Over the past 10 years, the Internal Revenue Service has devoted substantial resources to its battle against bank secrecy and the use of offshore accounts to evade income taxes. Individuals bent on ensuring secrecy with respect to their financial dealings, however, have other tools available to them and the IRS is constantly identifying and attacking these new devices. With the advent of virtual currencies, the IRS faces a new threat that has the potential of rendering assets effectively untraceable. In tackling the challenge presented by 21st century transactions, the IRS has turned to “John Doe” summonses, a tried-and-true method that has been an integral part of its enforcement program for decades.
Pursuant to §§7602 and 7609 of the Internal Revenue Code, the IRS has the authority to issue—with court approval—John Doe summonses, which are addressed to third parties and seek information relating to unidentified persons. This past November, the IRS filed an ex parte petition for leave to serve a John Doe summons on Coinbase, a San Francisco-based virtual currency exchange, seeking identifying information and transaction records relating to its U.S. clients. On November 30, Magistrate Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California granted the petition, but two weeks later, a Coinbase customer moved to intervene, arguing that the summons was overbroad, invasive, and unlikely to capture untaxed transactions. This dispute raises questions about whether technology and privacy can ever outpace enforcement.
