In the Matter of the Tax Liabilities of John Does

Background

The United States petitioned for authorization under 26 U.S.C. § 7609(f) to serve an Internal Revenue Service “John Doe” summons on Payward Ventures Inc., doing business as Kraken, and its subsidiaries. A John Doe summons seeks information about people who are not individually identified. The government sought information to help assess the potential tax liability of Kraken users.

The statute requires the government to show that the summons concerns a particular person or ascertainable group, that there is a reasonable basis to believe the people may have failed to comply with federal tax law, and that the requested information is not readily available from other sources. It also requires the information sought to be narrowly tailored to the suspected tax-law violations.

Court’s concerns

The court stated that the United States had likely made a sufficient showing on the first three statutory requirements to justify issuing at least some form of summons. The court nevertheless expressed concern about the scope of the proposed request.

In addition to registration, identification, and transaction information, the proposed summons sought broad categories including “complete user preferences,” other Know-Your-Customer due-diligence records, and all correspondence between Kraken and a user or third party with access to the account. The court found that explanations for some categories relied on conclusory statements that the information might help identify account users or reveal other accounts controlled by the same user.

The court discussed an earlier decision involving an IRS summons to another cryptocurrency exchange. In that decision, the court said the IRS should first review basic user information and transaction histories before deciding whether additional subpoenas were needed.

Ruling and next steps

The court ordered the United States to show cause—meaning to explain—why the petition should not be denied for failing to meet the statute’s narrow-tailoring requirement. The United States was required to file a response by April 14, 2021. The response could include an amended petition or summons and had to explain why each requested category was narrowly tailored, including whether more invasive requests could be deferred until after review of basic account-registration information and transaction histories.

The court stated that it would decide whether to hold a hearing after the United States filed its response. The order did not itself finally grant or deny the petition.