Coinbase Customer Responds Anew to IRS Efforts to Identify Bitcoin Users

The ongoing dispute over the IRS’s attempt to issue a “John Doe” summons on Coinbase, a company that facilitates transactions in digital currencies like Bitcoin and Ethereum, continues in court. Today, Coinbase customer and attorney Jeffrey K. Berns, managing partner of Berns Weiss LLP, filed an answer to the IRS’ response to his motion to intervene and quash a “John Doe” summons the IRS served on Coinbase to identify Bitcoin users.

The case began in November of 2016 with a request filed on behalf of the IRS to serve a “John Doe” summons on all United States Coinbase customers who transferred Bitcoin, a convertible virtual currency, from 2013 to 2015. A “John Doe” summons is an order that does not specifically identify the person but rather identifies a person or ascertainable group or class through their activities.

Judge Jacqueline Scott Corley granted the initial request. In response, Berns filed a motion to set aside the ruling and prevent the summons from being issued. He did so as an “intervenor,” meaning he asked the court to allow him to participate in the legal process even though he was not named in the original summons, arguing that the summons was overbroad and would expose private customer data to hackers. Berns was also concerned about the “chilling effect” the summons could have on the entire blockchain technology industry.

On December 27, 2016, the IRS filed a motion in court to proceed with the “John Doe” summons. The IRS argued, in part, that since Berns had “outed” himself as a Coinbase customer, he was no longer subject to the summons. That means, the IRS argued, that the matter as it affects Berns was resolved, making the motion moot and clearing the way for the IRS to begin identifying Coinbase customers.

However, in the latest round of legal maneuvering, Berns filed a reply to the IRS’s response, countering the IRS’s argument. Berns argues that the IRS is attempting to “artificially moot the motion” because it does not want the Court to scrutinize its actions in pursuing a summons he characterizes as “improper.” Berns also argues that the “John Doe” summons statute does not allow the government to shield itself from inquiries into whether it has acted in good faith. Finally, Berns contends that the Court should reconsider its decision to allow the IRS to issue the summons when questions remain about the IRS’ motives for seeking the information; specifically, Berns disputes that there is any basis for the IRS “or anyone to conclude that it is likely that Coinbase’s customers are engaging in any tax avoidance conduct merely because they opted to transact with virtual currency.”

Berns points out that the IRS has withdrawn its summons as it applies to him; the IRS says that because Berns identified himself as a Coinbase customer, it does not need any further information about him from Coinbase. Berns says this proves the summons was issued in bad faith, stating that if the IRS does not need any specific transaction or related information for Berns, it similarly should not need that information for any other Coinbase customer. Berns says that the withdrawal of the summons as it applies to him is merely a “transparent attempt by the IRS to avoid judicial review.”

In Berns’ most recent motion, he notes that he is prepared to withdraw his initial motion if the Court reconsiders its initial ruling. His goal, he says, is to protect the rights of Coinbase’s customers “from the clear bad faith conduct of the Government in obtaining the right to serve the IRS summons.” He says additional inquiry into the Government’s motives is necessary.

Without further legal action, the motion is scheduled to be heard on January 19, 2017.