Burden of Proof in Civil Tax Litigation (2024)

Meeting the burden of proof is a necessity to prevailing on your claim. There are two parts to the burden of proof: the burden of production and the burden of persuasion. The burden of production is a party’s obligation to present sufficient evidence to support their factual assertions. A judge, not a jury, will determine whether a party has satisfied its burden of production because it is an issue of law, not an issue of fact. The burden of persuasion, on the other hand, is met when a party has provided enough evidence to persuade the factfinder that a particular proposition is true and has met the requisite standard of persuasiveness. The three main evidentiary standards in tax litigation are: a preponderance of the evidence, clear and convincing evidence, and beyond a reasonable doubt.

• The preponderance of the evidence standard is the usual standard in civil tax trials and other civil trials. It is met when the party with the burden persuades the factfinder that there is a greater than 50% chance that his or her claim is true.
• The clear and convincing evidence standard is more rigorous than the preponderance of the evidence standard. It is satisfied when the party with the burden convinces the factfinder that his or her assertion is highly probable, not just more likely than not. It is required in cases involving fraud.
• The beyond a reasonable doubt standard is used in criminal tax cases and other criminal cases. It is the highest standard of proof. The US Supreme Court explained that reasonable doubt means “a doubt that would cause a reasonable person to hesitate to act.” Victor v. Nebraska, 511 U.S. 1 (1994).

Generally, the taxpayer will have the burden of proof, because the taxpayer has easier access to documents and information substantiating the items on his or her tax return. Pursuant to Internal Revenue Code Section 7491, however, the burden of proof shifts to the IRS in any court proceeding if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer’s tax liability. The burden of proof will shift only if:

1. The taxpayer has complied with the requirements under the Internal Revenue Code to substantiate any item;
2. The taxpayer has maintained all records required under the Internal Revenue Code and has cooperated with reasonable requests by the IRS for witnesses, information, documents, meetings, and interviews; and
3. If the taxpayer is a partnership, corporation, or trust, the taxpayer meets the net worth requirement of Section 7430(c)(4)(A)(ii).

WHEN THE IRS BEARS THE BURDEN OF PROOF

The IRS always bears the burden of proof in criminal tax cases. With respect to civil tax cases, the Internal Revenue Code explicitly provides that the IRS bears the burden of proof in the following situations:

1. Civil tax fraud cases (Section 7454(a));
2. When a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the IRS (Section 6201(d));
3. All proceedings involving a tax return preparer willfully attempting to understate a tax liability (Section 7427);
4. All proceedings involving an item of income which was reconstructed by the IRS solely through the use of unrelated taxpayers’ statistical information (Section 7491(b));
5. With respect to the liability for any penalty, addition to tax, or additional amount imposed by the Internal Revenue Code (Section 7491(c));
6. When the IRS contends that a payment is an illegal bribe, illegal kickback, or other illegal payment (Section 162(c));
7. Cases involving the issue of whether a levy or assessment was reasonable under the circ*mstances (Section 7429(g)); and
8. Cases involving the issue of whether a payment is a parachute payment (Section 280G(b)(2)(B)).

UNREPORTED INCOME AND DEDUCTIONS

With respect to issues regarding unreported income, the IRS must first provide some substantive evidence that the taxpayer received unreported income. The taxpayer must then show through evidence that the IRS’ determination is arbitrary or erroneous by a preponderance of the evidence. “This situation is rare and only occurs where the [IRS] has introduced no substantive evidence, and the evidence shows that the claimed tax deficiency arising from unreported income was derived by the government from unreliable evidence.” Gatlin v. Comm’r, 754 F.2d 921, 923 (11th Cir. 1985). On the other hand, when deductions are at issue, the taxpayer bears the initial burden of proof and must provide evidence supporting the amount and validity of the deductions.

US TAX COURT RULES OF PRACTICE AND PROCEDURE

As with other courts with specific subject-matter jurisdiction, the US Tax Court has its own rules of practice and procedure. According to the US Tax Court’s Rule 142, the burden of proof is on the taxpayer unless otherwise provided by statute or determined by the US Tax Court. Rule 142 explicitly places the burden of proof on the IRS in the following situations:

1. The IRS pleads a new matter, an increase in deficiency, or an affirmative defense in its answer;
2. The IRS alleges the taxpayer fraudulently intended to evade tax, which must be proved by clear and convincing evidence;
3. The case involves the knowing conduct of a foundation manager, a trustee, or an organization, which must be proved by clear and convincing evidence;
4. The IRS claims the petitioner is liable as a transferee of property of a taxpayer; or
5. The notice of deficiency is based in whole or in part on an allegation of accumulation of corporate earnings and profits beyond the reasonable needs of the business.

Since satisfying the burden of proof is a necessity to prevail in trial, you may want to consult with an attorney if you have a potential tax litigation matter. For any questions regarding the burden of proof or any other tax matter, please contact the tax attorneysat the Ben-Cohen Law Firm. Pedram Ben-Cohen has over 20 years of experience in tax matters and can advise you on your options. Our firm is unique as Pedram is an attorney, a CPA, and a Board Certified Taxation Law Specialist. Complete our online form or call us at (310) 272-7600.