A Bitcoin investor in New Hampshire has filed a lawsuit against the Internal Revenue Service after he received a letter from the IRS inquiring about his digital currency holdings.
The IRS has been cracking down on cryptocurrency holders, receiving the names of approximately 13,000 customers of the Coinbase exchange after issuing John Doe summonses in 2018, after a protracted court battle. Last year, the IRS also wanted to issue summonses to another cryptocurrency exchange, Bitstamp, but a judge ordered the IRS to limit its summonses, as it was forced to do with Coinbase as well (see story).
In the latest lawsuit, which was announced Wednesday by the New Civil Liberties Alliance (NCLA), a nonpartisan, nonprofit civil rights group, a New Hampshire resident, James Harper, is suing the IRS, arguing that the agency is overreaching by demanding and seizing private financial information from third parties without any judicial process in defiance of the Fourth and Fifth Amendments and statutory protections.
The NCLA complaint argues that Harper has paid all applicable taxes and reported all of his trades related to Bitcoin holdings ever since 2013, when he first began to invest in the cryptocurrency. Over the years, all his transactions occurred through three digital virtual currency exchanges: Coinbase, Abra and Uphold. He claims they contractually promised to protect his private information, but he was surprised when on Aug. 9, 2019, he received a letter from the IRS informing him that the agency had obtained his financial records without any specific suspicion of wrongdoing. He is one of 10,000 virtual currency owners who received such a letter, according to the IRS website.
The lawsuit claims the IRS obtained Harper’s records without a valid subpoena, court order or judicial warrant based on probable cause. The Fourth Amendment to the U.S. Constitution protects “the right of the people to be secure in their … papers … against unreasonable searches and seizures.” In this case, according to the NCLA, the IRS violated the Fourth Amendment by issuing an informal demand for Harper’s financial records from a third party even though it lacked any particularized suspicion that he had violated any law. The IRS did not respond to a request for comment.
The complaint also said the IRS violated the Due Process Clause of the Fifth Amendment by seizing Harper’s private financial information from third-party cryptocurrency exchange without first giving him notice and an opportunity to challenge the seizure of his property. From the beginning, according to the NCLA, the IRS acted in violation of the statute of special procedures by third-party summonses by failing to notify Harper of the summons and making a “gross, baseless, and arbitrary judgment” that he may not comply with IRS tax obligations. The NCLA believes the case will present the opportunity to correct the course of constitutional privacy law.
“The expectation is that when you enter into an agreement with a third party, the third-party and the government will respect contractual rights,” said NCLA litigation counsel Caleb Kruckenberg in a statement Wednesday. “But the law in this case has departed from cherished Constitutional principles and the fundamental understanding that prohibited peeking into a person’s private papers without the use of a judicially-approved subpoena. Not only did the IRS demand and seize Mr. Harper’s information, but it is unlawfully holding on to that data without any judicial process. NCLA is going to right this wrong.”