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Burden of Proof in Tax Cases

By Joel N. Crouch on June 11, 2019

A search of the IRS website for “burden of proof” turns up the following statement:

“The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.”

Stated another way, the IRS is presumed to be correct unless the taxpayer produces credible evidence to the contrary. Although this may be frustrating to many taxpayers, if the IRS had the burden to produce evidence it would need access to a taxpayer’s private files to find the evidence.  That is not something any taxpayer would want.  Therefore retaining documents and evidence related to income and expenses, including receipts and cancelled checks, and providing those documents is very important when the IRS comes calling.  

Although the statement that a taxpayer has the burden of proof is generally correct, as is usually the case, there are exceptions to every rule.  By statute the IRS automatically has the burden of proof in the following situations:
 

  1. Tax related criminal cases.  As with all criminal cases, the government has the burden of proof in a criminal tax case.
  2. Civil fraud cases.  In any civil proceeding involving the issue whether a taxpayer has been guilty of fraud with intent to evade tax, the IRS has the burden of proof. IRC Section 7454(a).
  3. Verification of amounts shown on information returns. In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the IRS by a third party and the taxpayer has fully cooperated with the IRS, the IRS has the burden of producing reasonable and probative information concerning such deficiency in addition to such information return. IRC Section 6201(d).
  4. Preparer penalty.   In any proceeding involving the issue of whether or not a tax return preparer has willfully attempted in any manner to understate the liability for tax, the IRS bears the burden of proof. IRC Section 7427.
  5. Accumulated and profits of corporations. In any proceeding before the Tax Court involving a notice of deficiency based in whole or in part on the allegation that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, the burden of proof with respect to such allegation shall generally be on the IRS.  IRC Section 534.
  6. Illegal bribes and kickbacks.   The IRS bears the burden of proof as to whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment and is therefore not deductible.  IRC Section 162(c).
  7. Transferee liability.   In proceedings before the Tax Court the IRS has the burden of proof to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax. IRC Section 6902(a).
  8. Jeopardy levy or assessment procedures. The burden of proof is on the IRS when the issue is the reasonableness of a jeopardy levy or assessment.  IRC Section 7429(g).
  9. Golden parachute payments. The IRS has the burden of proof when the issue is the whether a payment is nondeductible because it stems from the violation of a securities law.  IRC Section 280G.
  10. New matters raised in U.S. Tax Court. The IRS has the burden of proof for any new matter or increases in tax or penalties pled by the IRS after the issuance of the notice of deficiency.  U.S. Tax Court Rule 142.


In addition, a court may shift the burden of proof to the IRS in the following situations:
 

  1. Reconstruction of income. When the IRS reconstructs taxpayer income indirectly using the net worth method (change in net worth = income), some courts assign the burden of proof to the IRS. The rationale is that fundamental fairness demands that the taxpayer must know the basis for the government’s position if he is to disprove it.
  2. Lost documents. When the IRS loses documents, a court may adjust the burden of proof.
  3. Statute of limitations. Generally, the IRS bears the burden of proving that an exception to the general statute of limitations applies when the IRS is seeking the benefit of the exception. For example, the IRS bears the burden of proving there is an understatement of income of 25% or more (6 year SOL) or civil fraud (no SOL).
  4. Nonreceipt of income. If the taxpayer denies receipt of income, assigning to him or her the burden of proof would require proving a negative, i.e., providing evidence of a nonevent. In such cases, the courts will require that the IRS prove that the taxpayer received the income.


Finally, IRC Section 7491 allows a taxpayer who meets certain requirements to shift the burden of proof to the IRS in civil tax matters.  The burden is shifted if the taxpayer (1) introduces credible evidence relevant to determining the taxpayer’s income, estate or gift tax liability  (2) cooperates with reasonable IRS requests during an examination, and (3) complies with the recordkeeping and substantiation requirements in the code and regulations.  In addition, the taxpayer must meet certain net worth requirements.  In a later blog entry, we will discuss in more detail the procedures for shifting the burden of proof under Section 7491. 

For any questions on the burden of proof in a tax case or any other tax-related matters, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.