On November 29, 2017, the U.S. District Court for the Northern District of California dealt a partial blow to the U.S. Department of Justice and the IRS in connection with their collective efforts to enforce an expansive and overly broad "John Doe summons" request in relation to the customers of Coinbase Inc. (“Coinbase”). Coinbase is the largest cryptocurrency exchange in the United States and the fourth largest in the world. The narrowed court order represents an important victory for Coinbase and its customers, and sets a generally favorable precedent for other cryptocurrency exchanges that may face similar informational requests in the future.
Under the Internal Revenue Code of 1986, as amended (the “Code”), the Internal Revenue Service (the “IRS”) can use extraordinary methods to obtain information from the taxpayer. Under Sections 7603, 7605, and 7609 of the Code, the IRS is authorized to issue summonses to compel taxpayers and third parties to provide information relevant to an audit. Such third parties include record keepers such as banks or other financial institutions and, in this case, a cryptocurrency exchange. A third party may hold critical information, and may not object to a summons simply because the audit does not pertain to its liability but can negotiate the scope of the summons, depending on the economic burden of complying with the summons. If necessary, the IRS can proceed to summons enforcement action in the appropriate district court to compel production of the information it is seeking.
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