IRS Says It Will Limit Bitcoin Audits—But Only a Bit

July 6, 2017, 1:49 PM UTC

The Internal Revenue Service suggested it will scale back a sweeping probe of more than a million customer accounts at the popular digital currency exchange Coinbase, saying it will no longer seek password and security settings for the accounts.

The concession came during a legal skirmish last week between the IRS and anonymous bitcoin buyers at Coinbase, who are asking for the right to intervene in the case.

“DOJ trial attorney Amy Matchison said at a court hearing before U.S. Magistrate Judge Jacqueline Scott Corley Thursday that the IRS has been in talks with Coinbase about narrowing its request to only items the agency would need to look for unreported income,” reported The Recorder, a legal site that reported on the hearing.

The controversy began last year when the IRS demanded to see all of Coinbase’s customer account activity from 2013 to 2015—a time when bitcoin’s value soared from $13 to over $1,100 (it is currently worth around $2600). The agency has stated that only 802 people declared gains or losses related to bitcoin in 2015.

In a email, Coinbase declined to comment on the IRS’s reported decision not to seek passwords, and referred Fortune to a blog post from March in which the company said it is pushing the agency to reduce the scope of the probe.

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Currently, Coinbase is not directly involved in the court dispute over the probe. Instead, so-called “John Doe” accounts owners hired the law firm Berns Weiss to ask the judge for permission to challenge an IRS summons of Coinbase. The agency is pushing back, saying the anonymous customers don’t have standing to mount the challenge.

At last week’s hearing, a lawyer for Coinbase reportedly said the company planned to bring its own challenge over the scope of the summons.

When news of the IRS probe first emerged, some legal observers predicted the agency’s demands for all of Coinbase’s customer records was just a negotiating tactic, and that it would ultimately ask for only a portion of them.

So far, though, the agency has done little to scale backs its demands beyond last week’s claim it will not seek passwords or security settings.

Nor does the IRS appear to have responded to a critical letter from Congress in which Sen. Orrin Hatch (R-Ut) and others blasted the investigation as “overly broad, extremely burdensome, and highly intrusive to a large portion of individuals.”

It is unclear if the IRS is targeting other exchanges besides Coinbase in its probe. The San Francisco-based company, which also sells the digital currencies Ethereum and Bitcoin, is hardly the only exchange but it is by far the best known in North America.

Coinbase has over a million customer accounts and, according to the Congressional letter, 500,000 active customers who will be affected by the summons.

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