Crypto trader may sue IRS for ‘John Doe’ subpoena for Coinbase records – 1st Circ

The Internal Revenue Service (IRS) building is seen in Washington, U.S. September 28, 2020. REUTERS/Erin Scott

(Reuters) – The U.S. Internal Revenue Service risks losing a blunt weapon in its year-long campaign to collect income taxes from cryptocurrency investors following a ruling by the first U.S. Circuit Court of Appeals.

The 1st Circuit’s decision Thursday in Harper v. Rettig revives a challenge by crypto trader (and former Bitcoin Foundation in-house counsel) James Harper to the IRS’s use of so-called John Doe subpoenas to obtain trading records from cryptocurrency exchanges. The appeals panel — Judges William Kayatta, Kermit Lipez and Gustavo Gelpí — said in a statement by Lipez that under the U.S. Supreme Court’s 2021 precedent in CIC Services LLC v. IRS, taxpayers have the right to sue the IRS over its information-gathering tactics, despite a statutory order on taxpayers’ challenges in assessment and collection.

The IRS had argued that Harper’s case violated the Anti-Injunction Act of the Internal Revenue Code because his ultimate goal was to block the government from collecting taxes based on his crypto traders. But the First Circuit focused on Harper’s framing of the case, in which he demanded that the IRS delete trade records that, in Harper’s view, were obtained in violation of his Fourth and Fifth Amendment rights. Under CIC precedent, the appeals court said, Harper has the right to sue over IRS tactics, even if those tactics would ultimately enable the government to assess and collect taxes.

To be sure, Thursday’s ruling only allows Harper, a New Hampshire resident and a fellow at the American Enterprise Institute, to go back to court to argue that the IRS’s use of a John Doe subpoena to obtain his business records was unconstitutional . The 1st Circuit did not rule on the merits of Harper’s constitutional arguments. It simply reversed the dismissal of his lawsuit in 2021 on the basis of sovereign immunity.

The U.S. Department of Justice, which represented the IRS in the Harper appeal, did not respond to a request for comment. Harper’s lead attorney, Richard Samp of the New Civil Liberties Alliance, said the ruling upholds the fundamental principle that people have the right to go to court to protect their constitutional privacy rights.

The IRS has relied heavily on John Doe subpoenas to remove information about crypto traders from US platforms such as Coinbase, Inc and Circle Internet Financial. Most recently, the IRS won a ruling on Aug. 15 requiring SFOX, a cryptocurrency broker, to produce trade records for users who executed trades totaling at least $20,000, according to a John Doe subpoena.

The DOJ’s press release on the SFOX decision shows how powerful a device these John Doe subpoenas have been for the government. Crypto trades are often anonymous and difficult to track, the DOJ said, so it is difficult for the government to assess whether investors are reporting all taxable income from their transactions. The IRS has been able to convince several federal district courts that there is good reason to suspect that unknown clients of crypto exchanges are evading income taxes – and that the government is entitled to the documents that would demonstrate such evasion.

“The John Doe subpoena remains a very valuable enforcement tool that the U.S. government will use again and again to catch tax cheats,” IRS Commissioner Chuck Rettig said in the SFOX release. The IRS previously said that after sending warning letters to Coinbase customers identified through John Doe subpoenas, those crypto investors coughed up at least $25 million in unpaid taxes.

Harper, of course, hopes his revived suit limits the IRS’s ability to obtain trade records without even notifying taxpayers that the government is seeking information about them. Harper attorney Samp told me in a phone interview that taxpayers have a constitutional right to object to the disclosure of their business records. Samp said the IRS may be authorized to use John Doe subpoenas to learn the names and addresses of crypto platform users. But the government should not be allowed, he said, to obtain their business records en masse, without giving individual taxpayers an opportunity to contest claims by the IRS.

Harper believes the IRS obtained information about his trades from Coinbase and Abra, another US-based crypto platform. He received a letter from the IRS in August 2019, notifying him that the agency “has information that you have or had one or more accounts containing virtual currency, but that you may not have properly reported your transactions involving virtual currency. ” Harper claims that he actually paid the required taxes on all of his crypto trades, and the 2019 IRS notification appears to have been a standard letter. The government, Harper adviser Samp said, never took any action against Harper after sending the first letter.

On remand, the IRS will surely point to its successful litigation with Coinbase over a 2016 John Doe subpoena. Coinbase objected to the subpoena, which sought information about all of its users. The IRS then limited the demand to users who traded significant sums. Over protests from Coinbase and an anonymous user, US Magistrate Judge Jacqueline Corley sided with the IRS on the enforceability of the limited subpoena.

Samp said he is confident the Coinbase ruling is distinguishable from Harper’s claims because Coinbase was a third party, not a taxpayer, alleging a violation of constitutional rights.

Notably, the government used a John Doe subpoena to obtain users’ trading information from SFOX even after the 1st Circuit indicated quite strongly at oral arguments in the Harper case last December that it would allow Harper to proceed with his constitutional challenge. Harper’s revived case looks set to be quite a settlement.

Read more:

Cryptocurrency expert tells court IRS ‘fishing expedition’ violates privacy rights

Crypto user asks 1st Circuit to limit IRS collection of records

NH judge tosses case to block IRS from seizing taxpayers’ crypto records

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