Last summer, the U.S. Internal Revenue Service (IRS) sent 10,000 warning letters to suspected American cryptocurrency owners advising them to pay their taxes on digital currency under the threat of penalties and criminal charges. On Tax Day, July 15, one of the recipients of those “soft letters” filed a lawsuit against the agency, claiming that it has violated U.S. taxpayers’ constitutional rights to privacy of their financial information.
The lawsuit argues that the agency regularly seizes innocent Americans’ private financial information from third parties without any judicial process in defiance of the Fourth and Fifth Amendments and statutory protections.
The lawsuit reaches beyond cryptocurrency concerns to administrative subpoenas and other forms of information gathering.
Plaintiff James Harper has been a cryptocurrency user since 2013 and has diligently paid applicable taxes together with capital gains on bitcoin earnings. This, however, did not prevent the IRS from treating him, among many other digital currency holders, as a possible criminal intentionally evading an income tax. “The IRS sees all cryptocurrency users as potential tax cheats,” said Harper in an interview with The American Spectator. “And I don’t think it’s a valid basis for gathering private financial information.”
It remains unclear where the IRS has obtained this information and how long it will keep it. IRS Commissioner Chuck Rettig said the agency was able to identify cryptocurrency owners “through various compliance efforts.” This means that the agency most likely got the information from cryptocurrency exchanges, which were forced by the IRS to break a confidentiality agreement between them and their customers. “The IRS may have caused a service provider to break their promise to me, and that is concerning,” said Harper.
Harper signed contracts protecting sensitive information from leaking with three digital virtual currency exchanges: Coinbase, Abra, and Uphold, which gave him the right to privacy protected by the Fourth Amendment to the U.S. Constitution. It also gave him a property right to his own information. The Supreme Court has recognized that an agency cannot frustrate those expectations and violate those property rights without first giving a warrant.
“We do not know where the IRS got our client’s private financial information from and we do not know what they will do with it in the future,” Caleb Kruckenberg, Litigation Counsel at New Civil Liberties Alliance (NCLA), who works on Harper’s case, told The American Spectator. “We want an order to the IRS to destroy this information. They had no business having it in the first place.”
“I particularly worry about the possibility of a data breach that could expose my financial information to criminals,” said Harper. “I was a victim of the U.S. Office of Personnel Management [OPM] data breach. The OPM breached millions and millions of files of U.S. government employees. So, we know that federal agencies sometimes lose control of information.”
Luckily, James Harper is well prepared to wage this war with a leviathan. He was a senior fellow at the Cato Institute for over a decade, working on privacy, government transparency, and digital currency issues. He paid his taxes. For him, it is just about the principle of the intrusion.
Harper aims not only at protecting himself by getting his financial records out of the IRS’s hands, but he also wants to change the course of constitutional law that makes a lot of information available to federal agencies of all kinds. In Harper’s view, if a person contracts with a third party to hold their private financial information private and against government intrusion, then they assume that the third party and the government will respect their contractual rights. Failure to do so violates those expectations, in defiance of the Fourth and Fifth Amendments and statutory protections. Thus, the lawsuit reaches beyond cryptocurrency concerns to administrative subpoenas and other forms of information gathering.
Winning this court case could stop U.S. agencies, namely the IRS, from the unlawful invasion of people’s indefeasible right of personal security, personal liberty, and private property without any judicial process. This means all bitcoin users will no longer be unjustly considered guilty until proven innocent.