The IRS is finally encountering resistance to its push to obtain vast amounts of data on cryptocurrency transactions. This is after a Coinbase Inc. cu
The IRS is finally encountering resistance to its push to obtain vast amounts of data on cryptocurrency transactions. This is after a Coinbase Inc. customer sought to intervene in the federal case by filling a motion in the federal court. The motion was filed to block the IRS from enforcing it recent John Doe summons to get information on Coinbase use. As it stands, the motion is set to face a steep uphill battle.
The court typically gives the IRS wide ranging powers to enforce summonses that may uncover information that may potentially expose incidences of tax evasion. For this, the IRS needs not have a probable cause or even suspension to commence investigating crimes. Instead, the IRS has under federal law, the power to examine any data that they may deem relevant to determining the correct amounts of tax owed by taxpayers. Many people find this rather sweeping.
Here, the goal of the IRS is to use this broad power to acquire data on cryptocurrency transactions. What’s more, the agency hopes to get clues on who to target for audits. The IRS, however, still hasn’t obtained this data yet. The motion makes several strong arguments as to why the IRS was wrong to issue the summons.
First, the motion points out that compliance may affect over one million taxpaying Coinbase members. It further argues that the motion should be squashed given its broad scope. It adds that as with any other practical matter, the IRS would be extremely hard pressed to review such vast amounts of data accurately given how severely underfunded it is.
According to the motions, the IRS has, as per its own Inspector General, issued confusing and vague guidance on how digital currency transactions should be taxed, and even after this criticism, has failed to provide any further information for taxpayers seeking to transact in Bitcoin. It suggests that by failing to provide taxpayers with clear information on how to tax these transactions, yet taking measure to investigate them on a wide scale, the government was muddying the water unnecessarily.
The motion’s final argument is that the security of the IRS computer systems cannot be guaranteed. This means that Coinbase fears that the government may be hacked and any data it may have received from Coinbase could fall into criminal hands. There is a lot of weight to this argument when the IT security debacle the IRS has recently been embroiled in. The Agency was roundly criticised for its slow response to the security reach, as well as its failure to notify those it affected. This is important, considering that many people opt for crypto-currency to keep their financial information and transactions private and secure.
But is the motion likely to go through. Most likely not, going by the government success rates, in fact, the IRS wins over 90 percent of its cases according to data from the Unites States Taxpayer Advocate Service. The IRS has also been increasing the frequency with which t uses its summons power, and has as a result been embroiled in numerous court fights. According to data provided by the Taxpayer advocate, there were only 45 such cases but the number of disputes filed over a 1 year period had ballooned to 118 by 2013.
So can Coinbase users hope to succeed? A few taxpayers have successfully challenged the IRS summonses. But these particular motions may be of value even if it doesn’t succeed. For one, it may severely slow the IRS’s march towards getting the power to do audits. Alternatively, the Coinbase user could request to join the case a move that might postpone data handover. Besides, some users could file appeals, leading to further delays.
But can Coinbase uses breathe easy knowing that their data will fall into the hands of the IRS? While they can get some comfort from the fact that lawyers are fighting for them in court, it has never been easy to overturn an IRS summons. They probably should expect to prevail in the long run as the IRS is known to get what it wants. All concerned taxpayers should start preparing now, and consider amending any questionable past filings. Assuming that you will not be caught or are capable of fixing it can be dangerous when dealing with the IRS.