James Harper v. Daniel Werfel, et al.
CASE SUMMARY
NCLA’s client Mr. Harper bought his first bitcoin in 2013, diligently paying all applicable taxes and reporting his trades related to bitcoin holdings. Throughout these years, all his transactions were facilitated through three digital virtual currency exchanges: Coinbase, Abra, and Uphold. Given that all of them had contractually promised Mr. Harper to protect his private information, he was genuinely surprised when, on August 9, 2019, he received a letter from IRS informing him that the agency had obtained his financial records related to ownership of bitcoin without any particularized suspicion of wrongdoing. Mr. Harper is one of 10,000 virtual currency owners who received such a letter, according to the IRS website.
The IRS somehow obtained Mr. Harper’s records without a valid subpoena, court order, or judicial warrant based on probable cause. In this case, the IRS violated the Fourth Amendment by issuing an informal demand for Mr. Harper’s financial records from a third party even though it lacked any particularized suspicion that he had violated any law.
NCLA’s lawsuit says the IRS violated the Fifth Amendment’s Due Process Clause by seizing Mr. Harper’s private financial information from the third-party virtual currency exchange(s) without first providing him with notice and an opportunity to challenge the seizure of his property. From the very beginning, the IRS acted in violation of the statute of special procedures by third-party summonses by failing to notify Mr. Harper of the summons and making a gross, baseless, and arbitrary judgment that he might not comply with IRS tax obligations.
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CASE STATUS: Active
CASE START DATE: July 15, 2020
DECIDING COURT: U.S. Court of Appeals for the First Circuit
ORIGINAL COURT: U.S. District Court for the District of New Hampshire
CASE DOCUMENTS
January 31, 2024 | Plaintiff-Appellant’s Reply Brief
December 21, 2023 | Brief for the Appellees
October 20, 2023 | Amicus Curiae Brief of Coin Center in Support of the Plaintiff-Appellant James Harper and Reversal
October 20, 2023 | Amicus Curiae Brief of DeFi Education Fund Supporting Appellant and Urging Reversal
October 20, 2023 | Amicus Curiae Brief of Paradigm Operations LP in Support of Appellant and Reversal
October 20, 2023 | Amicus Curiae Brief of National Taxpayers Union Foundation in Support of Plaintiff-Appellant and Reversal
October 19, 2023 | Amicus Curiae Brief of Americans for Prosperity Foundation in Support of Plaintiff-Appellant and Reversal
October 13, 2023 | Plaintiff-Appellant’s Opening Brief
May 26, 2023 | Memorandum Order
February 28, 2023 | Defendants’ Reply in Support of Their Renewed Motion to Dismiss for Failure to State a Claim
February 7, 2023 | Plaintiff’s Response to Defendants’ Motion to Dismiss
November 4, 2022 | Order of the U.S. Court of Appeals for the First Circuit
October 28, 2022 | Appellant’s Response to Appellees’ Petition for Panel Rehearing
October 3, 2022 | Appellees’ Petition for Panel Rehearing
August 18, 2022 | Opinion of the U.S. Court of Appeals For the First Circuit
October 5, 2021 | Appellant’s Reply Brief in U.S. Court of Appeals for the First Circuit
August 31, 2021 | Brief for the Appellees
July 9, 2021 | Appellant’s Opening Brief in U.S. Court of Appeals for the First Circuit
April 20, 2021 | Notice of Appeal in the U.S. Court of Appeals for the First Circuit
March 23, 2021 | Order Granting Motion to Dismiss
January 19, 2021 | Memorandum in Opposition to Defendants’ Motion to Dismiss
December 4, 2020 | Memorandum in Support of Motion to Dismiss
August 5, 2020 | First Amended Complaint
July 15, 2020 | Complaint and Demand for Jury Trial
PRESS RELEASES
February 1, 2024 | NCLA Returns to First Circuit Asking It to Confront IRS’s Illegal Confiscation of Cryptocurrency Data
Washington, DC (February 1, 2024) – The Internal Revenue Service unlawfully seized financial records of New Civil Liberties Alliance client James Harper and thousands of others from a cryptocurrency exchange through abuse of a “John Doe” summons, without notifying account holders so they could contest the summons. IRS took Mr. Harper’s documents without any individualized suspicion to believe he had under-reported his income or failed to pay tax, and it denied him procedural due process to challenge the seizure. NCLA has filed a reply brief in Harper v. Werfel, urging the U.S. Court of Appeals for the First Circuit to rule that these actions violated Mr. Harper’s statutory, Fourth, and Fifth Amendment rights. NCLA filed the opening brief on October 13, 2023.
In November 2016, IRS issued a third-party summons demanding that the Coinbase cryptocurrency exchange turn over financial records concerning hundreds of thousands of unnamed customers, including customer identification information, account activity records, and periodic account statements. On August 9, 2018, IRS sent a threatening form letter to Mr. Harper stating, “We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency.” Mr. Harper has received no follow-up correspondence to that empty threat in the subsequent 5 years. IRS’s silence is unsurprising, given that Harper’s 2013-2015 tax returns properly reported his income from Coinbase cryptocurrency transactions.
Congress adopted the Tax Reform Act of 1976 to protect taxpayers from IRS overreach related to third-party summonses. The Act imposes several requirements that IRS must fulfill before it may obtain documents from a third-party recordkeeper using a John Doe summons, but IRS failed to satisfy those prerequisites here. The legislative history of the Act confirms that Congress sought to limit IRS’s use of John Doe summonses to only uncovering the identities of taxpayers, not obtaining their financial records. Harper v. Werfel has revealed that IRS now claims a far more expansive John Doe summons authority than Congress bestowed.
To make matters worse, IRS violated Mr. Harper’s property interests and liberty interests in the privacy of his financial records, which contain a history of his transactions over a three-year period. By using a John Doe summons, IRS denied him an opportunity to raise the full range of objections routinely available to taxpayers whose identity is known to IRS. In August 2022, a three-judge First Circuit panel unanimously ruled that Mr. Harper could take IRS to federal court for gathering private financial information about his use of virtual currency from third-party exchanges without a lawful subpoena. However, the U.S. District Court for the District of New Hampshire dismissed Mr. Harper’s subsequent lawsuit against IRS in May 2023, incorrectly ruling that he had failed to state a claim. The First Circuit should reverse that decision, remand the lawsuit to the district court, and address the agency’s egregious violations of Americans’ rights.
NCLA released the following statements:
“IRS has been improperly using John Doe summonses as fishing expeditions, allowing them to gather personal information on thousands of taxpayers without any suspicion of wrongdoing. This practice needs to stop; it violates both the Constitution and statutory restrictions imposed by Congress.”
— Richard Samp, Senior Litigation Counsel, NCLA
“IRS’s claim to unfettered authority to sweep up records concerning millions of transactions by thousands of Coinbase customers—all without any individualized suspicion of wrongdoing—is a recipe for a financial panopticon that Congress never authorized and the Constitution would never permit.”
— Sheng Li, Litigation Counsel, NCLA
For more information visit the case page here and watch the case video here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
February 7, 2023 | NCLA Contests Motion to Dismiss Suit Challenging IRS’s Unlawful Collection of Cryptocurrency Data
Washington, DC (February 7, 2023) – James Harper stands among thousands of victims of an extensive, unlawful Internal Revenue Service fishing expedition, whereby IRS seized financial records from a cryptocurrency exchange through abuse of a “John Doe” summons without notifying account holders or allowing them to contest the summons. Today, the New Civil Liberties Alliance, which represents the Plaintiff in Harper v. Rettig, filed a response to IRS’s Motion to Dismiss the lawsuit. NCLA argues that IRS violated Mr. Harper’s statutory, Fourth, and Fifth Amendment rights by seizing his documents without probable cause to believe he had under-reported his income or failed to pay tax and by denying him procedural due process to contest the seizure.
In November 2016, IRS issued a third-party summons to Coinbase, a large cryptocurrency exchange, demanding that the company turn over the financial records of hundreds of thousands of unnamed customers. This massive trove of documents included not only customer identification information but also records of customer account activity and periodic statements of account. On August 9, 2018, IRS sent a threatening form letter to Mr. Harper stating, “We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency.” That threat was apparently empty. In the ensuing 4-1/2 years, Harper has received no follow-up correspondence. IRS’s silence is unsurprising, given that Harper’s 2013-2015 tax returns properly reported his income from Coinbase cryptocurrency transactions.
Congress adopted the Tax Reform Act of 1976 to protect taxpayers from IRS overreach related to third-party summonses. The Act imposes several requirements that IRS must fulfill before it may obtain documents from a third-party recordkeeper using a John Doe summons. NCLA asserts that IRS failed to satisfy those prerequisites here. The legislative history of the Act confirms that Congress sought to limit the IRS’s use of John Doe summonses to uncovering the identity of taxpayers, not to obtaining their financial records. Harper has revealed that IRS now claims a far more expansive John Doe summons authority than Congress bestowed.
In addition to its statutory shortcomings, IRS violated Mr. Harper’s property interests and liberty interests in the privacy of his financial records, which contain a history of his transactions over a three-year period. By using a John Doe summons, IRS denied him an opportunity to raise the full range of objections routinely available to taxpayers whose identity is known to IRS. In August 2022, a three-judge panel of the U.S. Court of Appeals for the First Circuit unanimously ruled that Mr. Harper could take IRS to federal court for gathering private financial information about his use of virtual currency from third-party exchanges without a lawful subpoena. The U.S. District Court for the District of New Hampshire should now deny IRS’s Motion to Dismiss and address the agency’s alarming information-gathering practices.
NCLA released the following statement:
“The Supreme Court has long held that ‘the fundamental requirement’ of the constitutional right to due process of law is that the government may not deprive citizens of their liberty interests or property interests without providing them with a hearing at which they can object to that deprivation. IRS violated that fundamental due-process requirement in this case. It seized Mr. Harper’s financial records without giving him a right to object, or even letting him know what it was doing.”
— Rich Samp, Senior Litigation Counsel, NCLA
For more information visit the case page here and watch the case video here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
August 19, 2022 | In NCLA Win Against IRS, First Circuit Rules Taxpayers Can Indeed Take the Agency to Court
Washington, DC (August 19, 2022) – A three-judge panel of the U.S. Court of Appeals for the First Circuit has unanimously ruled in Harper v. Rettig that taxpayer James Harper can take the Internal Revenue Service (IRS) to federal court for gathering private financial information about his use of virtual currency from third-party exchanges without a lawful subpoena.
IRS has, until now, successfully prevented federal courts from asserting jurisdiction over a significant constitutional challenge to the agency’s unlawful 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 IRS’s motion to dismiss Mr. Harper’s Fourth and Fifth Amendment challenge based on an alleged lack of jurisdiction. The district court did not have the benefit of the Supreme Court’s May 2021 decision in CIC Services, LLC v. IRS, which concluded that the Anti-Injunction Act (AIA) does not prohibit a suit “seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal penalties.” Mr. Harper’s suit, which seeks to set aside IRS’s illegal 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, writing for the majority, rejects IRS’s argument that the AIA bars Mr. Harper’s suit because it seeks to restrain activities related to the assessment or collection of taxes. He notes that CIC Services provides clarity that “information gathering” is a “phase of tax administration procedure that occurs before assessment [or] collection.” Judge Lipez concludes that since IRS’s activities against Mr. Harper “clearly fall within the category of information gathering … the [AIA] is not an applicable exception to the United States’ waiver of sovereign immunity.” Indeed, as the Supreme Court explained in CIC Services, where, as here, there is no “tax penalty” at issue, then the case is a “cinch,” and “the suit c[an] proceed.”
Mr. Harper had contracted with third-party virtual currency exchanges to protect his private information against unlawful government intrusion. Despite his efforts to ensure his records were properly safeguarded, IRS took the data of Mr. Harper and thousands of other cryptocurrency holders from virtual-currency exchanges without reasonable suspicion and without providing a pre-data-collection notice and opportunity to contest IRS’s dragnet operation. In ruling that the district court has subject-matter jurisdiction, the First Circuit has ensured that the IRS can be held accountable for this violation of Harper’s Fourth and Fifth Amendment constitutional rights.
NCLA released the following statements:
“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. The IRS sought to deny that right, arguing that allowing people to object to its collecting personal data would unduly hamper tax-collection efforts. The court rightly rejected that argument. Efficient tax collection must never be permitted to trump constitutional rights.”
— Rich Samp, Senior Litigation Counsel, NCLA
“The bad news is the federal government recently passed a law that could lead to hiring over 86,000 new IRS agents. The good news is that courtesy of the First Circuit’s ruling, brave individual taxpayers like Mr. Harper may now sue the Internal Revenue Service—and its new agents—when it tramples their constitutional rights.”
— Mark Chenoweth, President and General Counsel, NCLA
For more information visit the case page here and watch the case video here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
July 15, 2021 | NCLA Appeals to First Circuit Over IRS’s Unlawfully Seizing Cryptocurrency Data of Thousands
Washington, DC (July 15, 2021) – In August 2019, James Harper received a letter from the Internal Revenue Service (IRS) accusing him of not having “properly reported” his “transactions involving virtual currency.” A press release followed shortly thereafter stating, “Taxpayers should take these letters very seriously” and “correct past errors.” Mr. Harper, one of more than 10,000 cryptocurrency holders who received such a letter, filed a lawsuit challenging IRS’s questionable information-gathering practices.
The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, has filed an opening brief in James Harper v. Charles P. Rettig, et al. in the U.S. Court of Appeals for the First Circuit, arguing that IRS took Mr. Harper’s data without reasonable suspicion and without a judicial warrant. NCLA contends IRS violated his Fourth and Fifth Amendment constitutional rights by obtaining his private financial information from virtual-currency exchanges without following statutory limitations on its power to issue subpoenas.
NCLA argues the U.S. District Court for the District of New Hampshire erred in its March 2021 decision granting IRS’s motion to dismiss. It was mistaken that a waiver of sovereign immunity is necessary; sovereign immunity does not divest federal courts of their subject-matter jurisdiction in suits for specific nonmonetary relief against IRS alleging that the government actors acted unconstitutionally or without statutory authority.
The district court ruled without benefit of the Supreme Court’s May 2021 decision in CIC Services, LLC v. IRS, which concluded that the Anti-Injunction Act (AIA) does not prohibit a suit “seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal penalties.” Mr. Harper’s suit, brought to set aside IRS’s illegal information gathering, is not a suit brought to enjoin a tax’s assessment or collection.
Mr. Harper requests declaratory and injunctive relief, including an order expunging his private financial information from IRS’s records if it was obtained in violation of the Constitution or the statute. The First Circuit should conclude that the district court has subject-matter jurisdiction, decide that Mr. Harper has stated a claim upon which relief can be granted, and either rule in his favor or else remand the case to the trial court for a decision on the merits.
NCLA released the following statements:
“After CIC, it is not sufficient for IRS to claim that the information it possesses ‘may culminate in the assessment or collection of taxes.’ By that logic, nearly all information that comes into IRS’s possession—whether obtained by following proper procedures or otherwise—could culminate in the assessment or collection of taxes. But the Fourth and Fifth Amendments to the Constitution do not contain an IRS exception.”
— Adi Dynar, Litigation Counsel, NCLA
“Earlier this year, the Supreme Court held that IRS cannot block lawsuits challenging the constitutionality of its behavior by hiding behind the Anti-Injunction Act. Unfortunately, that decision came out after the district court allowed IRS to abuse the law in just that way. According to the Supreme Court, though, this case is a ‘cinch,’ and the First Circuit should swiftly reinstate this lawsuit.”
— Caleb Kruckenberg, Litigation Counsel, NCLA
For more information visit the case page here or watch Mr. Harper’s story here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
May 17, 2021 | Watch: NCLA Releases Tax Day Video on IRS’s Unlawful Collection of Cryptocurrency Owners’ Data
Washington, DC (May 17, 2021) – Much has changed in the lives of Americans since last tax season, including the day we file our taxes. What has not changed is the resolve of NCLA client James Harper to challenge the IRS’s unbridled power to demand and seize Americans’ private financial information without judicial process.
This Tax Day, the New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, released a video featuring Mr. Harper’s case, James Harper v. Charles P. Rettig, et al., currently pending review in the U.S. Court of Appeals for the First Circuit.
On August 9, 2019, Mr. Harper received a letter from the IRS informing him that the agency had obtained his financial records related to his cryptocurrency ownership. As it turned out, he was one of more than 10,000 cryptocurrency owners who received such a letter. Mr. Harper paid all applicable taxes and diligently reported every transaction he had made using three virtual currency exchanges: Coinbase, Abra, and Uphold.
Although each exchange had contractually promised Mr. Harper to protect his private information, the IRS issued a demand for his data without reasonable suspicion and without a judicial warrant or subpoena, in violation of his Fourth and Fifth Amendment constitutional rights. The First Circuit should address the breadth of abuse related to these unlawful fishing expeditions and correct an error relating to the Anti-Injunction Act (AIA).
The federal district court tossed the case in March under a theory that the AIA bars suits over “the assessment or collection of any tax.” Only this case is not about collecting taxes. Harper already paid all applicable taxes and never disputed the amount he owed. His lawsuit instead challenges IRS’s violation of his constitutional rights.
The First Circuit’s job should be made easier by today’s Supreme Court decision. In CIC Services, LLC v. IRS, the Court held that the AIA does not bar suits like Mr. Harper’s that do not challenge tax assessment or collection, but rather the IRS’s unconstitutional and intrusive information-gathering practices.
Excerpts from the video:
“The danger here is that the IRS is looking at all of your private financial information: your name, your address, your bank account number, and all of the transactions that you’ve engaged in. 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.”
— Caleb Kruckenberg, Litigation Counsel, NCLA
“There is no IRS exception to the U.S. Constitution. The IRS did not follow the Fourth Amendment requirements of legally obtaining Mr. Harper’s private financial information. They did not obtain a warrant. They did not obtain a subpoena. They did not obtain a court order. They did not give Mr. Harper an opportunity to respond. They did not even notify Mr. Harper that they were seeking this information. That is wrong.”
— Adi Dynar, Litigation Counsel, NCLA
“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 can’t just dip into any warehouse of information when they feel like it. They have to follow the rules just like you and I do.”
— James Harper, Plaintiff, Harper v. Rettig
For more information about this case visit here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
March 23, 2021 | District Court Ruling Would Permit IRS to Violate Constitutional Rights with Impunity
Washington, DC (March 23, 2021) – Today, the U.S. District Court for the District of New Hampshire granted the Internal Revenue Service’s (IRS) motion to dismiss the case of James Harper v. Charles P. Rettig, et al. The district court’s flawed decision would ensure that no matter how many constitutional rights the IRS violates, Americans may not hold the agency accountable. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, represents James Harper in the lawsuit against IRS for violating his Fourth and Fifth Amendment constitutional rights by issuing a demand for his financial records from a third party without reasonable suspicion—let alone probable cause—that he violated any law.
The Fourth Amendment significantly constrains the types of searches IRS may conduct, particularly where a person, like Mr. Harper, has contracted with a digital asset exchange to keep his information private. Mr. Harper is also entitled under the Fifth Amendment’s Due Process Clause to receive notice and have an opportunity to protect his private information from IRS subpoenas before they are executed. IRS never disputed that it violated key limits on its ability to gather information through its subpoena process. And it collected Mr. Harper’s sensitive financial information, along with data for thousands of other innocent people, solely because of their lawful possession of digital currencies.
In this case, the court wrongly applied the Anti-Injunction Act (AIA), which bars suits over “the assessment or collection of any tax.” Mr. Harper has already paid all applicable taxes and never disputed the amount he owed, and his lawsuit was instead a challenge to IRS’s violation of his constitutional rights. Mr. Harper is one of 10,000 virtual currency owners who received a letter from IRS in 2019 informing him that the agency had obtained his financial records related to his ownership of bitcoin. Despite his efforts to ensure his records were properly safeguarded, IRS brazenly gathered sensitive information about Mr. Harper’s use of digital currency from one or more third-party exchanges without a lawful subpoena.
NCLA released the following statements:
“Today’s decision would mean that IRS is immune from suit over its wrongdoing in every conceivable circumstance. The court’s decision is legally unjustifiable, and it should be swiftly reversed on appeal.”
— Caleb Kruckenberg, NCLA Litigation Counsel
“The district court’s ruling screams for a reversal from the court of appeals. It is wrong to hold that Mr. Harper, who has fully paid his taxes and does not seek a refund, cannot seek the court’s help in securing an entirely separate right to keep his private information private from a grasping government.”
— Adi Dynar, NCLA Litigation Counsel
For more information visit case summary page here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
January 19, 2021 | NCLA Skewers IRS Efforts to Avoid Court Scrutiny of Its Unlawful Crypto Data Collection Practices
Washington, DC (January 19, 2021) – The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, filed a Memo in Opposition to IRS’s Motion to Dismiss today in the U.S. District Court for the District of New Hampshire in the case of Harper v. Rettig, et al. The Internal Revenue Service (IRS) seeks to dismiss the case of NCLA client and cryptocurrency holder, James Harper, who is suing the agency—and several unknown individual IRS agents in their personal capacity—over violations of his Fourth and Fifth Amendment constitutional rights.
Mr. Harper had contracted with third-party virtual currency exchanges to protect his private information against unlawful government intrusion. Despite his efforts to ensure his records were properly safeguarded, IRS brazenly gathered sensitive information about Mr. Harper’s use of virtual currency from the third-party exchanges without a lawful subpoena. NCLA contends that IRS’s attempt to avoid the Court’s jurisdiction is a misguided effort to avoid a significant constitutional challenge to IRS’s unlawful data collection practices.
Mr. Harper is one of 10,000 virtual currency owners who received a letter from IRS in 2019 informing him the agency had obtained his financial records related to ownership of bitcoin. In this case, IRS violated the Fourth Amendment by issuing an informal demand for Mr. Harper’s financial records from a third party, even though it lacked any particularized suspicion that he had violated any law.
Notably, IRS does not dispute in its motion to dismiss that it acquired Mr. Harper’s information without a lawful subpoena. IRS’s sole argument in defense of its attack on Mr. Harper’s Fourth Amendment claim is its assertion that Mr. Harper “does not have an expectation of privacy in his financial information.” However, the Fourth Amendment significantly constrains the types of searches IRS may conduct, particularly where a person has contracted with an exchange to keep his information private.
Mr. Harper is also entitled under the Fifth Amendment’s Due Process Clause to a notice and an opportunity to protect his private information from unreasonable searches and seizures. IRS concedes that it did not comply with this bare minimum due-process requirement.
NCLA released the following statements:
“When you enter into a third-party agreement, the reasonable expectation is that the third party and the government will respect contractual rights. But the IRS agents in this case departed from cherished Constitutional principles that prohibit peeking into a person’s private papers without first obtaining a judicially-approved subpoena. Not only did IRS demand and seize Mr. Harper’s private information, but it is unlawfully holding on to that data without any judicial process. NCLA will right these wrongs.”
— Caleb Kruckenberg, Litigation Counsel, NCLA
“This motion to dismiss shows how IRS requires law-abiding citizens to jump through numerous procedural hoops to even have their day in court. At the same time IRS tries to claim in the same motion that it would be impossible for them and their agents to abide by the Constitution to obtain Mr. Harper’s private financial information. Assuredly, the Constitution does not protect IRS from Mr. Harper’s suit. It protects Mr. Harper from IRS’s illegal surveillance.”
— Adi Dynar, Litigation Counsel, NCLA
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
July 15, 2020 | NCLA Stands up for Bitcoin Investors in Suit Against IRS for Unlawful Seizure of Private Financial Data
Washington, DC (July 15, 2020) – This Tax Day, New Hampshire resident James Harper filed a lawsuit against the Internal Revenue Service (IRS) along with his tax return. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, represents Mr. Harper in James Harper v. Charles P. Rettig, et al. before the United States District Court for the District of New Hampshire. Mr. Harper’s “crime”? Holding a bitcoin wallet. The lawsuit argues that the IRS has acquired the unbridled power to demand and seize Americans’ private financial information from third parties without any judicial process in defiance of the Fourth and Fifth Amendments and statutory protections.
Mr. Harper bought his first bitcoin in 2013, and ever since then, he diligently paid all applicable taxes and reported his trades related to bitcoin holdings. Throughout these years, all his transactions were facilitated through three digital virtual currency exchanges: Coinbase, Abra, and Uphold. Given that all of them had contractually promised Mr. Harper to protect his private information, he was genuinely surprised when on August 9, 2019, he received a letter from IRS informing him that the agency had obtained his financial records related to ownership of bitcoin without any particularized suspicion of wrongdoing. Mr. Harper is one of 10,000 virtual currency owners who received such a letter, according to the IRS website.
The IRS somehow obtained Mr. 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, the IRS violated the Fourth Amendment by issuing an informal demand for Mr. Harper’s financial records from a third party even though it lacked any particularized suspicion that he had violated any law.
The complaint also says that the IRS violated the Due Process Clause of the Fifth Amendment by seizing Mr. Harper’s private financial information from the third-party virtual currency exchange(s) without first providing him with notice and an opportunity to challenge the seizure of his property. From the very beginning, the IRS acted in violation of the statute of special procedures by third-party summonses by failing to notify Mr. Harper of the summons and making a gross, baseless, and arbitrary judgment that he may not comply with IRS tax obligations. This case presents the opportunity to correct the course of constitutional privacy law.
NCLA released the following statements:
“The expectation is that when you enter into an agreement with a third party, the third-party and the government will respect contractual rights. 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.”
— Caleb Kruckenberg, Litigation Counsel, NCLA
“The Internal Revenue Service is notorious for treating law-abiding taxpayers as guilty until proven innocent. IRS is hiding behind cryptic, unexplained reasons for using its formidable machinery against Mr. Harper. Thankfully, the Constitution is not so obscure. The Fourth and Fifth Amendments require IRS to demonstrate that the agency followed lawful procedures before attempting to audit Mr. Harper’s cryptocurrency transactions.”
— Adi Dynar, Litigation Counsel, NCLA
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.