(Reuters) – The US tax authorities are in danger of losing a blunt weapon in its years-long campaign to collect income taxes from cryptocurrency investors following a ruling by the US 1st Circuit Court of Appeals.
Thursday’s 1st Circuit decision in Harper v. Rettig revives a challenge by crypto trader (and former Bitcoin Foundation corporate lawyer) James Harper against the IRS’s use of so-called John Doe subpoenas to obtain trading data from cryptocurrency exchanges. The appeals panel — Justices William Kayatta, Kermit Lipez and Gustavo Gelpí — said in an opinion issued by Lipez that under 2021 U.S. Supreme Court precedent CIC Services LLC v. IRS, taxpayers have the right to sue the IRS for its tax-collection tactics. information, despite a legal prohibition on taxpayers objecting to tax assessment and collection.
The IRS had argued that Harper’s lawsuit violated the Internal Revenue Code’s anti-injunction law because its ultimate goal was to prevent the government from collecting taxes based on its crypto transactions. But the 1st Circuit focused on Harper’s framing of the case, in which he demanded that the IRS know company information that Harper said had been obtained in violation of his Fourth and Fifth Amendment rights. Under the CIC precedent, the appeals court said Harper had the right to sue the tax authorities’ tactics, even if those tactics ultimately allowed the government to collect and collect taxes.
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Granted, Thursday’s ruling allows Harper, a New Hampshire resident and member of the American Enterprise Institute, to return to court to argue that the IRS’s use of a subpoena from John Doe to transfer his business records to be seized was unconstitutional. . The 1st Circuit did not rule on the merits of Harper’s constitutional arguments. He simply overturned the dismissal of his 2021 lawsuit on the grounds of sovereign immunity.
The United States Department of Justice, which represented the IRS in Harper’s appeal, did not respond to a request for comment. Harper’s lead attorney, Richard Samp of the New Civil Liberties Alliance, said the decision upholds the basic principle that people have the right to go to court to protect their constitutional privacy rights.
The IRS relied heavily on John Doe’s call to steal information about crypto traders from US platforms such as Coinbase, Inc and Circle Internet Financial. Recently, the IRS won an August 15 ruling requiring SFOX, a cryptocurrency broker, to produce transaction records for users who have made transactions totaling at least $20,000, under a subpoena from John Doe.
The DOJ’s press release on the SFOX decision shows what a powerful tool these John Doe subpoenas have been for the government. Crypto transactions are often anonymous and difficult to trace, the DOJ said, making it difficult for the government to assess whether investors report all taxable income from their transactions. The IRS has succeeded in convincing several federal courts that there are good reasons to suspect that unknown customers of crypto exchanges are evading income taxes – and that the government is entitled to records proving such an escape.
“The John Doe subpoena remains a very valuable enforcement tool that the US government will use time and again to catch tax evaders,” IRS Commissioner Chuck Rettig said in the SFOX statement. The IRS previously said that after sending warning letters to Coinbase customers identified by subpoenas from John Doe, these crypto investors are coughing up at least $25 million in unpaid taxes.
Harper, of course, hopes her renewed lawsuit will limit the IRS’s ability to obtain business documents without even informing taxpayers that the government is seeking information about them. Harper’s attorney, Samp, told me in a telephone interview that taxpayers have a constitutional right to object to the disclosure of their company information. Samp said the IRS may use John Doe’s subpoena to find out the names and addresses of users of the crypto platform. But the government should not be allowed, he said, to obtain their business data en masse, without giving individual taxpayers a chance to challenge the IRS’s claims.
Harper believes the IRS obtained information about its transactions from Coinbase and Abra, another US-based crypto platform. He received a letter from the IRS in August 2019 advising him that the agency “has information that you have or have had one or more virtual currency accounts, but you may not have properly reported your virtual currency transactions.” Harper states that he has in fact paid the required taxes on all of his crypto transactions and that the 2019 IRS notification appears to have been a form letter. The government, Harper Samp’s lawyer said, never took action against Harper after sending that initial letter.
On remand, the IRS will certainly highlight its dispute with Coinbase over a 2016 John Doe subpoena. Coinbase objected to the subpoena, asking for information on all of its users. The IRS then limited the request to users who traded large amounts of money. After protests from Coinbase and an anonymous user, US Magistrate Judge Jacqueline Corley sided with the IRS over the enforceability of the limited subpoena.
Samp said he was confident that the Coinbase ruling was distinct from Harper’s claims because Coinbase was a third party and not a taxpayer claiming violation of constitutional rights.
It should be noted that the government has used a subpoena from John Doe to obtain business information from SFOX users, even after the 1st Circuit alluded rather heavily last December to oral arguments in the Harper case that it would be Harper to be his constitutional challenge. Harper’s revived case looks like a great showdown.
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