Arguments were heard Monday in a federal district court in New Hampshire in a lawsuit challenging the IRS's actions in seizing financial records from the cryptocurrency exchange Coinbase using a "John Doe" summons without notifying account holders or allowing them to contest the summons.
The lawsuit, Harper v. Rettig, is contesting the IRS's motion to dismiss the suit. The New Civil Liberties Alliance, representing James Harper, argued that the IRS violated his statutory, Fourth and Fifth Amendment rights by seizing his documents without probable cause to believe he had under-reported his income or failed to pay tax, and by denying him procedural due process to contest the seizure.
In November 2016, the IRS issued a third-party summons to Coinbase, demanding the crypto company turn over the financial records of hundreds of thousands of unnamed customers. This massive trove of documents included not only customer identification information but also records of customer account activity and periodic statements of account.
On Aug. 9, 2018, the IRS notified Harper in a form letter that it possessed information about his virtual currency accounts and transactions, and warned him that he could face civil or criminal enforcement actions for inaccurate reporting of the transactions.
The letter stated: "We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency." Harper was one of 10,000 virtual currency owners who received such a letter, according to the NCLA.
Since he believed the IRS had acquired his personal financial information from a digital currency exchange via a third-party summons, Harper sued the IRS for injunctive relief and monetary damages, alleging the third-party summons process violated his constitutional and statutory rights. The district court concluded it lacked subject matter jurisdiction over the suit under Code Section 7421, the Anti-Injunction Act.
The IRS has, until now, been successful in preventing federal courts from asserting jurisdiction over a constitutional challenge to its data collection practices. The First Circuit ruled that the U.S. district court in New Hampshire erred in its March 2021 decision granting the IRS motion to dismiss Harper's challenge. The district court's decision was prior to the U.S. Supreme Court decision in CIS Legal Services LLC v. IRS, which held that the Anti-Injunction Act does not prohibit a suit "seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal penalties."
Harper's suit, which seeks to set aside the IRS's information gathering, is likewise not a suit brought to enjoin a tax's assessment or collection, so it's not subject to the AIA's limits on court jurisdiction.
Judge Kermit Lipez rejected the IRS argument that the AIA bars Harper's suit because it seeks to restrain activities related to the assessment or collection of taxes, noting that CIC Services provides that information gathering is a "phase of tax administration procedure that occurs before assessment or collection." Therefore where there is no tax penalty at issue, then the suit can proceed. It remanded the case to the district court, and the IRS again filed a motion to dismiss.
"The Supreme Court has long held that the fundamental requirement of the constitutional right to due process of law is that the government may not deprive citizens of their liberty interests or property interests without providing them with a hearing at which they can object to that deprivation," said NCLA senior litigation counsel Rich Samp. "IRS violated that fundamental due-process requirement in this case. It seized Mr. Harper's financial records without giving him a right to object, or even letting him know what it was doing."
"We are very encouraged by today's oral argument," Samp added. "Judge Lipez allowed the attorneys to argue for a full hour — highly unusual in a district court case and a sure sign that the judge is seriously considering the constitutional claims we are raising against the IRS. The Supreme Court has repeatedly stated that all citizens have the right to be heard before the government deprives them of their rights. But in this case — as it has done in many other similar cases — the IRS confiscated our client's financial records without any sort of hearing and without even letting him know what it was doing. Indeed, the IRS has never claimed to have any evidence that our client has not compiled with the tax laws."
