Law Office Of David C. Dodge, Inc. A Professional Corporation

A Tax Lawyer's Advice

Newsletter For Businesses And Their Owners

Fourth

BUSINESSES BEWARE:

The New Burden Of Proof Shift
To The I.R.S. In Court Proceedings Is Not What You May Think

Despite all the recent media coverage praising the Revenue Service's new burden of proof in Court proceedings, taxpayers should beware of its many pitfalls. In this article, I argue the Revenue Service gained more procedurally than taxpayers, and taxpayers will suffer increased costs in audits and in litigation.

HOW TO SHIFT THE BURDEN OF PROOF TO THE IRS

To shift the burden of proof in court proceedings to the Revenue Service, a taxpayer must satisfy three conditions

First, the taxpayer must comply with substantiation and record keeping requirements. In other words, taxpayers still must present pretrial credible evidence to the Revenue Service with respect to a factual issue necessary to determine the taxpayer's liability. Credible evidence means evidence the Court would find sufficient to make a decision -- like general ledgers, bank statements, etc.

Second, the taxpayer must cooperate with the Revenue Service's pretrial reasonable requests for witnesses, information, documents, meetings, interviews, etc. Cooperation includes (a) timely providing access to these items within the taxpayer's control; (b) reasonably assisting the Revenue Service with these items not within the taxpayer's control; and (c) exhausting all available administrative remedies including Revenue Service appeals.

Third, shifting the burden to the Revenue Service in Court proceedings is not available for taxpayers other than individuals with

a net worth over $7 million (ie. corporations or trusts).

RELATED PROVISIONS

Where the Revenue Service seeks to establish in Court through the sole use of statistical information of any item of an individual's reconstructed income, it has the burden of proof to that item of income. An example of statistical information would be average income in an area where the taxpayer lives. Also, where the Revenue Service seeks to assess a penalty to an individual, it has the burden of production that the penalty should apply (but the individual still has the burden of proof to establish any penalty defenses).

PITFALL #1- REVENUE AGENTS WILL INCREASE THE INTENSITY OF AUDITS

Arguing that taxpayers may be successful in shifting the burden of proof in Court proceedings to the Revenue Service, revenue agents now have a new weapon against taxpayers. Revenue agents can now increase the aggressiveness and intrusiveness of audits to obtain more evidence to satisfy the Revenue Service's potential burden of proof. This provides a far greater procedural benefit to the Revenue Service because approximately 99% of all audits will conclude without proceeding to Tax Court. Thus, the Revenue Service can be more aggressive and more intrusive in audits with only an approximate 1% chance of ever facing a potential burden of proof issue in Court.

PITFALL #2 - SEEKING TO SHIFT THE BURDEN OF PROOF MAY BE A PROCEDURAL DISASTER IN SOME CASES

Sometimes the Revenue Service cannot obtain evidence on its own that would harm the taxpayer. Where the taxpayer could obtain such evidence, it is often better to delay introduction of such evidence until after a Tax Court

petition is filed.

After the Revenue Service's audit concludes, taxpayers may conduct a Revenue Service administrative appeal. While this is required to successfully shift the burden of proof in court, it can be a procedural disaster for the taxpayer because the Revenue Service may raise new issues at administrative appeal. When there are "skeletons in the closet" not addressed during the audit it is wise to bypass the administrative appeal and proceed directly to Tax Court where new issues are rarely raised.

PITFALL #3 - TAXPAYERS WILL PAY HIGHER AUDIT AND LITIGATION COSTS

Taxpayers will end up paying more fees to their representative to defend against more aggressive audits from revenue agents. The requisite administrative appeals involve considerable time where interest and penalty will continue to accrue. Pretrial litigation costs will soar to determine whether the taxpayer "cooperated" or presented "credible evidence" with/to the Revenue Service. In practice it is the Revenue Service that has gained with more procedural traps for taxpayers.

This newsletter does not represent legal advice - it is a general information tool.

This newsletter is authored by
David C. Dodge, JD, CPA, MBA. He is a civil and criminal tax litigation lawyer. His main office is located at David C. Dodge, Inc., 19200 Von Karman Avenue, Suite 400, Irvine, CA 92612.

Telephone: (714) 378-4355
Facsimile: (714) 963-1115
Email: ATaxLawyer@aol.com