A court in northern California has asked Coinbase Inc. to release its records of Bitcoin transactions under a John Doe summons. The information requested is to span over three years, from 2013 to 2015. This has many worried about the possibility of audits and mass charges of tax evasion.

IRS Suspects Users of Not Paying Taxes

John Koskinen, Commissioner for the IRS, explains that virtual currencies are taxable just like those established by the government. He added that the inquest will provide the means of ensuring that everyone is paying the proper amount. Though there are currently close to 1,000 digital payment methods in existence, the most well known of them all is Bitcoin.

There exists no accusation against Coinbase Inc. in the paperwork filed by the IRS, but it has been proposed that some of their customers may be in violation of the law. The John Doe method is used when the identities of the persons in question are unknown and when this is precisely the data being sought.

One Coinbase customer has filed a motion pushing back against the inquiry, petitioning in a federal court to look into the matter. This action has the desired effect of blocking the process which the IRS has started but few remain hopeful that this will be the case. It is estimated by the Taxpayer Advocate Service that the IRS is successful in 90% of such cases.

The Workings of the IRS

The powers granted to the IRS are sweeping. Unlike police, they do not need to have a “reasonable suspicion” before acting, and the also do not need to have a “probable cause”. The courts grant them the freedom to investigate whatever they have to in order to determine how much a person accurately owes. This even extends to cryptocurrencies like Bitcoin.

It states in the IRS code that virtual currencies can be taxed just like fiat money. When exchanges have occurred for good and services, the profits must be reported to the proper agency for collection. The guidelines for the IRS go on to say that whatever monies are received in digital form must be taxed according to their worth in American dollars.

This includes the popular sport of mining for Bitcoin which refers to the process of creating new money from the cloud. This is done by obtaining hardware for the purpose of completing large mathematical computations in order to receive a proof-of-work that results in profits which are paid in Bitcoin.

Details of the Bitcoin Customer’s Filing

According to the person who is asking to stall the probe, there are certain fundamental flaws with the governmental inquiry. It notes that the IRS does not have the funding necessary to complete this search of transfers said to involve close to a million people.
The statement further alleges that the IRS’s own terms regarding Bitcoin are too vague, and that they don’t provide adequate guidance. It went on to add additional criticism by stating that the original filing was not done in good faith because of this lack of clarity.

This rebuttal to the initial paperwork also takes a jab at security levels within the IRS network. It contends that the computer network is not secure and that Coinbase Inc. intelligence has the possibility of being leaked. It brought up the fact that transactions are not straightforward in determining whether a person has received monetary gain and that it would not be feasible for the agency to connect all the dots.