Imagine if you found out that the IRS had just issued a summons for every financial transaction by every customer of your bank for the last two years, just to see if they had maybe committed some form of tax fraud, and that a federal judge had approved that request.
Last week, that is exactly what happened to the bitcoin exchange, Coinbase. Under the guise of ferreting out people committing tax fraud, the IRS, via the DOJ, filed a "John Doe' summons requesting every financial transaction that has occurred on Coinbase between 2013 and 2015.
The IRS has audited taxpayers who failed to report bitcoin income and were Coinbase users, but there is no indication that fraud has been committed on a mass scale by Coinbase's users. A federal judge granted the IRS the authorization to collect millions of records, nonetheless.
According to a Forbes article, the head of the Justice Department's Tax Division, Principal Deputy Assistant Attorney General Caroline D. Ciraolo, explained the filing as addressing the concerns mentioned above:
“As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance. Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”
In short, the DOJ and IRS are using a brute force technique to tell bitcoin users, without reasonable suspicion of wrongdoing, that they can run but they can't hide.
For its part, Coinbase has said it will fight to protect users' privacy. On reddit, the company posted:
Coinbase here. We are aware of, and expected, the Court’s ex parte order today. As we stated before, we look forward to opposing the DOJ’s request in court.
Tax attorney Daniel Winters penned an op-ed for Coindesk explaining what the summons means for bitcoin users, most notably that the IRS wants to scare users into reporting income and paying applicable taxes.
But there is a much more concerning aspect to this fishing expedition: the “John Doe” summons creates a class of people (bitcoin users) and would allow a similar summons to be issued at any other organization that operates as a bitcoin “bank” or exchange.
By virtue of using bitcoin, you are already under suspicion of the very serious crimes of tax fraud or evasion.
IRS Commissioner John Koskinen said, of the summons:
“Transactions in virtual currency are taxable just like those in any other property. The John Doe summons is a step designed to help the IRS ensure people doing business in the emerging economy are following the tax laws and meeting their responsibilities.”
This isn't the first time the IRS has used its unchecked power to target specific groups of people en masse. IRS targeting of activist groups based on their political ideology has remained in the news for several years. Attempts to pin down accountability for that scandal, despite proof of negligence and outright misleading information shared with investigators, have proven impossible.
Just this week, Koskinen faced a failed impeachment effort by the House. During those impeachment proceedings, Rep Jim Jordan (R-OH) said of the Commissioner:
“John Koskinen has been able to get away with stonewalling Congress, obstructing justice, and breaching the public trust. It’s time that Congress held him accountable for his actions.”
The IRS needs a healthy dose of accountability to taxpayers. An attack on Bitcoin is just another assault on Americans' freedoms — whether they're into the financial mechanism or not.