Who has to prove what in a Tax Court case?

In most Tax Court cases the taxpayer has to prove the IRS's determination wrong: Tax Court Rule 142(a) puts the burden of proof on the petitioner. There are important exceptions. The IRS carries the burden on new matters and increased deficiencies it raises in its answer, must prove fraud by clear and convincing evidence, must come forward with evidence on penalties against individuals, and can take on the burden for a factual issue when you introduce credible evidence and have kept records and cooperated (IRC 7491(a)).

The rules reward taxpayers who documented their returns before any dispute began, which is why records matter long before trial. Burden of proof runs through every case in Kathryn Meyer's tax litigation practice.

Who bears the burden on each kind of issue?

How the burden plays out in a case, step by step

1. The petition. Rule 34(b) requires lettered assignments of every error you say the IRS made, including errors on which the IRS has the burden, and the facts supporting each error on which you carry the burden.
2. The answer. Rule 36(b) requires the IRS to state every ground, with supporting facts, on which it relies and has the burden of proof. Any material allegation in your petition that the answer does not admit or deny is deemed admitted (Rule 36(c)).
3. The reply. If the answer alleges matters on which the IRS has the burden, such as fraud, Rule 37 gives you 45 days to reply, admitting or denying each of those allegations. If you file no reply, those allegations are treated as denied unless the IRS moves within 45 days to have specific allegations deemed admitted, a motion the court may grant if you still do not file the reply it directs (Rule 37(c)).
4. Stipulations. Rule 91(a) requires both sides to stipulate everything that fairly should not be in dispute, "without regard to where the burden of proof may lie."
5. Trial. Evidence comes in under the Federal Rules of Evidence (Rule 143(a)). Statements in briefs, unadmitted allegations in pleadings and ex parte affidavits are not evidence (Rule 143(c)), so what you assert must be proved through testimony and documents.

Most of this proof is assembled in the stipulation of facts and the exhibits exchanged before trial, which are explained in what happens before a Tax Court trial.

How the burden can shift to the IRS under section 7491(a)

Section 7491(a)(1) says that if you introduce "credible evidence" on a factual issue relevant to your income tax liability, the IRS has the burden of proof on that issue. The shift applies only if all of these conditions in section 7491(a)(2) are met:

1. you complied with the Code's requirements to substantiate the item;
2. you maintained all records the Code requires; and
3. you cooperated with the IRS's reasonable requests for witnesses, information, documents, meetings and interviews.

A partnership, corporation or trust must also meet the net worth limits in IRC 7430(c)(4)(A)(ii), the same $7 million and 500-employee limits that apply to cost awards. And section 7491(a)(3) says the shift does not apply where another Code provision sets a specific burden for the issue.

In practice, the conditions make the shift hardest to use where taxpayers most need it: if the records are missing, the burden usually stays with you. The record-keeping rules for business deductions, including the strict proof required for travel, gifts and vehicles under section 274(d), are explained in what records the IRS requires to support business deductions. Cooperation during the audit, such as answering each Information Document Request on time, is part of the same test.

How the burden works for penalties and fraud

For penalties against individuals, section 7491(c) gives the IRS the burden of production: it must come forward with evidence that the penalty is appropriate before you need to show a defense such as reasonable cause. What the IRS must show for the accuracy-related penalty, including written supervisory approval, is covered in what penalties the IRS can add after an audit.

Fraud is different in kind. Under Rule 142(b) and IRC 7454(a), the IRS must prove fraud with intent to evade tax by clear and convincing evidence, a higher standard than the usual one. Fraud matters beyond the 75 percent civil fraud penalty because a fraudulent return has no limitation period for assessment, as explained in how far back the IRS can audit your tax returns. The signs examiners look for are described in the warning signs that a civil IRS audit could turn criminal.

What changes the answer

• Whether the IRS raised something new. An issue the IRS first raises in its answer, or an increase beyond the notice, is the IRS's to prove under Rule 142(a)(1).
• Whether you can substantiate. Without the records the Code requires, section 7491(a) does not shift the burden, and some deductions cannot be allowed without specific proof.
• Third-party information returns. If a Form W-2 or 1099 is wrong and you reasonably dispute it while cooperating, section 6201(d) requires the IRS to produce more than the form; mismatches usually start with a CP2000 notice.
• The kind of case. In collection cases the court usually reviews Appeals' decision for abuse of discretion rather than deciding facts anew; see how the Tax Court reviews a Collection Due Process decision.
• Small case procedure. In a small case, the court may admit any evidence with probative value (Rule 174(b)), but the burden of proof rules do not change.
• The taxpayer type. Larger businesses and trusts outside the net worth limits cannot use section 7491(a) at all.

For example: a mileage log and a 1099

For example, imagine a self-employed consultant whose notice of deficiency disallows $14,000 of vehicle expenses, adds $9,000 of income from a Form 1099 she says was issued in error, and imposes an accuracy-related penalty. On the vehicle expenses, the burden starts with her; she has a contemporaneous mileage log meeting section 274(d), kept the records the Code requires, and answered every IRS request during the audit, so if her testimony and log are credible, section 7491(a) can shift the burden on that factual issue to the IRS. On the 1099 income, she raised a reasonable dispute and cooperated, so section 6201(d) requires the IRS to produce reasonable and probative information beyond the form itself. On the penalty, the IRS has the burden of production under section 7491(c). If the IRS's answer had also alleged fraud, it would have to prove that by clear and convincing evidence. This is a hypothetical, not a real case.

Common mistakes about the burden of proof

• Assuming the IRS must prove its case. On most issues in the notice, the taxpayer carries the burden.
• Relying on testimony without records. Section 7491(a) requires substantiation and records before the burden can shift.
• Refusing reasonable requests in the audit. Lack of cooperation can block the shift later.
• Ignoring a wrong information return. The 6201(d) protection requires you to raise a reasonable dispute and cooperate.
• Treating penalties as automatic. For individuals the IRS must first produce evidence supporting them.
• Waiting until trial to organize evidence. Rule 91 stipulations and settlement talks turn on the evidence you can show early.

What to do this week

1. List each adjustment in the notice and mark who bears the burden on it.
2. Gather the records that substantiate each disputed item, organized by year and issue.
3. Note every IRS request during the audit and how and when you answered it.
4. Identify any information return you dispute and the evidence that it is wrong.
5. Check whether the IRS's answer raises new matters or increases the deficiency.

Frequently asked questions

What counts as "credible evidence"?

Section 7491 does not define the term, so whether evidence is credible is for the court to judge on the facts of the case. It shifts the burden only alongside the substantiation, records and cooperation the statute requires.

Does the burden matter if the case settles?

Yes. Each side weighs the strengths and weaknesses of its position, and who must prove what is central to that; see whether a Tax Court case can settle before trial.

Is the burden different in a small tax case?

No. The evidence rules are more flexible, but the burden of proof rules are the same; see small tax case or regular case.

Can the IRS reconstruct income without records?

Yes, but if it does so for an individual solely from statistics on unrelated taxpayers, section 7491(b) puts the burden on the IRS.

Does the burden change on appeal?

The court of appeals reviews the Tax Court's decision on the record made at trial; see whether you can appeal a Tax Court decision.

How long should records be kept?

At least as long as the IRS can assess tax for the year, which is generally three years and longer in some cases; the audit process is summarized in Understanding the IRS Audit Process.

Can planning before a dispute help?

Yes. Keeping records and correcting problems early is the focus of strategic tax counsel.

Building the record you will need

The burden of proof decides who must persuade the judge on each issue, and the records you keep decide whether you can. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel, trying Tax Court cases for the government, and now represents taxpayers. If you are preparing for a Tax Court case, contact the firm or call (571) 560-8674.

Sources

• Tax Court Rule 142, Burden of Proof
• 26 U.S.C. 7491, Burden of proof
• 26 U.S.C. 7454, Burden of proof in fraud cases
• 26 U.S.C. 6201, Assessment authority
• 26 U.S.C. 6001, Records
• IRS, How long should I keep records?
• 26 U.S.C. 7430, Awarding of costs and certain fees
• Tax Court Rule 34, Petition
• Tax Court Rule 36, Answer
• Tax Court Rule 37, Reply
• Tax Court Rule 91, Stipulations for Trial
• Tax Court Rule 143, Evidence
• Tax Court Rule 174, Trial (small tax cases)