About two weeks ago, a federal court in the Northern District of California has officially authorized the Internal Revenue Services (IRS) to require the records of every user who conducted transactions in a convertible virtual currency between 2014 and 2015 from Coinbase. Previously, the IRS had grounded its requirement on the fact of two cases of tax evasion involving Coinbase and the anonymous nature of bitcoin.
Not that Coinbase welcomed such a decision of the Court. The company said to its customers: “Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request. Our customers’ privacy rights are important to us and our legal team is in the process of examining the government’s petition. In its current form, we will oppose the government’s petition in court.”
The dissatisfaction of Coinbase customers resulted in the case filed by Los Angeles attorney Jeffrey K. Berns, the Managing Partner of Berns Weiss LLP, who used the exchange company to buy and sell bitcoins.
Berns has estimated that more than a million Americans are subject to the summons granted to the IRS by Judge Jacqueline Scott Corley. Moreover, the IRS is interested in the detailed information including transaction history, all correspondence between Coinbase and the user or a third party; contact information, including addresses and user profiles; balances; security settings; user preferences; and payment records.
“There is no legitimate reason to seek these records,” states Berns. “Individuals with no taxable events shouldn’t be subject to a complete investigation because the IRS doesn’t understand a developing technology.”
Berns argues against the court decision as the initiative can open private customer data to hackers who would potentially be able to steal the funds. He recalls the previous hacker attack on the IRS when 700,000 Social Security numbers were stolen. It is more than risky to share Coinbase information with the agency.
“Information concerning a virtual currency customer’s account is highly sensitive,” the motion states. “If this security information is obtained by a hacker who uses the information to misappropriate virtual currency, there is no way for the true owner of that virtual currency to recover it. If the IRS were to obtain this information, which again, is unrelated to tax compliance, it could expose the government to huge potential liability from Coinbase customers if the keys are not properly safeguarded.”
The hearing of the case is scheduled on January 19. Barring a ruling, Berns has alternatively requested that the Court schedule an evidentiary hearing that would include an IRS deposition.