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BURDEN OF PROOF
By: Robert E. McKenzie
It Switches to IRS Only If Taxpayer Proves
Four Eligibility Requirements Met!
Under prior law, there is a rebuttable
presumption that IRS's determination of tax liability is correct, and therefore
(with some exceptions such as fraud), the burden of proof is on the taxpayer to
show that the IRS's determination was wrong, and to show the merit of his or
her claims by a preponderance of evidence. The Bill provides that the Secretary
shall have the burden of proof in any court proceeding with respect to a
factual issue related to income, estate, gift, and generation-skipping transfer
taxes if the taxpayer introduces credible evidence relevant to
ascertaining the taxpayer's income tax liability. To be eligible, the taxpayer
must prove that he or she
1. has complied with present-law statutory
and regulatory substantiation requirements of any item,
2. has met present-law recordkeeping
requirements;
3. has cooperated with reasonable IRS
requests for meetings, interviews, witnesses, documents, and information; and
4. met the net worth limitations if not an
individual, (i.e., qualifies under net worth limitations for awarding
attorneys' fees such as a corporation, trust, or partnership, whose net worth
does not exceed $7 million). Therefore, corporations, trusts, and partnerships
whose net worth exceeds $7 million aren't eligible to shift the burden of proof
(Act §3001(a); Code §7491(a)).
What is cooperation? Cooperation encompasses: providing reasonable
assistance to the IRS in accessing witnesses, information, and documents not
within the taxpayer's control, including providing English translations for
witnesses or documents located in foreign countries; exhausting
administrative remedies, including IRS appeal rights; and establishing
the applicability of a privilege. Cooperation does not require that the
taxpayer agree to extension of the limitations period.
What is credible evidence? Credible evidence is 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 were submitted, without regard to
the judicial presumption of IRS correctness. Implausible factual assertions,
frivolous claims, or tax protestor-type arguments are not credible evidence.
The IRS has not met its burden if the court finds that the evidence is equally
balanced.
Query: Will IRS become more intrusive because of desire to collect
information from taxpayer at the very beginning of the audit process?
Query: Clearly, litigation costs will increase because the IRS will require
the taxpayer to prove they have met the four conditions for the shift to occur.
For example, to what extent will taxpayers have to prove they have met the
substantiation and recordkeeping rules?
IRS Must Prove Statistically Computed
Income.
When the IRS uses statistical information
from unrelated taxpayers solely to reconstruct an individual taxpayer's income
(such as found in life-style or financial status audits), the burden of proof
is also on the IRS with respect to the income items reconstructed (Act
§3001(b), Code §7491(b)).
Use of Financial Status Audits Limited
The Bill prohibits the IRS from using
financial status or economic reality examination techniques to determine the
existence of unreported income unless there is a "reasonable
indication" that there is a likelihood of unreported income (Act §3412;
Code §7602; effective on July 22, 1998).
When IRS Wishes to Impose Penalty, Burden
of Proof Is on IRS.
In any court proceeding the IRS must initially
come forward with evidence that it is appropriate to apply a particular penalty
before the court can impose the penalty. If the taxpayer believes the penalty
is not appropriate due to reasonable cause, substantial authority, or a similar
provision, the taxpayer must raise those issues (Act §3001; new Code §7491;
effective date: applicable to court proceedings arising in connection with
examinations commencing after July 22, 1998. If there is no examination, it
applies to court proceedings arising in connection with taxable periods or
events beginning or occurring after July 22, 1998).
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Last update: Jan. 19, 2000