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WASHINGTON, DC - JUNE 28: The U.S. Supreme Court is shown at dusk. (Photo by Drew Angerer/Getty ... More Images)
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The Internal Revenue Service (IRS) was aware of significant underreporting of cryptocurrency on tax returns and used one of its investigative tools (i.e. a John Doe summons) in 2016 to seek financial information on thousands of individuals, including Mr. James Harper. Harper sued in 2020, alleging unlawful access to his private financial information, and has been embroiled in litigation since then and is now seeking relief from the Supreme Court of the United States. Harper’s case against the IRS has brought significant attention to the issue of financial privacy in the digital age. Harper’s petition to the Supreme Court challenges the IRS’s warrantless seizure of his cryptocurrency transaction records from Coinbase, arguing that this action violates the Fourth Amendment. The case also raises critical questions about financial privacy rights for individuals as banking and financial services digitize more services and request sensitive financial data. Individuals, and the companies offering to secure their customers information, are now waiting to see if the Supreme Court will weigh in on these important issues.
John Doe Summonses: Uncovering Financial Information
Harper’s case has focused attention on the IRS’s use of John Doe summonses in the debate over financial privacy and government overreach. A John Doe summons allows the IRS to obtain information about a group of unidentified individuals from a third party, such as a financial institution or cryptocurrency exchange. In Harper’s case, the IRS issued a John Doe summons to Coinbase, seeking detailed transaction records for over 14,000 customers, including Harper, with only a general suspicion of potential wrongdoing. Following the Coinbase summons the Department of Justice sought similar information from other popular cryptocurrency service providers like Kraken and Circle. However, John Doe summonses are not limited to cryptocurrency and are a common IRS tool for all types of financial transactions involving private financial information the government may want for investigative and tax enforcement efforts.
The government seeks the requested financial information in an ex-parte proceeding, meaning neither the owner of the financial information or the third-party safeguarding it is involved (i.e. no opposing party). Only after the request is approved by the courts is the third-party served with the summons and asked to provide the information. This puts the burden on the institution to fight and/or inform its customer of the request so they can potentially fight the request. Meanwhile, the IRS holds a court order allowing disclosure unless affirmative action is taken. Because no opposing party was able to challenge the scope of the information sought or explain the innocence of the transactions the one-sided requests by the IRS are routinely granted.
Harper’s petition argues that the IRS’s use of a John Doe summons in this context constitutes an unreasonable search and seizure under the Fourth Amendment. The petition highlights the deeply invasive nature of the data collected, which includes not only historical transaction records but also the potential to track future financial activities. This level of surveillance, Harper contends, goes far beyond what the Constitution allows. Several other organizations have filed amicus briefs (i.e. “friend of the court” briefs) supporting protection for records held by third-party institutions. The challenge, essentially, asks for stricter standards before sensitive financial information is provided.
The statute allowing for John Doe summonses was itself amended, pursuant to the Taxpayer First Act, add a requirement that any such summons be “narrowly tailored to information that pertains” to the alleged failure or potential failure to comply with the tax laws. The federal court in the Northern District of California used this change in the law to deny, in part, a similar John Doe summons request against another large cryptocurrency exchange (i.e. Kraken). If the Supreme Court takes Harper’s case, it could provide further clarification to lower courts on what limits they can impose on these types of government requests to protect financial privacy. Since the lower courts are the gatekeepers, without the benefits of the usual adversarial process, this guidance is important to protect privacy in an ever-increasing data driven financial system.
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