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Shifting the Burden of Proof to the IRS

By Joel N. Crouch on July 17, 2019

In a prior blog post, I discussed the burden of proof in a tax controversy and how in most situations, the taxpayer has the burden of proof. In this post, I will discuss how a taxpayer can shift the burden of proof to the IRS.  While the result of most cases does not turn on which party has the burden of proof, it is my experience that the willingness of IRS counsel to discuss a reasonable settlement increases if the IRS has the burden of proof.

Pursuant to IRC Section 7491, an individual or business may shift the burden of proof to the IRS in a civil tax matter, in a court proceeding, if the taxpayer:

  1. Introduces credible evidence relevant to determining the taxpayer’s income or estate or gift tax liability;
  2. Cooperates with reasonable requests from the IRS during the examination; and
  3. Complies with the substantiation and record keeping requirements in the code and regulations.

“Credible evidence” has been defined by the courts as the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence was submitted.  For example, if the IRS challenged a meals and entertainment deduction, a copy of a receipt, along with a contemporaneously written note showing those in attendance at the dinner and the nature of the business related discussions would generally be sufficient to shift the burden of proof.  The note can be written on the receipt itself.  Importantly, the IRS does not consider credit card statements to be sufficient evidence, since it is not contemporaneous.  

Park v. Commissioner, T.C. Summ. Op. 2018-46  provides a good example.  In Park, the taxpayer purchased a house in 2008 and had a mortgage with Bank of America on which he was making monthly payments.  In 2012 Mr. Park was on military deployment overseas but continued making both principal and interest payments on the mortgage.   In 2014, Mr. Park received and cashed a $13,508.38 check from BOA’s customer service. Included with the check was a letter stating that, “[b]ased on a recent review of your account, we may not have provided you with the level of service you deserve, and are providing you with this check.” The letter further stated, that petitioner might wish to consult with someone about any possible tax consequences of receiving the funds, included a number for petitioner to call if he had any questions, and concluded by thanking him for his military service.

Petitioner called the phone number provided on several occasions, but he was unable to obtain any further information. Considering all the information available, petitioner concluded that he had overpaid his mortgage during the time of his overseas military deployment. Accordingly, he did not report any portion of the $13,508.38 on his 2014 Federal income tax return.  The IRS received a Form 1099-MISC, Miscellaneous Income, reporting other income of $12,789, and a Form 1099-INT, Interest Income, reporting interest income of $719 from BOA for the 2014 tax year. Because Mr. Park did not report those amounts on his return, the IRS issued a notice of deficiency determining that Mr. Park had failed to report income from BOA.

Mr. Park filed a petition in Tax Court challenging the Notice of Deficiency and issued a subpoena to BOA for records related to the check.  BOA responded with a letter that “the bank is unable to locate any accounts or records requested with the information provided.”  At trial, the IRS argued that the only evidence regarding the payment was the Forms 1099-MISC and 1099-INT and Mr. Park failed to provide any credible evidence showing that the IRS’s determination was incorrect.

In ruling that the $12,579 from BOA was not taxable, but instead a return of principal, the Tax Court relied on what it called Mr. Park’s credible testimony, effectively shifting the burden of proof to the IRS.

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.