2016 Year End Review: Virtual Currency: DOJ and IRS Broadly Seek Virtual Currency Account User Information

Ballard Spahr LLP

Ballard Spahr LLP

Under Internal Revenue Code section 7609(f), the IRS may issue a “John Doe” administrative summons to discover the identities of unknown taxpayers. A “John Doe” summons can be a powerful enforcement tool because it allows the government to force third parties, such as banks and credit card companies, to provide numerous records regarding suspected tax code violations by persons whose precise identities are unknown to the IRS but who, as a group, are suspected of tax evasion. The IRS may serve a “John Doe” summons on a third party only with federal court approval.

On November 30, 2016, a federal judge in the Northern District of California granted an IRS application to serve a “John Doe” summons on Coinbase, Inc., which operates a virtual currency wallet and exchange business headquartered in San Francisco. The court found that the summons “relates to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue laws, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summons is issued) are not readily available from other sources.” The government has not alleged that Coinbase has violated any law.

In the memorandum and declaration supporting the petition to serve the summons, the government asserted that virtual currency represents not only a potential vehicle for tax evasion, but also a possible conduit for money laundering. The government’s memorandum in part quoted a 2014 Government Accountability Office report, which found that because of “the higher degree of anonymity” offered by virtual currencies, they “may be attractive to parties seeking to . . . move or conceal money obtained by illegal means.” The government is seeking records of Coinbase users who transferred virtual currency between December 31, 2013, and December 31, 2015, including their U.S. addresses, telephone numbers, email domains, and bank account information.

Coinbase is likely not the only virtual currency business that will receive a “John Doe” summons. In the ongoing enforcement campaign against more traditional undisclosed foreign bank accounts held by U.S. taxpayers, the U.S. Department of Justice and the IRS have used this powerful weapon against several Swiss banks, with long-term and substantial results. Having tasted success, the U.S. government presumably will use this same playbook against multiple virtual currency exchanges to root out alleged tax evasion and other crime. Federal courts generally can be expected to approve the summonses.

Nonetheless, such enforcement tools should not curb significantly the use of virtual currency, which continues to expand. Virtual currency is not merely the tool of would-be tax cheats or money launderers; it typically is used for perfectly legal activities, as the government itself has stated. The current action directed against the users of Coinbase is merely a reminder that virtual currency is not truly anonymous, and that those who use it to hide income or illicit activity should not assume impunity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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