Supreme Court Urged to End IRS Warrantless Crypto Data Seizures

The Supreme Court is being urged to dismantle a controversial IRS tactic that allowed warrantless data grabs from 14,000 crypto users, redefining privacy rights for the digital age. A constitutional showdown over the privacy rights of cryptocurrency users could reshape how digital financial data is protected under the Fourth Amendment. On June 13, the New Civil Liberties Alliance (NCLA) and Supreme Court litigator Kannon Shanmugam filed a reply brief with the U.S. Supreme Court in Harper v. Faulkender, challenging the federal government’s use of the “third-party doctrine” to justify warrantless seizures of crypto-related financial records. The case centers on James Harper, a Coinbase customer whose data was swept up in an Internal Revenue Service (IRS) probe. According to the brief, the Internal Revenue Service unlawfully seized financial records of NCLA client James Harper and more than 14,000 other people from the Coinbase cryptocurrency exchange through abuse of a ‘John Doe’ summons.

The legal action follows a series of lower court rulings. In 2022, the U.S. Court of Appeals for the First Circuit ruled Harper could pursue legal action against the IRS. However, a federal district court dismissed the suit in 2023, and that dismissal was later upheld, with the courts relying on the third-party doctrine. NCLA contends this precedent—originally used in targeted investigations of individuals—cannot be justified when applied to mass data collection in the digital economy. Their position: “The Justices should return the doctrine to that focused, limited foundation or do away with it entirely.” This view echoes broader concerns in the judiciary, including Justice Sonia Sotomayor’s assertion that the doctrine is “ill suited to the digital age.”

Mark Chenoweth, president of NCLA, emphasized the broader stakes: “The third-party doctrine is a Fourth Amendment abomination. People have little choice in the digital age but to share private information with third-party service providers. Doing so does not surrender their property or privacy interests in that data, so the Court should require government agencies to obtain search warrants to access it.” Senior Litigation Counsel John Vecchione added: “The government has failed to proffer convincing reasons why certiorari ought not be granted in this case. The case not only represents an injustice to Jim Harper’s rights but also presents novel and important questions for Fourth Amendment rights in the digital age.”

While law enforcement agencies warn that curtailing the doctrine could hamper criminal investigations, digital rights advocates argue that robust constitutional protections are essential as cryptocurrencies and decentralized platforms become central to financial life. The IRS's action comes at a time when the use of cryptocurrencies has surged, with more individuals and businesses adopting digital currencies for various transactions. This trend has raised concerns about tax evasion and money laundering, prompting regulatory bodies to tighten their grip on the sector. The IRS's data collection effort is seen as a proactive measure to address these issues and ensure that taxpayers are fulfilling their obligations.

However, the move has also raised questions about the legality and ethical implications of such data grabs. Critics argue that the IRS's actions could infringe on individuals' privacy rights and set a dangerous precedent for future surveillance activities. The debate has intensified as legal experts and advocacy groups call for greater transparency and accountability in the IRS's data collection practices. The Supreme Court is now being closely watched to see if it will intervene in this matter. The high court's decision could have far-reaching implications for the future of cryptocurrency regulation and the balance between privacy and government oversight. The IRS's data grab has also highlighted the need for clearer guidelines and regulations in the cryptocurrency space. As the use of digital currencies continues to grow, there is a pressing need for comprehensive frameworks that address tax compliance, privacy concerns, and regulatory oversight. The outcome of the Supreme Court's deliberations will be closely monitored by industry stakeholders, who are eager to see how the legal landscape for cryptocurrencies will evolve in the coming years.