Volume 10 Issue 3

May/June 1998

© by Tax & Business Professionals

Recently, there has been much talk about Congress changing the burden of proof in Tax Court cases. Would this be a real change or just more talk?

A close reading of the proposed law (not yet enacted, as we go to press) indicates that the new requirements for switching the burden of proof to the IRS may be more onerous for taxpayers in many cases than the existing system.

For many years, taxpayers have had to jump over two fairly high hurdles to prevail in litigated tax controversy. First, there is a longstanding presumption that the IRS's determination of additional tax liability, usually a Notice of Deficiency, is correct. Even if a taxpayer successfully shows that the Notice of Deficiency is wrong, the taxpayer must then still convince the court that the taxpayer's position is correct. Thus, a taxpayer both has to prove that the position taken by the IRS was wrong and then show WHY it was wrong.

Both houses of Congress, apparently seeking an attractive election year issue, recently voted to change the second hurdle, the general burden of proof. Smoke and mirrors may perhaps be an overstatement of the effect of the proposed new law, but in order to gain an election year issue, Congress may ultimately cause taxpayers to be subject to more, rather than less, scrutiny by the Internal Revenue Service.

While it may seem inconceivable that a remedial piece of legislation could make things worse for the average taxpayer, that may turn out to be the case. At first glance, the proposed requirements for switching the burden of proof to the IRS may seem harmless. A taxpayer would need to have all necessary substantiation (records), fully cooperate with the IRS, and exhaust administrative remedies. Let's look at these requirements more carefully.

Records -- The taxpayer must comply "with the requirements under this title [the Internal Revenue Code] to substantiate any item." This means, for example, that with regard to travel and entertainment expenses, the taxpayer must still retain all of the Who, What, Where, Why, etc. information, and, as before, it MUST be contemporaneous.

In many cases, audited taxpayers have lost largely because they failed to keep "adequate records." In such situations, under the proposed law, the burden of proof will still rest with the taxpayer.

Cooperation -- The taxpayer must "cooperate with all reasonable requests by the IRS for meetings, interviews, witnesses, information, and documents," according to the Senate explanation of the legislation. Also, the taxpayer must provide the Commissioner with access to, and inspection of, witnesses, information, and documents within the control of the taxpayer, as "reasonably requested by the Commissioner."

It is easy to envision all-encompassing requests for information by the IRS, similar to that currently used in "discovery" proceedings by overzealous lawyers. It is easy to imagine IRS document requests listing pages and pages of particular information covering extended periods of time. This requirement must also be viewed in light of the well-known propensity of any government agency, but particularly the IRS, to go to great lengths to avoid having to bear the burden of proof.

Exhaustion of Administrative Remedies -- In nearly all tax matters, the taxpayer has the right to meet with the Appeals Division of the Internal Revenue Service. Often, meeting with the IRS Appeals Division is counterproductive and a waste of the client's money. If the issue is one of the "legal interpretation" of a statute and the IRS has already stated its position on the law, going to the Appeals Division is usually a waste of money and time. The Appeals Division is a part of the IRS and is bound to follow all legal positions taken by the IRS.

Even if the matter is still in the audit stage, another practical consideration is that it usually takes less time for an attorney to prepare a petition to the Tax Court than it does to prepare a protest to the Appeals Division. Often, a taxpayer's attorney will request that the Statutory Notice of Deficiency be issued because the client is frustrated with an IRS agent and supervisor who have been difficult, and the prospect of going to the Appeals Division would lead to more of the same.

While, technically, the burden of proof may be changed in a few cases, the probabilities are that the IRS will make investigations increasingly burdensome for taxpayers in order to avoid having the burden of proof. In the past, the IRS has shown amazing propensities for avoiding the burden of proof. It is likely that the fear of having the burden of proof will continue or, even worse, increase. Expect the IRS to make audits much more burdensome than they have been in the past. So much for tax relief.

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