A Taxpayer Can Not Challenge An IRS Crypto Exchange Summons

According to Law360, a New Hampshire man cannot block the Internal Revenue Service from obtaining his records from cryptocurrency platforms because it would unlawfully impede the collection of tax, a federal judge said on  3/23/21 in dismissing his case challenging the agency's summons.

James Harper cannot force the IRS to expunge records it obtained on his accounts with Coinbase or block the agency from seeking information on his digital currency holdings from other platforms because it would prevent the U.S. from assessing or collecting federal taxes, which is prohibited by the Anti-Injunction Act, U.S. District Judge Joseph A. DiClerico Jr. said in an order.

"The effect of Harper's requested declaratory and injunctive relief would be to prevent the IRS from assessing Harper's or others' taxes using the information it has obtained through the John Doe third-party process," Judge DiClerico said.

In August 2019, Harper was one of more than 10,000 digital currency owners who 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 originally sued the IRS in July, claiming the agency violated his constitutional rights when it obtained personal financial information related to his digital currency accounts directly from third parties.

Over the course of a few years, Harper used the Coinbase, Abra and Uphold cryptocurrency exchanges to hold and liquidate his bitcoin holdings, according to court documents. The exchanges are not named defendants, but the complaint said they might have violated their terms of service by providing Harper's financial records to the IRS without a "valid subpoena, court order or judicial warrant based on probable cause."

Harper said in his initial complaint he disclosed all his trades and paid all relevant taxes on his digital currency holdings since he first invested in bitcoin in 2013. He argued the IRS obtained financial information from thousands of taxpayers holding digital currency without first obtaining a warrant or lawful subpoena.

Harper argued that the IRS violated his rights under the Fourth and Fifth Amendments of the U.S. Constitution by demanding his information from third parties without any specific suspicion of wrongdoing and doing so without notifying him or allowing him to challenge the seizure of such property, according to court documents.

Harper asked the court to order that the IRS expunge the information it received on his digital currency accounts from its summons, award him money damages and grant injunctive relief against the agency, according to the complaint.

In his Tuesday order, Judge DiClerico said Harper's claim that he paid all taxes related to his digital currency holdings was unfounded after he noted in his complaint the IRS might have obtained information in its summons that could lead to assessment of additional tax liabilities.

The summonses were also issued to determine whether taxpayers who may hold digital currency are complying with federal tax laws, which the court found to be a legitimate purpose.

The court also found Harper's arguments too broad to prove that any of the IRS officials named in his suit should be liable for money damages related to their involvement in issuing the summons. The judge dismissed those claims.

Read more at: Tax Times blog