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Court Rules Taxpayers Can Sue IRS For Violating Constitutional Rights On Data Collection

The Internal Revenue Service (IRS) building stands in Washington, D.C., U.S., on Wednesday, April 6, 2011. The IRS would have to suspend tax audits, the Small Business Administration’s processing of loan applications would be halted and National Parks would close if the federal government is forced into a partial shutdown because of the budget impasse in Congress. Photographer: Bloomberg/Bloomberg

The First Circuit U.S. Court of Appeals just issued a ruling that taxpayers will be able to take the IRS to court for violating their rights with data collection.

The court ruled that the U.S. District Court for the District of New Hampshire was wrong to dismiss the court challenge based on an alleged lack of jurisdiction.

Until now, the IRS has prevented federal courts from allowing any significant challenge to the IRS’ data-collection practices.

Here is the full press release:

A three-judge panel of the U.S. Court of Appeals for the First Circuit has unanimously ruled in Harper v. Rettig that taxpayer James Harper can take the Internal Revenue Service (IRS) to federal court for gathering private financial information about his use of virtual currency from third-party exchanges without a lawful subpoena.

IRS has, until now, successfully prevented federal courts from asserting jurisdiction over a significant constitutional challenge to the agency’s unlawful data-collection practices. The First Circuit ruled that the U.S. District Court for the District of New Hampshire erred in its March 2021 decision granting IRS’s motion to dismiss Mr. Harper’s Fourth and Fifth Amendment challenge based on an alleged lack of jurisdiction. The district court did not have the benefit of the Supreme Court’s May 2021 decision in CIC Services, LLC v. IRS, which concluded that the Anti-Injunction Act (AIA) does not prohibit a suit “seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal penalties.” Mr. Harper’s suit, which seeks to set aside IRS’s illegal information gathering, is likewise not a suit brought to enjoin a tax’s assessment or collection, so it is not subject to the AIA’s limits on court jurisdiction.

Judge Kermit Lipez, writing for the majority, rejects IRS’s argument that the AIA bars Mr. Harper’s suit because it seeks to restrain activities related to the assessment or collection of taxes. He notes that CIC Services provides clarity that “information gathering” is a “phase of tax administration procedure that occurs before assessment [or] collection.” Judge Lipez concludes that since IRS’s activities against Mr. Harper “clearly fall within the category of information gathering … the [AIA] is not an applicable exception to the United States’ waiver of sovereign immunity.” Indeed, as the Supreme Court explained in CIC Services, where, as here, there is no “tax penalty” at issue, then the case is a “cinch,” and “the suit c[an] proceed.”

Mr. Harper had contracted with third-party virtual currency exchanges to protect his private information against unlawful government intrusion. Despite his efforts to ensure his records were properly safeguarded, IRS took the data of Mr. Harper and thousands of other cryptocurrency holders from virtual-currency exchanges without reasonable suspicion and without providing a pre-data-collection notice and opportunity to contest IRS’s dragnet operation. In ruling that the district court has subject-matter jurisdiction, the First Circuit has ensured that the IRS can be held accountable for this violation of Harper’s Fourth and Fifth Amendment constitutional rights.

NCLA released the following statements:

“The appeals court’s decision upholds a basic tenet of our justice system: every citizen claiming the government is violating his constitutional rights is entitled to his day in court. The IRS sought to deny that right, arguing that allowing people to object to its collecting personal data would unduly hamper tax-collection efforts. The court rightly rejected that argument. Efficient tax collection must never be permitted to trump constitutional rights.”
— Rich Samp, Senior Litigation Counsel, NCLA

“The bad news is the federal government recently passed a law that could lead to hiring over 86,000 new IRS agents. The good news is that courtesy of the First Circuit’s ruling, brave individual taxpayers like Mr. Harper may now sue the Internal Revenue Service—and its new agents—when it tramples their constitutional rights.”
— Mark Chenoweth, President and General Counsel, NCLA

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