Lawsuits challenging the tax authorities’ seizure of crypto account records are back in court

A New Hampshire man has fired back at the IRS over the agency’s issuance of a “John Doe” summons. James Harper recently filed a response to the IRS’s motion to dismiss his lawsuit, which alleged a violation of his constitutional rights in a battle to access his cryptocurrency records.

Background

In November 2016, the IRS issued a formal request to serve a John Doe summons on all US CoinbaseCOIN customers who transferred convertible virtual currency from 2013 to 2015. A John Doe summons is an order that does not explicitly identify the person, but instead identifies a person or identifiable group or class by their activities.

The IRS was not sure if any particular Coinbase customers had failed to properly report income, but assumed, based on high rates of cryptocurrency trades, that many taxpayers had failed to report taxable cryptocurrency transactions.

The IRS’s request was granted by Judge Jacqueline Scott Corley, who found that “[b]After reviewing the petition and supporting documents, the Court has determined that the “John Doe” subpoena to Coinbase, Inc. relates to the investigation of an identifiable group or class of persons, that there is a reasonable basis to believe that such group or class of persons have failed or may have failed to comply with any provision of internal tax laws and that the information sought to be obtained from the examination of the records or the testimony (and the identity of the persons with respect to whose responsibility the summons is issued) is not readily available from other sources.” As a result, Coinbase transferred several documents that included customer identification information, records of account activity and periodic bank statements.

Coinbase then posted on its website that “on February 23, 2018, Coinbase notified a group of approximately 13,000 customers of a subpoena from the IRS regarding their Coinbase accounts.” The message referred readers to the Order.

More than a year later, according to court documents, the IRS sent a threatening form letter to Harper saying, “We have information that you have or had one or more accounts containing virtual currency, but that you may not have reported your transactions involving virtual currency the right way.”

Harper surmised that the IRS must have received his financial records from at least one of the three cryptocurrency exchanges he has done business with: Coinbase, Abra and Uphold. The IRS’s motion to dismiss confirmed that it received Harper’s financial records from Coinbase.

However, Harper claims that “the threat was apparently empty” since he received no follow-up correspondence over the next 3-1/2 years. That’s because, he claims, his 2013-2015 tax returns correctly reported his cryptocurrency transactions.

Original lawsuit

Harper filed a lawsuit in July 2020 alleging that the IRS accessed his private financial records in violation of his rights. In March 2021, Judge Joseph DiClerico granted the IRS’s motion to dismiss. The First Circuit reversed that ruling in 2022 and returned the case to the U.S. District Court in New Hampshire.

New round of prayer

On 10 January 2023, the tax authorities filed a motion to dismiss all claims, this time for failure to present a claim. In response, Harper again claimed he was the victim of IRS overreach related to third-party subpoenas in violation of his rights.

In his response, Harper notes that the US Supreme Court has ruled that the right to privacy is “legitimate” deserving of constitutional protection. And he says courts have recognized that interest includes “information within an individual’s reasonable expectation of privacy — including financial information.” That right, he claims, doesn’t disappear just because Coinbase stored those records for him. Fourth Amendment protections for digital data stored at a company still exist, Harper argues, if “customers have a significant legal interest in that information, including at least some right to include, exclude, and control its use.”

The IRS claims it could not have offered Harper an opportunity to be heard before accessing the records. That’s the whole point of a John Doe summons, they argue—the identities of the parties are unknown.

But Harper claims the IRS could have issued a John Doe subpoena to Coinbase for the names and contact information of Coinbase’s customers. Then, he says, the IRS could have examined his tax return and determined whether it needed access to Harper’s financial records through a subpoena.

Harper also argues that the subpoena has put him and his family at risk since “[h]seniors with cryptocurrency are uniquely at risk of violent crime if third parties become aware of their holdings and trading activities.” According to his plea, “[m]all cryptocurrency owners maintain their assets on home computers or devices and therefore need to be wary of criminal attacks on their households, such as home invasion and kidnapping. Such attacks are alarmingly common.” Since the IRS still has possession of his records, he argues, it increases the risk of those records being accessed by hackers, inviting attacks from criminals who may believe he has significant crypto assets.

Finally, Harper argues that the taking of his records is a “seizure” and the IRS’s subsequent review is a “search.” The seizure and search, he says, were unreasonable without probable cause, and the IRS has cited no specific exception to the warrant requirement.

Next step

Harper is asking the court to deny the IRS’s motion to dismiss and allow his lawsuit to proceed so he can “address the agency’s alarming information-gathering practices.” In other words, at this stage it is all about process. The court is not being asked to decide whether the subpoena was proper, but rather whether Harper can proceed with the lawsuit.

Meanwhile, the IRS continues to pursue John Doe subpoenas. On August 15, 2022, a federal court in California authorized the IRS to serve a John Doe subpoena on SFOX, seeking information on US taxpayers who conducted at least $20,000 in crypto transactions between 2016 and 2021 with or through SFOX. Another set of John Doe subpoenas was approved on September 22, 2022, requiring MY Safra Bank to produce similar information targeting customers who may have used banking services that MY Safra Bank offered to SFOX customers. As part of its argument, the IRS noted that investigations have identified at least ten US taxpayers who used SFOX’s services for cryptocurrency transactions but did not report those transactions to the IRS.

Harper is represented by the New Civil Liberties Alliance in Harper v. Right, No. 20-cv-771-JD (DNH 2022). You can find out more about the lawsuit here.

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