SAN FRANSICO – The Internal Revenue Service claims people are using virtual money to avoid paying taxes and wants it to stop, and a court ruling has moved the IRS one step closer to doing just that.

The Department of Justice, on behalf of the IRS, has asked the court for permission to request Coinbase, Inc., which buys and sells virtual money, such as bitcoin, to provide the government with customer records from 2013-15. Coinbase says the nature of the request is wide-sweeping and an invasion of its customers' privacy and it will object.

“The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes,” Director of Coinbase David Farmer told the Northern California Record.

In the petition filed in a Northern California District Court (Case No. 3:16-cv-06658-JSC), the Department of Justice issued a John Doe summons. The DOJ claims there is reason to believe a group of people using virtual money have failed to follow IRS laws. It wants Coinbase to release its records to the IRS to make the identities of these people known since this information isn't readily available from other sources. The court has ruled the DOJ may make this request of Coinbase. This tactic has been used by the IRS in the past against other financial institutions when attempts were made by some customers to avoid paying taxes on their income.

“Although Coinbase's general practice is to cooperate with properly targeted law enforcement inquiries we are extremely concerned with the indiscriminate breadth of the government's request,” Farmer said.

Coinbase, launched in 2012, is an exchange system that allows virtual money including bitcoin and others available, to be purchased and sold. Virtual currency can be used to purchase real items from vendors that accept it. Virtual currency first made an appearance in the 1990s but has increased in popularity since bitcoin was created in 2009. The ruling allows the IRS, which does not have the names of people using virtual currency, to instead ask that the people be identified based on their actions.

“Our customers' privacy rights are important to us and our legal team. I am in the process of examining the government's petition,” Farmer said. “In its current form, we will oppose the government's petition in court.”

Farmer said Coinbase was made aware of the request being filed and had expected the court to rule in favor of the DOJ and IRS since an ex parte order decision is made by the court without requiring all parties to be present. “We look forward to opposing the DOJ's (Department of Justice's) request in court,” he said.

Bitcoin was created by an unknown person in 2009 and is the most well-known virtual currency. Investopedia.com said in 2014 that over 150 virtual currencies were in use at that time. Unlike government-issued money, virtual money is not regulated, which makes it difficult for the government to monitor. 

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