III. Taxpayer Bill of Rights 3
A. Burden of Proof
Under present law, a rebuttable presumption exists that the Commissioner's determination
of tax liability is correct. "This presumption in favor of the Commissioner is a procedural device
that requires the plaintiff to go forward with prima facie evidence to support a finding contrary to
the Commissioner's determination. Once this procedural burden is satisfied, the taxpayer must still
carry the ultimate burden of proof or persuasion on the merits. Thus, the plaintiff not only has the
burden of proof of establishing that the Commissioner's determination was incorrect, but also of
establishing the merit of its claims by a preponderance of the evidence".
The general rebuttable presumption that the Commissioner's determination of tax liability is
correct is a fundamental element of the structure of the Internal Revenue Code. Although this
presumption is judicially based, rather than legislatively based, there is considerable evidence that
the presumption has been repeatedly considered and approved by the Congress. This is the case
because the Internal Revenue Code contains a number of civil provisions that explicitly place the
burden of proof on the Commissioner in specifically designated circumstances. The Congress
would have enacted these provisions only if it recognized and approved of the general rule of
presumptive correctness of the Commissioner's determination. A list of these civil provisions
(1) Fraud.--Any proceeding involving the issue of whether the taxpayer has been guilty of
fraud with intent to evade tax (Secs. 7454(a) and 7422(e)).
(2) Required reasonable verification of information returns.--In any court proceeding, if a
taxpayer asserts a reasonable dispute with respect to any item of income reported on an information
returned filed with the Secretary by a third party and the taxpayer has fully cooperated with the
Secretary (including providing, within a reasonable period of time, access to and inspection of all
witnesses, information, and documents within the control of the taxpayer as reasonably requested
by the Secretary), the Secretary has the burden of producing reasonable and probative information
concerning such deficiency in addition to such information return (Sec. 6201(d)).
(3) Foundation managers.--Any proceeding involving the issue of whether a foundation
manager has knowingly participated in prohibited transactions (Sec. 7454(b)).
(4) Transferee liability.--Any proceeding in the Tax Court to show that a petitioner is liable
as a transferee of property of a taxpayer (Sec. 6902(a)).
(5) Review of jeopardy levy or assessment procedures.--Any proceeding to review the
reasonableness of a jeopardy levy or jeopardy assessment (Sec. 7429(g)(1)).
(6) Property transferred in connection with performance of services.--In the case of
property subject to a restriction that by its terms will never lapse and that allows the transferee to
sell only at a price determined under a formula, the price is deemed to be fair market value unless
established to the contrary by the Secretary (Sec. 83(d)(1)).
(7) Illegal bribes, kickbacks, and other payments.--As to whether a payment constitutes an
illegal bribe, illegal kickback, or other illegal payment (Sec. 162(c)(1) and (2)).
(8) Golden parachute payments.--As to whether a payment is a parachute payment on
account of a violation of any generally enforced securities laws or regulations (Sec. 280G(b)(2)(B)).
(9) Unreasonable accumulation of earnings and profits.--In any Tax Court proceeding as
to whether earnings and profits have been permitted to accumulate beyond the reasonable needs of
the business, provided that the Commissioner has not fulfilled specified procedural requirements
(10) Expatriation.--As to whether it is reasonable to believe that an individual's loss of
citizenship would result in a substantial reduction in the individual's income taxes or transfer taxes
(Secs. 877(e), 2107(e), 2501(a)(4)).
(11) Public inspection of written determinations.--In any proceeding seeking additional
disclosure of information (Sec. 6110(f)(4)(A)).
(12) Penalties for promoting abusive tax shelters, aiding and abetting the understatement of
tax liability, and filing a frivolous income return.--As to whether the person is liable for the penalty
(13) Income tax return preparers' penalty.--As to whether a preparer has willfully
attempted to understate tax liability (Sec. 7427).
(14) Status as employees.--As to whether individuals are employees for purposes of
employment taxes (pursuant to the safe harbor provisions of section 530 of the Revenue Act of
Description of Proposal
The proposal would provide that the Secretary shall have the burden of proof in any court
proceeding with respect to a factual issue if the taxpayer introduces credible evidence with respect
to the factual issue relevant to ascertaining the taxpayer's income tax liability. Four conditions
apply. First, the taxpayer must comply with the requirements of the Internal Revenue Code and
the regulations issued thereunder to substantiate any item (as under present law). Second, the
taxpayer must maintain records (as under present law). Third, the taxpayer must cooperate with
reasonable requests by the Secretary for meetings, interviews, witnesses, information, and
documents. Fourth, taxpayers other than individuals must meet the net worth limitations that apply
for awarding attorney's fees (accordingly, no net worth limitation would be applicable to
The proposal would also provide that in any instance in which the Secretary uses arbitrary
statistics to determine the taxpayer's income (such as average income for the area in which the
taxpayer lives), the burden of proof would be on the Secretary with respect to that issue.
Finally, the proposal would provide that, in any court proceeding, the Secretary must
initially come forward with evidence that it is appropriate to apply a particular penalty to the
taxpayer before the court can impose the penalty.
The proposal would apply to court proceedings arising in connection with examinations
commencing after the date of enactment.
B. Proceedings by Taxpayers
1. Expansion of authority to award costs and certain fees
Any person who substantially prevails in any action by or against the United States in
connection with the determination, collection, or refund of any tax, interest, or penalty may be
awarded reasonable administrative costs incurred before the IRS and reasonable litigation costs
incurred in connection with any court proceeding. Reasonable administrative costs are defined as
(1) any administrative fees or similar charges imposed by the IRS and (2) expenses, costs and fees
related to attorneys, expert witnesses, and studies or analyses necessary for preparation of the
case, to the extent that such costs are incurred before earlier of the date of the notice of decision by
IRS Appeals or the notice of deficiency (Sec. 7430(c)(2)). Net worth limitations apply.
Reasonable litigation costs include reasonable fees paid or incurred for the services of
attorneys, except that the attorney's fees will not be reimbursed at a rate in excess of $110 per hour
(indexed for inflation) unless the court determines that a special factor, such as the limited
availability of qualified attorneys for the proceeding, justifies a higher rate.
Rule 68 of the Federal Rules of Civil Procedure (FRCP) provides a procedure under which
a party may recover costs if the party's offer for judgment was rejected and the subsequent court
judgment was less favorable to the opposing party than the offer. The offering party's costs are
limited to the costs (excluding attorney's fees) incurred after the offer was made. The FRCP
generally apply to tax litigation in the district courts and the United States Court of Federal Claims.
Description of Proposal
The proposal would:
- (1) move the point in time after which reasonable administrative costs can be awarded to
the date on which the first letter of proposed deficiency which allows the taxpayer an
opportunity for administrative review in the IRS Office of Appeals is sent;
- (2) permit awards of reasonable attorney's fees at the prevailing rate for the locality;
- (3) permit the award of attorney's fees to specified persons who represent for no more
than a nominal fee a taxpayer who is a prevailing party;
- (4) provide that in determining whether the position of the United States was substantially
justified, the court shall take into account whether the United States has lost in other courts
of appeal on substantially similar issues; and
- (5) provide that if a taxpayer makes an offer after the taxpayer has a right to administrative
review in the IRS Office of Appeals, the IRS rejects the offer, and later the IRS obtains a
judgment against the taxpayer in an amount that is equal to or less than the taxpayer's offer
for the amount of the tax liability (excluding interest), reasonable costs and attorney's fees
from the date of the offer would be awarded.
The above awards would apply subject to the same net worth limitations as under present law.
The proposal would apply to eligible costs and services incurred more than 180 days after
the date of enactment.