First Circuit Wary of Reviving Challenge to IRS Coinbase Summons

A Coinbase client faced skeptical First Circuit judges during oral arguments Monday over his bid to shield his records from a third-party IRS summons targeting the cryptocurrency exchange.

James Harper, who used Coinbase to buy and sell cryptocurrency, asked the US Court of Appeals for the First Circuit to revive his petition to quash the IRS’s summons after a federal court in New Hampshire dismissed his case. The lower court agreed with the IRS’s position that, because Harper had provided the records to Coinbase voluntarily he had no reasonable expectation of privacy nor property interest in the information subject to the summons.

Harper told the appeals court that the IRS had failed to meet a necessary standard of individualized suspicion, violating his constitutional protection against unlawful search and seizure, but received pushback over how that standard might limit the IRS’s investigative powers.

“The entire John Doe summons process would be gone, correct?” Judge Kermit V. Lipez asked, later referencing the US Supreme Court’s decision in United States v. Powell. “It sounds to me like you’re trying to import into this investigative scheme a probable cause standard, which Powell explicitly says does not apply to this IRS investigative procedure.”

Harper’s counsel Sheng Li, of New Civil Liberties Alliance, said that even if Powell foreclosed a probable cause standard for the IRS’s summons, the agency would still fail to meet Harper’s proposed standard of individualized suspicion, which is lower than probable cause.

Judge William J. Kayatta Jr. agreed with IRS counsel Kathleen E. Lyon that similar amounts of information may be obtained through an individual’s bank records and cryptocurrency records, such as the identity of payees.

“That some intimate information might have been gained here is not enough to justify not being able to get the transaction information, which is precisely the transaction information that is covered by the Bank Secrecy Act and which is exactly the transaction information that Mr. Harper and his amended complaint says that he relied on in in filing his returns,” Lyon said.

Judge Gustavo A. Gelpí also sat on the panel.

Champions Law also represents Harper.

Americans for Prosperity Foundation, National Taxpayers Union Foundation, Coin Center, DeFi Education Fund, and Paradigm Operations LP filed amicus briefs supporting Harper.

The case is Harper v. Werfel, 1st Cir., No. 23-01565, oral arguments 3/4/24.