Coinbase Inc., a virtual currency exchange platform, was recently ordered by the United States District Court for the Northern District of California to provide the Internal Revenue Service (IRS) with 2013-2015 transaction data for thousands of Coinbase accounts. See United States v. Coinbase Inc., et al., No. 17-CV-01431-JSC, 2017 WL 5890052, (N.D. Cal. Nov. 28, 2017). The IRS, citing references to 5.9 million customers and more than $6 billion of bitcoin transactions on Coinbase’s website, identified a potential reporting gap, since only 800-900 taxpayers have identified bitcoin transactions on their tax returns in the past few years. (Coinbase’s website currently references 10 million customers and $50 billion in transactions.) Although the IRS narrowed the scope of the third-party record keeper summons it had originally issued to Coinbase under Code Sections 7602, 7603 and 7609 (aka, a “John Doe Summons”), the parties could not reach agreement on what was to be produced, and the government initiated enforcement proceedings earlier this year. Continue Reading Governments are Pulling Back the Crypto-Currency Curtain
Courts continue to strike down the Internal Revenue Service (IRS) as it continues to test the bounds of the attorney-client privilege and work product doctrine through the issuance of improper summonses. In the last several years, the IRS has filed numerous summons enforcement proceedings related to the production of documents generally protected by the attorney-client privilege, tax-practitioner privilege, and/or work product doctrine. These summonses include overt requests for “tax advice” and “tax analysis,” which several courts have refused to enforce. For example, see Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015).
Once again, in United States v. Micro Cap KY Insurance Co., Inc. (Eastern District of Kentucky), a federal district court rejected the IRS’s arguments and refused to enforce an inappropriate summons. The opinion is available here. The IRS filed this enforcement proceeding seeking to compel the production of confidential communications between taxpayers and the lawyers that assisted them in forming a captive insurance company. After conducting an in camera review (where the judge privately reviewed the documents without admitting them in the record), the judge found the taxpayers had properly invoked privilege since each document “predominately involve[d] legal advice within the retention of  counsel.”
The court also rejected the government’s argument that the attorney-client privilege was waived by raising a reasonable cause and reliance on counsel defense to penalties in the taxpayers’ case filed in Tax Court. Because the government’s argument was untimely, it was waived and rejected outright. The court, however, proceeded to explain how the argument also failed on its merits. Continue Reading The IRS Is Struck Down Again in Privilege Dispute