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IRS Wants to Identify Bitcoin Users, Spy Into Coinbase Records

The IRS is looking for tax money wherever it can, but is finding that it's not so easy in the world of virtual currency.

Bitcoin, a digital currency targeted by taxing authorities, is still safe at Coinbase, the nation's largest exchanger of the crypto-currency. The IRS recently served a summons for information about Coinbase users, but the company is expected to oppose the request. The IRS claims that two people used exchanger to avoid taxes, and it has asked for information to identify all Coinbase customers from 2013 to 2015.

No Fishing Here

"We want to work with law enforcement -- that's generally our policy," said Juan Juarez, head legal counsel for Coinbase. "But we can't tolerate sweeping fishing expeditions. We are very concerned about the financial privacy rights of our customers."

The summons emanates from a "John Doe" petition filed by the IRS in U.S. District for the Northern District of California. It seeks information about "account registration records and any Know-Your-Customer due diligence performed for each account owned or controlled by a user during the stated period, the associated transaction records, account statements, and records of payments made and processed for these users."

The petition notes that these types of documents "should reveal the identity of account holders, as well as amounts of transactions from those accounts."

According to the petition, Coinbase is the fourth-largest Bitcoin exchanger in the world. The San Francisco-based company offers trading in 32 countries and maintains more than 4.9 million digital wallets. It has served more than 3.2 million customers, and exchanged more than $2.5 billion in Bitcoin.

Crackdown Here, Crackdown There

The U.S. government has been concerned about tax evasion in the virtual economy for at least a decade. In 2007, the IRS assessed the tax compliance risks from virtual exchanges. At the request of the U.S. Senate, the Government Accountability Office issued a report in 2013 regarding tax compliance issues relating to virtual currencies.

The case against Coinbase is another step in that direction. Through its "John Doe" petition, the IRS wants information about taxpayers in a group or class of people, even if it doesn't know their identities. The IRS has also used the summons to crackdown on undeclared offshore accounts.

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