IRS Crypto Exchange Data Suit Wrongly Tossed, 1st Circ. Told

A New Hampshire federal court wrongly found that a man's efforts to block the Internal Revenue Service from obtaining his records from cryptocurrency platforms would unlawfully restrain the collection of tax, he told the First Circuit.

James Harper's suit requesting the IRS expunge his financial records that it obtained from unknown cryptocurrency exchanges violates neither the Anti-Injunction Act  nor the Declaratory Judgment Act , which bar lawsuits that would restrain tax collection or that implicate federal tax liabilities, Harper told the appeals court in a brief Friday. The lower court incorrectly dismissed his case in finding his arguments were barred by both acts, he said.

Harper's suit doesn't challenge a tax collection, but instead contests the constitutionality of the IRS' information gathering practices related to his cryptocurrency holdings, he argued.

"In short, Mr. Harper's suit is not one that seeks 'to foreclose tax liability'; it seeks to challenge IRS' illegal information gathering practices that violate Mr. Harper's constitutional and statutory rights," Harper said.

This position is bolstered by the U.S. Supreme Court's recent decision in CIC Services LLC v. IRS , in which the justices found that the advisory firm's challenge to agency reporting requirements that had been previously dismissed by a district court was not barred by the AIA, Harper said.

A New Hampshire federal court in March dismissed Harper's suit contesting the IRS information collection from one of three cryptocurrency exchanges where he held digital assets. He was one of more than 10,000 digital currency owners who, in August 2019, received letters from the IRS outlining that the agency obtained information on their digital currency holdings without specifying any wrongdoing.

The letters were received as the federal tax agency began examining potential reporting errors or omissions by digital currency owners on their tax returns. Harper has accounts with cryptocurrency exchanges including Coinbase and Abra, but it's not clear where the IRS got the information that led to him receiving the IRS letter, according to his brief. Harper claims he is compliant with his tax reporting and payment obligations.

In his suit filed in July 2020, Harper contended that the IRS violated his rights under the Fourth and Fifth Amendments by demanding his information from third parties without any specific suspicion of wrongdoing and doing so without notifying him or allowing for him to challenge the seizure of such property.

In dismissing his suit, U.S. District Judge Joseph A. DiClerico Jr. said Harper couldn't force the IRS to expunge the records it obtained on his accounts or block the agency from seeking information on his digital currency holdings because it would prevent the U.S. from assessing or collecting federal taxes. His suit would effectively bar the IRS from assessing taxes against Harper using the information it got through third-party summonses, the judge found.

But in his brief on Friday, Harper said the judge wrongly applied the AIA and the similar DJA as his suit has nothing to do with tax collection. The IRS hasn't assessed any additional taxes against Harper and he hasn't sought a tax refund, according to his brief.

"The court's assumption is incorrect because IRS' assessment or collection of taxes is several steps removed from the information gathering practice sought to be enjoined and declared illegal here," Harper said.

Instead, he's challenging the IRS procurement of his financial information in violation of his constitutional rights, he argued. Harper had plausibly argued that the IRS violated his Fourth and Fifth Amendment rights by obtaining his information without a subpoena and without giving him notice to the private information collection, he argued.

Moreover, the Supreme Court's May decision in CIC Services shows that cases can be brought challenging the IRS' information collections without restraining the assessment or collection or taxes, Harper contended. In that case, the justices determined that CIC's suit narrowly targeted the legality of a notice requiring microcaptive insurance transactions be reported on pain of penalties, with Justice Elena Kagan writing that it is "hard to characterize this suit's purpose as enjoining a tax."

In a statement Monday, Harper's representative Aditya Dynar highlighted the CIC case, saying it demonstrates the IRS can't justify information seizures by referring to potential tax collections down the road.

"After CIC, it is not sufficient for IRS to claim that the information it possesses 'may culminate in the assessment or collection of taxes,'" Dynar told Law360. "By that logic, all information IRS comes into 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." 

The U.S. Department of Justice declined to comment on the suit.

Harper is represented by Aditya Dynar and Caleb Kruckenberg of the New Civil Liberties Alliance.

The U.S. government is represented by Thomas P. Cole and Edward J. Murphy of the U.S. Department of Justice, Tax Division, and Seth R. Aframe of the U.S. Attorney's Office for the District of New Hampshire.

The case is James Harper v. Charles P. Rettig et al., case number 21-1316, in the U.S. Court of Appeals for the First Circuit.


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IRS Crypto Exchange Data Suit Wrongly Tossed, 1st Circ. Toldhttps://www.cbiz.com/Portals/0/Images/IRS-Crypto-CBIZ.jpg?ver=2021-07-13-134245-447A New Hampshire federal court wrongly found that a man's efforts to block the Internal Revenue Service from obtaining his records from cryptocurrency platforms would unlawfully restrain the collection of tax, he told the First Circuit.2021-07-13T17:00:00-05:00

A New Hampshire federal court wrongly found that a man's efforts to block the Internal Revenue Service from obtaining his records from cryptocurrency platforms would unlawfully restrain the collection of tax, he told the First Circuit.

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