Cryptocurrency use has burst into the mainstream. Once perceived as complex and confusing, digital currency has quickly become a staple asset in many investors’ portfolios. Today, tens of millions of Americans own cryptocurrency as a means to diversify their holdings and improve their financial security. And millions more will buy cryptocurrency in the coming years as interest continues to grow.
James Harper, a technology policy analyst and cryptocurrency investor, became interested in blockchain technology in 2011 when he learned about bitcoin. “Cryptocurrency is entirely online. It takes the idea of dollar bills and coins and makes it into something that’s entirely on the internet,” Harper explained in a new NCLA video. “It has no place. It has no jurisdiction. It’s around the world on the net.” And now, the Internal Revenue Service (IRS) is attempting to establish vast regulatory authority over cryptocurrency holders.
On August 9, 2019, Mr. Harper received a letter from the IRS informing him that the agency had obtained his financial records related to bitcoin ownership without any suspicion of wrongdoing. Mr. Harper was one of more than 10,000 cryptocurrency owners who received such a letter. “I was aware before I received my letter that the IRS was pursuing information about cryptocurrency holders, but I didn’t know I was one of them,” Harper said.
Mr. Harper had accurately reported and documented all trades related to bitcoin holdings for applicable tax years. Every transaction was facilitated through three digital virtual currency exchanges. Each exchange had contractually promised Mr. Harper to protect his private information. “I’ve done nothing wrong. In fact, I’ve done everything right. It’s pretty hard to track your taxable gains and cryptocurrency, and I’ve done it in detail and reported every year and paid my taxes in full,” explained Harper.
The IRS obtained Mr. Harper’s records without a valid subpoena, court order, or judicial warrant based on probable cause. Further, the agency did so by forcing third parties to hand over his data without providing the notice and opportunity to challenge the seizure of his property.
“Our client, James Harper, received a letter from the IRS last year saying that the IRS had gathered information about him and his activities and his use of cryptocurrencies, and it decided that he probably didn’t pay his taxes. They sent this threatening letter to tell him that he was under investigation,” said NCLA Litigation Counsel Caleb Kruckenberg in the case video.
Where once it lacked the authority to peek into a person’s private papers even with the use of a subpoena, the IRS now seemingly has the power to demand access to anyone’s private records without any judicial process. “The danger here is that the IRS is looking at all of your private financial information, your name, your address, your personal information, your bank account number, and all the transactions that you’ve engaged in. And they’re looking at it to see what you’re up to, just in case they think that a crime has occurred. That’s not what we expect out of law enforcement, and that is a gross invasion of our privacy,” said Caleb Kruckenberg.
Mr. Harper challenged the IRS in the U.S. District Court for the District of New Hampshire, arguing that the agency violated the Fourth Amendment, the Due Process Clause of the Fifth Amendment, and tax statutes requiring the IRS to jump through specific hoops to obtain private financial information. The District Court tossed the lawsuit based on the Anti-Injunction Act (AIA), which bars lawsuits over “the assessment or collection of any tax.”
Now, Mr. Harper’s case, James Harper v. Charles P. Rettig, et al., is pending review in the U.S. Court of Appeals for the First Circuit. Mr. Harper’s case is about the IRS’s illegal information-collection practices. It has nothing to do with the IRS’s power to assess and collect taxes. The AIA, therefore, should have no bearing on the matter. Moreover, the Supreme Court’s recent decision in CIC Services, LLC v. IRS held that the AIA does not bar suits like Mr. Harper’s that do not challenge tax assessment or collection.
The IRS’s unconstitutional and intrusive information-gathering practices must cease. Fortunately, cryptocurrency holders like Mr. Harper are optimistic. “I’m hopeful that this case will show not only that the IRS was wrongful in gathering information about cryptocurrency users for no reason, but also that it may establish good law that shows that agencies just can’t dip into any warehouse of information when they feel like it. They have to follow the rules just like you and I do.”