A three-judge panel of the U.S. Court of Appeals for the First Circuit ruled on Aug. 18, 2022, that cryptocurrency holder James Harper can take the Internal Revenue Service to federal court for gathering private financial information about his use of virtual currency from third-party exchanges without a lawful subpoena.
In August 2019, the IRS notified Harper 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. Since he believed that the IRS had acquired his personal financial records from a digital currency exchange via a third-party summons, Harper sued the IRS for injunctive relief and monetary damages, alleging that the third-party summons process violated his constitutional and statutory rights. The district court concluded that it lacked subject matter jurisdiction over the suit under Code Section 7421, the Anti-Injunction Act.
The IRS has, until now, successfully prevented federal courts from asserting jurisdiction over a significant constitutional challenge to its data collection practices. The First Circuit ruled that the U.S. District Court for the District of 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 CIC Legal Services LLC v. IRS, which concluded 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 is 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. He noted that CIC Services provides clarity that “information gathering” is a “phase of tax administration procedure that occurs before assessment [or] collection.” Judge Lipez concluded that since IRS activities against Harper “clearly fall within the category of information gathering … the [AIA]” is not an applicable exception to the United States’ waiver of sovereign immunity.” Therefore where there is no tax penalty at issue, then the suit can proceed, Lipez reasoned.
“They don’t allow individual taxpayers who are the subject of a John Doe warrant to object,” observed Rich Samp, senior litigation counsel at the New Civil Liberties Alliance, which took part in the case. “In this case, the IRS went to Coinbase and said ‘Turn over all your records.’ They indicated it would be better for him if he would ‘fess up’ and pay what he owed. But Mr. Harper thinks the IRS has no probable cause to think he owes additional taxes.”
“The issue that the First Circuit decided was whether district courts have jurisdiction over these cases,” explained Samp. “This was debatable until the CIC Services case [May 17, 2021], which said you can’t get an injunction against the IRS but that does not apply to their effort to get documents. They don’t want people to go to court and interrupt the tax collection effort by bringing lawsuits. In this case, there was never the indication that Harper was the subject of a collection effort.”
“The appeals court’s decision upholds a basic tenet of our justice system: Every citizen claiming the government is violating his constitutional rights is entitled to his day in court,” Samp concluded.