Let’s understand how the burden of proof works in cases before the U.S. Tax Court.
First, let’s understand the concept of the presumption of correctness, which forms the foundation for allocating the burden of proof before the U.S. Tax Court. Understanding this presumption is essential, as it assumes the IRS’s determination is correct and shifts the burden to the taxpayer to prove otherwise.
When the IRS issues a notice of deficiency to a taxpayer, it carries a built-in legal advantage known as the presumption of correctness. This simply means that the IRS’s determination is presumed correct unless the taxpayer can prove otherwise. In other words, the IRS does not have to prove that its assessment is correct. Instead, the burden falls on the taxpayer to show that the IRS got it wrong.
It is important to understand that the presumption of correctness does not mean the IRS has already proven its case. It simply means the taxpayer should step forward and provide credible evidence to challenge it. If the taxpayer fails to do so, the court will generally side with the IRS and uphold its determination.
In international cases, satisfying this burden often demands foreign records, overseas witness testimony, and extensive translations.
Now, we understand that the primary burden of proof rests with the taxpayer under the presumption of correctness. However, there are situations where the burden may shift to the IRS. Next, let’s understand how the burden of proof shifts from the taxpayer to the IRS in the next section.
Enacted in 1998, IRC § 7491 permits the burden to shift to the IRS on factual issues when the taxpayer:
We’ve now covered how the burden of proof may shift away from the taxpayer to the IRS in specific situations. Next, let’s examine how the rules regarding burden of proof apply when the IRS is alleging that the taxpayer owes penalties.
The rules on the burden of proof shift depending on the type of tax penalties the IRS alleges. This may involve checking whether the IRS is alleging deliberate fraud or a less serious accuracy-related penalty. Understanding this distinction is important because it determines how much proof the IRS should present and what the taxpayer should do to defend themselves.
First, let’s understand the burden of proof in fraud-related penalties.
When the IRS asserts fraud, it bears the burden of proof by clear and convincing evidence under IRC § 7454(a). This heightened standard applies even in international cases involving offshore accounts or unreported foreign income.
Next, let’s understand the burden of proof in accuracy-related penalties.
For accuracy-related penalties under IRC § 6662, the IRS is required to first produce evidence supporting the penalty (IRC § 7491(c)). The burden then shifts to the taxpayer to establish reasonable cause and good faith under IRC § 6664(c)
Next, let’s understand the burden of proof in the U.S. Court of Federal Claims.