the Burden-of-Proof Rules in Federal Tax Cases
Tanya M. Marcum
2005 - The Internal Revenue Service Restructuring and Reform
Act of 1988 was intended to simplify tax collection and administration
and to better protect taxpayers from the perceived overzealous
agents of the IRS. One of the law’s provisions shifted
the burden of proof from the individual taxpayer to the IRS
in the U.S. Tax Court, the federal district courts, or the
Court of Federal Claims. For this burden of proof to actually
shift from the taxpayer to the IRS, however, certain contingencies
must first be satisfied by the taxpayer.
to the changes, a taxpayer contesting an IRS audit had the
burden of proof to show in court that the tax deficiency
was in error or that a tax refund was due. Essentially,
taxpayers had to show that they were entitled to deductions
and tax credits or that they had reported the correct income
on the form filed with the IRS. Under the new law, Congress
intended for taxpayers to cooperate with the audit, and
upon its completion, if there was still a dispute and a
court proceeding commenced, the IRS would have the burden
of proof in the case. Taxpayers must first prove that they
have complied with the requirements of the law before the
burden of proof is shifted.
Tax Court Process
who contests the findings of an audit by the IRS and has
not paid the contested deficiency in tax can file a petition
in the U.S. Tax Court. This petition is usually a result
of the receipt by the taxpayer of a notice of deficiency.
A statutory notice of deficiency prepared by the IRS indicates
that an audit has been completed, that a deficiency in tax
has been determined, and that this deficiency can be contested
by the taxpayer. The deadline for filing a petition with
the U.S. Tax Court is 90 days from receipt of the notice;
150 days if the taxpayer is outside of the U.S. A taxpayer
who contests a deficiency but pays it can also contest the
IRS’s position and file a claim for refund with the
U.S. District Court in the appropriate jurisdiction.
to the IRS Restructuring and Reform Act, there was a long-established
principle of tax law that the IRS’s determinations
in the statutory notice of deficiency were presumptively
correct (Welch v. Helvering [290 U.S. 111 (1933)]
and Rule 142(a), Tax Court Rules of Practice and Procedure).
The taxpayer also bore the burden of proving that the IRS’s
determinations were incorrect. A taxpayer would not prevail
by merely asserting that the return was correct as filed.
Other evidence was necessary to substantiate the deductions
that the taxpayer claimed [Wilkinson v. Comm’r,
71 TC 633 (1979)]. The IRS ordinarily requested from the
taxpayer the information that was needed to substantiate
an issue during the audit. If providing the information
made the issue no longer contested, it would then be considered
resolved between the parties.
IRS Restructuring and Reform Act introduced IRC section
7491(a)(1), which states that if a taxpayer introduces credible
evidence about any factual issue relevant to ascertaining
the liability for any tax imposed by subtitle A or B, the
IRS will have the burden of proof with respect to such issue.
In a bankruptcy court action, the court determined that
this new section did not apply to an audit that began before
the enactment of the law [Berardi v. U.S., 2002-2
USTC P 50736, 90 AFTR ed 7554 (ED Pa 2002); aff’d
70 Fed Appx 660, 92 AFTR 2d 5669 (CA3 2003)]. The examination
must begin after July 22, 1998, for the burden of proof
to be shifted to the IRS.
burden of proof in any case means that the party must prove
the allegations brought forth by them in the complaint.
More specifically, this burden of proof means the burden
of production and the burden of persuasion. The burden of
production means that the party must present prima facie
evidence to have an issue decided by the trier of fact.
The burden of persuasion requires the party to establish
the merits of the claim by a preponderance of the evidence.
of the Changes by the Tax Court
Tax Court opinions refer to the party with the burden of
proof. A footnote usually references the Internal Revenue
Code section and the date of the commencement of the examination
by the IRS. Such a footnote would indicate that the Tax
Court has given a summary review of the issue. If the burden
of proof were a contested issue, then the court would discuss
the resolution of the issue in the body of the opinion itself.
some cases, the IRS and the taxpayer have filed a stipulation
of facts with the court as to the actions of the taxpayer
during the audit. These facts are agreed upon by both parties
and will not need to be proved during the trial. If the
court finds that the taxpayer has complied with the law
regarding substantiation and cooperation, the burden of
proof falls on the IRS. If it finds that the taxpayer has
not complied, the burden of proof would then remain with
the taxpayer for the duration of the trial. In some cases,
pretrial motions will require the court to determine which
party bears the burden of proof.
the IRS to have the burden of proof in a tax case, certain
conditions or contingencies must first be met by the taxpayer.
IRC section 7491(a)(2) indicates that the taxpayer must
do three things for the burden of proof to shift to the
IRS: substantiation of all claimed items; long-term maintenance
of records; and cooperation at all stages with the IRS.
taxpayer must comply with the substantiation and record-keeping
requirements of the IRC. The substantiation requirements
include any requirement under the IRC or Treasury Regulations
for the taxpayer to establish an item to the IRS’s
satisfaction, generally proof of a deduction or expense.
This may include receipts, journals, statements, logs, accounting
records, or other such proof. The taxpayer must also maintain
these records over time. These records must also be made
contemporaneously with the event that generates the deduction
cooperation with the IRS at all times during the audit is
paramount in order for the burden of proof to lie with the
IRS. If the IRS requests a document, the taxpayer must produce
it. If the IRS requests a meeting or conference, the taxpayer
must cooperate. In Redman v. Commissioner [T.C.
Summary Opinion 2003-42 (April 22, 2003)], the court looked
at the new law to determine if the burden of proof shifted
from the taxpayer to the IRS. The case revolved around whether
the head-of-household filing status was applicable for the
taxable year involved. The court ruled that section 7491
was not applicable because the taxpayer could not establish
cooperation, substantiation, or the maintenance of applicable
Is Credible Evidence?
the new law states that the evidence must be credible, it
does not define the term “credible evidence.”
The Conference Report preceding the enactment of the IRS
Restructuring and Reform Act states the following:
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 the IRS correctness). A taxpayer has not produced credible
evidence for these purposes if the taxpayer merely makes
implausible factual assertions, frivolous claims, or tax
protestor-type arguments. The introduction of evidence
will not meet this standard if the court is not convinced
that it is worthy of belief. If after evidence from both
sides the court believes that the evidence is equally
balanced, the court shall find that the Secretary has
not sustained his burden of proof.
Tax Court has applied the language from the Conference Report
in cases where the burden of proof has become an issue.
Mentzel v. Comm’r (TC Summary Opinion 2003-38,
which cannot be treated as precedent for any other case),
the issue was whether the taxpayer was entitled to a dependency
exemption. The court ruled that the taxpayer had failed
to provide credible evidence, leaving him with the burden
of proof for that issue. An item of proof or substantiation
that was not provided to the court was proof that he was
the custodial parent during the year at issue. He did not
attach to his tax return a written declaration by his ex-spouse
indicating that he was the custodial parent of the minor
child for the year. The taxpayer could not prove that he
provided more than one-half of the support for his child.
Griffin v. Commissioner [TC Memo 2004-64 (March
11, 2004); 315 F.3d 1017 (8th Cir. 2002), rev’g and
remanding 83 T.C.M. (CCH) 1058, 2002 T.C.M. (RIA) P2002-006],
the Tax Court examined the issue of credible evidence. Robert
and Julia Griffin owned all of the stock of Griffin California
Enterprises, Inc. Robert paid substantial delinquent real
property taxes on partnership property for 1995 and 1996
and claimed the tax payments as deductible expenses on Schedule
E, Supplemental Income and Loss. The IRS disallowed the
deduction during an audit because it was not their expense,
but the expense of another taxpayer.
Tax Court determined that the burden of proving that the
expenses were deductible was on the Griffins because they
failed to introduce credible evidence that they were engaged
in a trade or business for which the tax payments would
have been ordinary and necessary business expenses. The
8th Circuit Court of Appeals overruled the Tax Court’s
decision, finding that the Griffins’ testimony in
the Tax Court constituted credible evidence. The case was
remanded back to the Tax Court, and the burden of proof
was on the IRS. The IRS could not provide evidence to overcome
the testimony, and the Tax Court allowed the tax payments
as deductions for ordinary and necessary business expenses.
Gale v. Comm’r [83 TCM 1270 (2002)], the
court ruled that an admission by the taxpayer that income
was received was sufficient evidence to shift the burden
of proof to the IRS. In Tanner v. Comm’r
[91 AFTR 2d 1842 (5th Cir. 2003)], the court ruled that
an undisputed Form 1099 was credible evidence to shift the
burden of proof to the IRS. The burden only shifted because
the taxpayer introduced evidence with respect to a factual
issue relevant to the determination of the tax liability.
another case, a small claims court petition that sought
to recover a loss due to home damage was not considered
credible evidence of a casualty loss. The taxpayer’s
receipts were also not credible evidence without independent
evidence of its donated value for a claimed charitable contributions
deduction [Higbee v. Commissioner, 116 TC 438 (2001)].
evidence for travel, entertainment, business gift, or local
transportation expenses can be proven by some simple acts
by the taxpayer. If a taxpayer keeps timely and accurate
records that substantiate these expenses, there should be
enough credible evidence to satisfy the court. These records
must be contemporaneous with the occurrence of the expense,
not reproduced for an audit or the court. Written records
are given greater weight than oral testimony. Cancelled
checks and credit card receipts should be kept in a journal
indicating the date, destination, and business purpose for
each expense. For entertainment expenses, the taxpayer should
note the business benefit gained or expected to be gained,
and the recipients of the entertainment expenses.
items taken together are proof of actually incurring these
expenses by the taxpayers and their purpose toward a business
or individual tax deduction.
record-keeping is essential in protecting deductions during
an IRS audit. The IRS operates during an audit under the
basic premise of “no substantiation, no deduction.”
The best records indicate whom one has paid, when one has
paid them, how much one has paid them, and what type of
expense was incurred. If the audit remains contested, good
record-keeping should cause the Tax Court to find that the
IRS should bear the burden of proving that the deductions
are not legitimate.
M. Marcum, JD, is an assistant professor in the department
of finance and law at Central Michigan University, Mt. Pleasant,