The Internal Revenue Service (IRS) is facing a legal challenge from the New Civil Liberties Alliance (NCLA) over its alleged illegal confiscation of cryptocurrency data. The NCLA, representing client James Harper and thousands of others, argues that the IRS unlawfully seized financial records from a cryptocurrency exchange through the abuse of a John Doe summons. The IRS failed to notify account holders, preventing them from contesting the summons. According to the NCLA, the IRS took Mr. Harper’s documents without any individualized suspicion of under-reported income or tax evasion, depriving him of procedural due process. In their reply brief filed in Harper v. Werfel, the NCLA urges the U.S. Court of Appeals for the First Circuit to rule in favor of Mr. Harper, citing violations of his statutory, Fourth, and Fifth Amendment rights.
The case revolves around an IRS third-party summons issued to cryptocurrency exchange Coinbase in November 2016. The summons demanded financial records for hundreds of thousands of unnamed customers, including customer identification information, account activity records, and periodic account statements. In August 2018, Mr. Harper received a threatening form letter from the IRS, accusing him of improper reporting of virtual currency transactions. However, no follow-up correspondence has been received in the five years since. The NCLA argues that this silence is unsurprising, as Mr. Harper’s tax returns for the years 2013 to 2015 correctly reported his income from Coinbase cryptocurrency transactions.
The NCLA contends that the IRS’s actions violate the Tax Reform Act of 1976, which aims to protect taxpayers from IRS overreach with respect to third-party summonses. The Act sets forth specific requirements that the IRS must meet before obtaining documents from a third-party recordkeeper using a John Doe summons. The NCLA argues that the IRS failed to satisfy these prerequisites and has exceeded the scope of authority granted by Congress. The NCLA also claims that the IRS violated Mr. Harper’s property and privacy rights by denying him the opportunity to raise objections typically available to taxpayers whose identity is known.
In August 2022, a three-judge panel of the First Circuit unanimously ruled that Mr. Harper could take the IRS to federal court for gathering private financial information without a lawful subpoena. However, the U.S. District Court for the District of New Hampshire dismissed Mr. Harper’s subsequent lawsuit against the IRS in May 2023, stating that he had failed to state a claim. The NCLA is now asking the First Circuit to reverse that decision, remand the lawsuit to the district court, and address the alleged violations of Americans’ rights by the IRS.
The NCLA has released statements condemning the IRS’s use of John Doe summonses as fishing expeditions and asserting that the practice violates both constitutional provisions and statutory restrictions imposed by Congress. They argue that the IRS’s claim to unfettered authority over the financial records of thousands of Coinbase customers, without individualized suspicion of wrongdoing, is a violation of Americans’ constitutional rights.
The New Civil Liberties Alliance (NCLA) is a nonpartisan, nonprofit civil rights group founded by legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. Their public-interest litigation and other pro bono advocacy aim to challenge the unlawful power of state and federal agencies and foster a new civil liberties movement to restore Americans’ fundamental rights.
For more information on the case, visit the NCLA’s case page and watch the case video.
Contact:
Ruslan Moldovanov
New Civil Liberties Alliance
202-869-5237
ruslan.moldovanov@ncla.legal
