Magazine article The CPA Journal

To What Extent Has It Really Shifted to the IRS? the Burden of Proof in Tax Controversies

Magazine article The CPA Journal

To What Extent Has It Really Shifted to the IRS? the Burden of Proof in Tax Controversies

Article excerpt

In Brief

It All Makes Sense

The word was out that the tax restructuring act of 1998 turned completely upside down the issue of who has to prove what in court proceedings involving the IRS. The burden of proof was said to have shifted to the IRS--apparently good news for the taxpayer, but perhaps not such good news for the tax preparer who deals with the IRS and its now apparent need to build a stronger case.

But the tax act did not throw out all the rules regarding what each party has to prove.

A complete understanding requires a look at the issues of burden of proof and standard of proof both before and after the IRS Restructuring and Reform Act of 1998. It is and oversimplification to say that the new law merely shifts the burden of proof in tax liability cases. It does not apply to taxpayer entities above a certin size, and those that do qualify must still meet the "Credible evidence" test.

Two tables and two exhibits clarify these somewhat complex issues.

The IRS Restructuring and Reform Act of 1998 (RRA '98), reflects the legislative branch's willingness to address several long-simmering issues pertaining to administration of the tax laws. With bipartisan support of the kind not seen since, Congress enacted provisions that, among other things, reallocate the burden of proof in civil tax litigation.

Ironically, the new burden of proof rules have aroused considerable constituent controversy since first being pro posed in the House of Representatives. Most taxpayers seem to favor the revisions, while many tax professionals are wary of them. Practitioners worry that IRS agents, knowing they may have to prove their case if litigation occurs, will become more intrusive during routine taxpayer examinations. Additionally, the complexity of the new burden of proof statutes might result in a surge of malpractice actions directed at tax advisors, who, because they are not trained in legal proceedings, might give faulty advice.

Practitioners and taxpayers will benefit from an overview of the fundamental rules regarding both the burden of proof and the standard of proof in tax adjudications. Pre-RRA '98 rules still come into play because many still apply. The two accompanying "penalty continuum" tables provide convenient pictorial summaries of the applicable provisions. Familiarity with the rules regarding burden of proof lessens the likelihood that an advisor will suggest actions not in a client's best interests.

The Genesis of Litigation: Tax Assessments

The Secretary of Treasury is charged with examining taxpayer returns and, if necessary, making an additional assess ment for taxes due. When the IRS, acting in the Secretary's stead, determines that an additional amount is due, it issues a Notice of Deficiency. The notice advises the taxpayer that an additional tax will be assessed in 90 days unless the taxpayer files a petition in the Tax Court. Civil tax litigation begins in one of two ways: Either the taxpayer files a Tax Court petition before the assessment is rendered, challenging the IRS's determination; or the taxpayer pays the tax, then challenges the assessment by suing for a refund. A refund suit is brought in a U.S. district court or in the U.S. Court of Federal Claims.

Criminal tax litigation works differently. The IRS must determine that a "wilful" violation has occurred. Then, the Government brings a judicial action. Criminal prosecution can occur without regard to whether a tax has been assessed. "Intent to evade" is not a required element for the crime of tax evasion. In particularly egregious situations, "reckless disregard" of tax rules, typically a basis for civil fraud, will satisfy the willfulness prerequisite for criminal charges.

Burden of Proof and Standard of Proof

Regardless of how the litigation begins, courts generally follow a long-standing common law tradition. The party bringing the lawsuit must introduce evidence to prove its case. …

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