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What’s a John Doe summons

On Behalf of | Dec 14, 2016 | Tax Law

In most cases when a law enforcement agency wants information, it can use a summons, for instance, if it wants additional information from a taxpayer concerning details of their tax returns from specific years. A summons typically is issued by a court for an individual taxpayer, but when the Internal Revenue Service needs information regarding a larger group of taxpayers, it may not have specifics, because the identity of the taxpayer is part of the information they are seeking.

In such a case, instead of using an individual summons, they obtain a “John Doe” summons from a federal court. This is the tool that the IRS used to break the wall of secrecy surrounding Swiss banks and their restrictive banking laws. What makes this tool so powerful is that once they are inside a single entity, they can prosecute those individuals and, in many cases,  use the additional information they obtain to issue additional summons’ for other individuals.

The IRS just received court authorization for issuing a john doe summons to Coinbase, a company that functions as a “wallet” for the Bitcoin holdings of millions of individuals. The IRS ruled in 2014 that Bitcoin is “property” and subject to the same tax rules as any other security. The IRS is suspicious that some taxpayers are using services like Coinbase to create illegal tax shelters for their income.

The company is planning on opposing the request, but if the experience of the Swiss banks is instructive, they may have limited success during the litigation. While financial instruments like Bitcoin are novel, the IRS is determined to apply traditional taxation to the financial holdings they represent.

For taxpayers with holdings in Coinbase, it may be imperative to be certain you are in compliance with all U.S. tax laws, especially reporting and payment, as the experience of FATCA and the Offshore Voluntary Compliance Program has shown that the best time to comply is before the IRS finds your name with john doe summons. Penalties in these programs have increased, but they are still less expensive than criminal penalties for non-compliance.