Should the IRS be able to declare a particular kind of investment “suspicious” and demand the records of thousands of Americans on that declaration alone? That’s the question of Harper v. Werfel, currently before the United States Court of Appeals for the First Circuit, centered in New England.
The Taxpayer Defense Center filed an amicus curiae (“friend of the court”) brief to describe how important financial privacy is to Americans–a right protected by the First, Fourth, Fifth, and Tenth Amendments. Our brief applied important Fifth Amendment precedent to say Mr. Harper’s records should not have been disclosed to the IRS. TDC’s brief has already generated media attention.
Mr. Harper bought his first Bitcoin in 2013, diligently paying all applicable taxes and reporting his trades related to bitcoin holdings. He used three digital virtual currency exchanges: Coinbase, Abra, and Uphold. But the IRS issued a “John Doe” summons demanding the records of thousands of accounts on these exchanges, including Mr. Harper’s accounts. This is another example of IRS overreach, demanding vast amounts of data on little to no suspicion–certainly not from Mr. Harper.
Overzealous enforcement is a perennial problem for the IRS. Congress provided protections to taxpayers and bystanders alike that give early warning and a chance to contest illegal searches from wayward agents. There is a narrow exception for so-called “John Doe” warrants—really dragnet data scraping of many innocent citizens' private information—in limited circumstances and for a limited number of people. Yet if the decision below stands, the exception will swallow the rule.
The court below held Mr. Harper had no property interests in his financial data, since it was handed over to a third party—that is, his financial institution holding his financial instruments. That holding is in stark contrast to extensive precedent from the Supreme Court and Courts of Appeals holding otherwise. That is because to know where one is spending money is to know a lot about a person: where they eat and shop, what medical bills they pay, and even what ideological or political causes they care about. People treat their finances as private, and it is a substantial interest for Mr. Harper asserts in this case.
Since Mr. Harper has an interest in the privacy of his financial information, then the Fifth Amendment requires he be afforded due process before the government takes it. Mr. Harper’s case tests whether the IRS met the safeguards of 26 U.S.C. § 7609(f). The asserted interest is one of privacy—and once information is disclosed, it cannot be remedied.
Finally, the court below asserted that Mr. Harper should have tried to intervene when the financial institutions holding his accounts were summonsed under the John Doe provisions of 26 U.S.C. § 7609(f). His complaint alleged that he tried, but the federal court in California rebuffed his attempts to intervene in the first case. Relegated to bringing some of his legal theories via an amicus curiae brief in the California case, the District Court erred in holding Mr. Harper’s claims here foreclosed. Engaging as amicus curiae is not enough for res judicata to attach. (Res judicata is a legal doctrine that once a claim has been presented to a court–even if by someone else in another federal court–then later plaintiffs can’t try again on the same legal theories.)
John Doe warrants are dangerous tools that should only be used in limited circumstances against a limited pool of potential targets–for example, the members of a crime syndicate. The provision was not designed to allow for thousands of innocent taxpayers’ data to be handed over to an IRS agent in the hopes of finding a wayward file or two.
NTUF maintains that Americans have substantial rights in the privacy of their data and should not be presumed to be tax cheats simply for using new technology like cryptocurrency. Mr. Harper should be allowed to bring his claims and assert his statutory and constitutional rights.