IRS to Scale Back Bitcoin Audit of Coinbase Users

The Internal Revenue Service (IRS) plans to narrow its request for customer account information from bitcoin exchange Coinbase, an IRS attorney said on Thursday.

Last year, the IRS asked Coinbase to provide U.S. customer account information, including passwords, security settings and communications with the company to allow the agency to search for unreported income from bitcoin holders.

Amy Matchison, a Justice Department trial attorney, told U.S. Magistrate Judge Jacqueline Scott Corley at a hearing Thursday that the IRS has spoken with Coinbase about limiting its request to items it would need to look for unreported income. Matchison said the agency will retract its request for security setting and password information for U.S. Coinbase users, according to The Recorder, a legal publication.

John Doe Account Holders Seek Voice

During the hearing, anonymous Coinbase account holders sought to oppose the government’s request for the information. Lee Weiss, an attorney at Berns Weiss representing two anonymous “John Doe” account holders, said his clients’ interests are distinct from Coinbase’s, and his clients’ information is at stake.

Corley early on appeared to be sympathetic to the account holders’ desire to be heard, which the IRS has opposed.

Judge Questions IRS’ Tactics

Corley said she found it troubling the IRS is trying to keep the account holders from having their voices heard.

Matchison said Congress only authorized individuals or companies served with a request for information to oppose enforcement in court. She argued that allowing account holders to intervene would complicate the process Congress established. Matchison said the John Doe account holders did not have standing, and claimed they couldn’t show any “actual injury” from Coinbase providing lawfully requested information.

Corley responded that if Coinbase handed over information that went beyond what the IRS was entitled to, account holders could be potentially harmed.

Corley said it would be extraordinary to say the government gaining information that Matchison said it doesn’t have a right to is not an injury. Corley, however, did not rule whether the John Doe account holders could intervene.

Also read: Coinbase users file motion to block bitcoin tax summons

Coinbase To File Its Own Brief

Steven Ellis of Goodwin Procter, Coinbase’s lawyer, said the company will file its own opposition to the IRS request.

Corley asked the IRS’s lawyer to advise Coinbase in the next week about any changes the agency plans to make to its request to enable the company to draft its opposition accordingly. Coinbase declined a request from Fortune to comment on the IRS’s reported decision not to seek passwords, and referred to a March blog post in which it said it is pushing the agency to reduce the scope of the probe.

Coinbase is not directly involved in the court dispute over the probe. Instead, “John Doe” account holders hired Berns Weiss to ask the judge for permission to challenge the IRS summons. U.S. Sen. Orrin Hatch, R-Utah, and others criticized the investigation as extreme and intrusive to a large number of individuals.

The IRS said in March that less than 1,000 Coinbase users were declaring their bitcoin profits or losses in their yearly tax returns after the agency conducted an investigation from 2013 to 2015.