A federal judge granted a bitcoin owner the right to intervene in a closely watched court case involving the digital currency exchange Coinbase while also upbraiding the Internal Revenue Service's demand for potentially millions of customer records.
In a stern 12-page order, the judge agreed to let an anonymous customer, known only as "John Doe 4," challenge the IRS's power to enforce a sweeping summons it served on the San Francisco-based Coinbase last year for customer records. The agency claims that only 802 people declared gains or losses for bitcoin in all of 2015, and suspects many others failed to pay taxes on profits following a two-year period in which the digital currency's value soared from $13 to over $1,100.
The IRS's investigation, however, has drawn fire from Coinbase and others who claim the agency's demands ensnare too many people and involve too much information.
In her ruling, U.S. Magistrate Judge Jacqueline Corley strongly agreed, and declared the scope of the IRS request is unprecedented.
Under that reasoning the IRS could request bank records for every United States customer from every bank branch in the United States because it is well known that tax liabilities in general are under reported and such records might turn up tax liabilities. It is thus no surprise that the IRS cannot cite a single case that supports such broad discretion to obtain the records of every bank-account holding American [my emphasis]
Corley made this finding despite a decision by the IRS earlier this month to narrow the scope of documents covered by its summons, and to only request records for accounts involving bitcoin transactions worth $20,000 or more.
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The judge also blasted the IRS's efforts to prevent John Doe 4, who has agreed to identify himself or herself later in the process, from participating in the case. Corley pointed out it is Doe's financial records that are at stake, and declared the IRS arguments to exclude Doe "makes no sense."
Corley undertook a legal analysis of when a person can intervene to challenge the enforcement of an IRS summons, and concluded Doe qualified under two separate legal tests.
Earlier this year Coinbase suggested it would challenge the summons, but it has yet to do so. The company declined to comment on this week's ruling. The IRS does not comment on current investigations.
Corley's ruling comes as the price of bitcoin and other digital currencies crashed last week only to post a significant recovery. As of Thursday afternoon, the price of bitcoin was approximately $2,600.
You can read Corley's order for yourself here.