IRS Coinbase Probe Could Leave American Bitcoin Users Vulnerable

If you’re a Bitcoin user, the IRS’s probe into Coinbase may give you the feeling your freedom and anonymity are hanging in the balance. Due to the IRS’s attempt to collect a massive amount of data on Bitcoin users, many are wondering what the agency's true motives are and what could unfold if Coinbase sells out 500 thousand users.

Overview of the Witch Hunt

In November of 2016, the U.S. Department of Justice approved the IRS’s “John Doe” summons to Coinbase which requested all records from 2013-2015 U.S. users. The IRS started getting suspicious of Coinbase when it discovered two individuals who were not being honest on their taxes. After realizing they were both Coinbase users – and earning millions – the witch hunt began. So far, the digital currency exchange has yet to comply with the summons, (since its last update on March 16, 2017).

Coinbase users have been standing their ground as well. Jeffrey Berns, a Coinbase user and attorney, has tried to stop the IRS, though unsuccessfully. The law firm he is partners with, Berns Weiss LLP, has since started representing two other Coinbase users. They, too, are challenging the agency and its lack of proof any of these Bitcoin users are criminals by having a Coinbase account.

Are All Bitcoin Users Criminals?

Based on the IRS’s far-reaching summons to Coinbase they might as well be saying all digital currency users are criminals. If that’s the case, what about FinTech innovators who have adopted the currency and its underlying technology, blockchain? Are they criminals, too?

Just because two Coinbase users have cheated on their taxes does not mean every Coinbase user is a tax cheat. That would be like saying John Doe has committed fraud, and he banks at Wells Fargo, so now the millions of other Americans who bank there need to be investigated for fraud.

The Implications of the "John Doe" Summons

Since the summons has lumped together such a large number of people, the IRS’s actions could have quite an impact. For instance, once turned over to the IRS, the account information could be stolen by hackers, putting users at risk of identity theft and having their Bitcoins stolen.

If this sensitive data fell into the wrong hands - even those of a rogue IRS agent – we could see a case like we did when Secret Service agents on the Silk Road case stole millions of Bitcoin back in 2015.

Will Coinbase Users Be Shadowed?

The summons has an eerie stealth-factor. Anyone who is lumped into the document, (currently, all U.S. Coinbase users), will probably never be personally notified, as this is not a requirement. Therefore, if Coinbase reveals this information, you could be investigated by the IRS and not even know it (until they seize your account, of course).

The vague wording in the IRS's procedures manual, the Internal Revenue Code (IRC), is also concerning as it relates to the summons. It states the IRS has cause for concern if an individual or organization "may fail or may have failed to comply with any provision of the tax laws."

Does this mean anyone who has tax debt or has ever been late on an installment to the IRS is more vulnerable to the probe?

Final Thoughts

One has to question whether this is not part of a bigger scheme to track Bitcoin users. Once the U.S. government identifies who uses digital currencies, will it keep tabs on them? Digital currencies are already associated with crime, imagine if digital currencies ever became illegal. The government could pull up your past digital currency history and find reasonable suspicion you may fit the "criminal" profile.

It is still too soon to tell if this probe into Bitcoin users will be thwarted. However, if this is any indication of how the IRS is going to treat Americans who use digital currencies, prepare to be profiled and watched more closely.