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IRS targets Coinbase with broad John Doe summons

In our last post, we explained how difficult it can be to report Bitcoin on your tax return. With allegations that corporate taxpayers are using the currency to evade taxes, the IRS has stepped up its scrutiny.

Last year, the Service served Coinbase, Inc., one of the most successful Bitcoin trading platforms, with a John Doe summons. It asked the company to disclose records on transactions and user profiles of U.S. customers. This type of summons lets the IRS find out information about taxpayers when it doesn’t know their identities. This type of summons has been used successfully in the past to uncover hidden offshore accounts.

Coinbase process payments for merchants, including Overstock.com and Expedia.com, and allows customers to store and use the currency. Properly reporting Bitcoin has been tricky under current IRS regulations.

Why is the company fighting the request?

While Coinbase has generally complied with law-enforcement inquiries, it has refused to turn over the requested information from 2013 to 2015. The company argues that the scope is “indiscriminate and overbroad.” It has asked the IRS to narrow its focus.

Because the Service is only required to show “a reasonable basis for believing that such person or group or class of persons may fail or have failed to comply” with federal tax law, there have been few successful challenges of these summonses. A small number of taxpayers reporting Bitcoin and several cases of corporate tax evasion are however all that support the summons.

Few tax experts can remember a similarly broad request. The IRS is asking a federal court to enforce its summons. It remains to be seen whether Coinbase will prevail on its argument and force the Service to scale down its request.

If you have significant Bitcoin holdings or frequently use the digital currency for transactions, you should discuss your situation with a tax attorney. Proactive action is the best way to mitigate risks of hefty penalties from a future audit.

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