First Circuit Holds that JDS for Crypto Records Is Not Entitled to Pre-Enforcement Review (10/1/24)

In Harper v. Werfel, 118 F.4th 100 (1st Cir. 2024), CA1 here and GS here, the Court rejected Harper’s claim that the documents gathered by the IRS John Doe summons (“JDS”) to Coinbase should be eliminated from its files because of alleged deficiencies in the JDS process.

I blogged on a prior appeal where the First Circuit held that the Anti-Injunction Act (“AIA”), § 7421(a), did not apply to prevent the pre-enforcement suit under the Administrative Procedure Act (“APA”) because the activity in question was “information gathering” rather than tax collecting and assessing. First Circuit Holds that Target of JDS May Bring Challenge to JDS Prior to Tax Enforcement Against Target (Federal Tax Procedure Blog 11/9/22), here. The prior appeal was styled Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), CA1 here and GS here. (Rettig was the former IRS Commissioner; Werfel is the current IRS Commissioner.) The Solicitor General did not authorize petition for certiorari in Harper v. Rettig, so the case was remanded to the district court for further consideration consistent with Harper v. Rettig. Harper v. Rettig thus appeared to be a big win in the line of cases allowing pre-enforcement review beginning with CIC Services, LLC v. IRS, 593 U.S. 209 (2021).

On remand, the district court reached the same result—dismissal—on different grounds as follows:

• The Court rejected Harper’s Fourth and Fifth Amendment claims on the basis that, by becoming a Coinbase customer, Harper (i) had no reasonable expectation of privacy or protectable interest with respect to Coinbase’s records (not his records) (the third party doctrine) and (ii) the JDS did not deprive Harper of due process. (Slip Op. 11-35  In the latter holding, the Court cited prominently S.E.C. v. Jerry T. O'Brien, Inc., 467 U.S. 735 (1984) which held “the Due Process Clause of the Fifth Amendment . . . is [not] offended when a federal administrative agency, without notifying a person under investigation, uses its subpoena power to gather evidence adverse to him.” (Slip Op. 29-30.) Readers should recall that the JDS is required in the first instance because the IRS does not know the identity of the account holder, so any requirement of due process of advance notice would judicially eliminate the JDS.
• On the APA issue, although there could be pre-enforcement review, “The APA provides for judicial review of ‘final agency action for which there is no other adequate remedy in a court.” (Slip op. 31-35.) The JDS was not final agency action. The Court concluded (Slip op. 35):

          Mindful that early "[j]udicial intervention into the agency process denies the agency an opportunity to correct its own mistakes and to apply its expertise," Standard Oil, 449 U.S. at 242, it strikes us as premature at this point to wade into the IRS's investigation of potential widespread misreporting of income from digital asset transactions. See also id. at 243 (cautioning against premature judicial review as "a means of turning prosecutor into defendant before adjudication concludes"); Univ. of Med. & Dentistry of N.J., 347 F.3d at 69 ("In the ordinary course, an investigation is the beginning of a process that may or may not lead to an ultimate enforcement action."). We thus affirm the district court's dismissal of Harper's statutory claim without needing to address the requirements of § 7609(f).

So, bottom line, as finally decided (absent Supreme Court review), the case offers no APA hope to taxpayers and others affected by this swath of IRS pre-enforcement action.