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Legal Sparring Continues in Bitcoin User’s Battle with IRS Tax Sweep

Jan 01, 2017

In a strange twist, Coindesk reports that the IRS has, somewhat indirectly, removed one target from its broad request for data about U.S. users of the Bitcoin exchange Coinbase. It no longer wants data about Jeffrey Berns, a lawyer who also happens to be fighting the IRS’s “John Doe” request in court.

Berns originally filed a motion on December 13th asking the U.S. District Court for Northern California to stop the IRS’ subpoena of Coinbase records. The IRS believes that its request, filed in November, is justified because Bitcoin owners “may fail, or may have failed, to comply with one or more provisions of the internal revenue laws.”

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Berns is represented by his own law firm, Berns Weiss, whose motion argues that the IRS data search is “an abuse of process” and “overbroad.” Berns has said his motion is intended to defend not only himself, but all targeted users.

But according to a December 28th court filing by the IRS, Berns is no longer a target of its records request because he identified himself in his own filing, and the request is only for unidentified users. Therefore, the IRS argues, Berns is not a party to proceedings and his request to block the data grab should be thrown out of court.

In response, Berns Weiss had its own spin, telling Coindesk that “The IRS’s willingness to withdraw the summons as to Mr. Berns only because it is now aware of his identity,” and without the additional information they’re seeking about many other Coinbase users, “Makes it clear that the IRS does not have a legitimate purpose in seeking substantial personal and financial information concerning approximately 3 million Americans.”

Coinbase has said it is ready to mount its own legal challenge when subpoenaed, citing concern over customers’ privacy rights.

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The IRS’s sweeping request for Coinbase user information may seem overreaching, particularly in the post-Snowden era when government intrusion is a bugaboo for many. But experts are divided as to whether resistance to the motion is justified. Clay Littlefield, a financial technology specialist at the law firm Alston & Bird, told Fortune that the request is comparable to those previously used effectively in the 2009 IRS crackdown on Swiss tax shelters including UBS.

“When it comes to taxes,” said Littlefield, “You’re not entitled to that level of privacy.”

Notably, UBS faced a hefty fine in that case, suggesting Coinbase could face liability for its customers' failure to properly pay taxes.

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Littlefield also identified the deeper issue at stake. “The [IRS] request challenges a fundamental expectation” of "complete anonymity and privacy” by bitcoin users.

More bitcoin advocates and experts are acknowledging the reality that “regulatory arbitrage” is a key value proposition of the technology, and that tighter oversight is a risk to its appeal. For Coinbase and other exchanges, one key regulatory advantage is that they’ve so far avoided being required to file 1099-B financial reports to the IRS on behalf of their customers, as do many exchanges trading other kinds of assets.

But the taxman, however slow, eventually comes for us all.

A hearing on the dueling motions from Berns and the IRS is currently set for January 19th.

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