. Berns is the managing partner of Berns Weiss LLP and is also a Coinbase customer.
Berns filed his recent motion in response to the IRS’s reply to his motion to intervene and quash the John Doe summons.
The reply disputed the government’s claim that Berns’ motion is moot because on Dec. 27, 2016, the IRS withdrew the summons as it applied to Berns only, even though it had not obtained any of the documents or information sought by the summons with respect to Berns. Berns contended that the court should reject the government’s attempt to artificially moot the motion because it does not want the court to scrutinize its actions in pursuing the improper summons.
On December 1, a federal judge approved the IRS summons and demanded Coinbase reveal user transaction records.
Berns argued the summons statute does not permit the government to protect itself from inquiries on its acting in good faith.
Berns Questions Agency’s Motives
Berns claimed the court should reconsider allowing the IRS to issue the summons considering there are questions about the agency’s motives for gathering information. He argued there is no basis for the agency or anyone to conclude it is likely Coinbase customers engage in tax avoidance activity just because they do business with virtual currency.
Berns’ motion claimed that based on three instances of taxpayers using bitcoin to avoid paying undisclosed amounts of income taxes, the agency is using the John Doe summons process to require Coinbase to identify millions of its U.S. customers and to provide “substantial personal and financial information concerning those customers, some of which has absolutely no relation to any tax compliance issue.”
The fact that virtual currency is a new technology should not change the legal case, the motion noted. If three taxpayers used Bank of America wire transfers in tax avoidance schemes, then petitioned the court to serve a summons to identify every bank customer who used a bank transfer and produce all documents on those customers, the outrage would be “limitless,” the motion noted.
To avoid scrutiny of its motives, the agency has acknowledged it does not need all the information it is seeking, the motion stated. It said the IRS acted in bad faith in issuing a summons for information it does not need.
Berns said he is ready to withdraw his initial motion if the court reconsiders its initial ruling. He said he is trying to protect the rights of Coinbase customers from the bad faith the government is showing in exercising the right to serve the summons. He said an additional inquiry is needed into the government’s motives.
Treasury Report Questioned IRS On Virtual Currency
The motion noted that a Treasury Inspector General for Tax Administration (TIGTA Report), which was issued two months before the IRS filed its petition, criticized the IRS for not having the ability to analyze the risk of virtual currency tax noncompliance and estimate its significance.
The report then offered multiple recommendations for the IRS to fix the problem, such as clarifying its vague virtual currency taxation policies to increase voluntary taxpayer compliance.
In response to his report, the IRS ignores most of the recommendations, the motion claimed.
“How can it be the case that the IRS is unable to estimate the extent of any virtual currency tax noncompliance, yet it told this court that tax evasion using virtual currency was so serious that it justified the government obtaining personal and financial data concerning millions of taxpayers merely because they had engaged in a transaction involving virtual currency?”
While it contends that it is “pure speculation” that the IRS is seeking the summons for research purposes, evidence indicates the IRS does not have the ability to examine the tax returns of many Coinbase customers for tax compliance, Berns’ motion noted.
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