IRS Restructuring and Reform Act of 1998
3001 - Burden of Proof
A. Provision(s) covered: Section 3001 (new I.R.C. § 7491). Burden of Proof.
B. Background: By statute or rule, the general burden of proof in court with
respect to establishing the taxpayers liability has always been placed upon the
taxpayer. There were exceptions to this rule made by statute, court rule, and federal
common law, but those exceptions were few. Under prior law, there was no specific burden
of proof rules with respect to proof of income by statistic averages or with respect to
penalties (except the fraud and other minor penalties); therefore, the taxpayer bore the
burden of proof with respect to those issues also.
Congress believed that the placement of the general burden of proof on the taxpayers
created the perception of guilt until proven innocent and that a better
balance would place the burden of proof on the government to show an increase in liability
if the taxpayer complied with the procedural and recordkeeping requirements of the tax
laws. That is, if the taxpayer was generally law-abiding, it should be the
governments responsibility to show that the taxpayers determination of
liability was not correct. Congress was also concerned that individual and small business
taxpayers, who are generally tax compliant, are at a disadvantage when forced to litigate
with the Service and the general burden of proof contributed to that unfairness or
appearance of unfairness.
Congress also believed that it is inappropriate in all cases for the taxpayer to be
required to disprove unreported income when the Service determined that income solely on
statistical information on unrelated taxpayers. Finally, Congress was concerned that in a
court proceeding, taxpayers often ignored the issue of penalties, and that they were
applied by the courts and the IRS by default. Therefore, it determined that
the IRS should not be able to rest on the presumption of correctness if it does not
provide any evidence whatsoever relating to penalties.
C. Change(s): Three changes were made in the burden of proof in tax litigation.
- A new provision places the general burden of proof on the Service with respect to
factual issues in certain situations. To qualify, the taxpayer must show that they have
complied with all the substantiation requirements; has maintained all the records required
by the Code; has cooperated with all the Service's reasonable requests for witnesses,
information, documents, meetings, and interviews; and meets certain net worth
- A second provision places the burden of proof on the Service if it asserts an item of
income based solely on statistical information relating to unrelated taxpayers. In this
event, there is no requirement that the taxpayer maintain records or cooperate with the
- A third provision provides that when the Service asserts penalties, additions to tax, or
additional amounts, the Service must initially produce evidence with respect to the
penalty before the general burden of proof rules apply.
- When taxpayers meet the prerequisites for a shift in the burden of proof, the Service
will have the burden to show the correctness of the Services position, rather than
rely upon the taxpayer to disprove the Services determination. However,
this shift should not pose an unreasonable obstruction to the Service in
determining the correct tax liability. Good auditing and good litigation practice, similar
to most determinations in the past, will ordinarily produce sufficient evidence to sustain
the burden of proof. That is, the Service and Chief Counsel have not, in the past,
generally relied upon the taxpayers failure of proof to sustain the asserted
liability, but rather have affirmatively shown the proper liability. Adherence to these
practices will satisfy the new standard, but it is now extremely important that a thorough
investigation and documentation of liability be done prior to the initiation of
- Further, the standard will now place greater emphasis and scrutiny as to the audit
process. Under prior law, determinations of the court were strictly de novo
meaning that what happened during the audit was immaterial -- the taxpayer needed to prove
the proper liability in court. Now, the exceptions to the burden of proof rule concentrate
on communications between the Service and the taxpayer during audit; that is, what
requests for information were made by the Service and did the taxpayer cooperate. Thus it
is essential that audit workpapers document the taxpayers cooperation and substantiation,
and the Services requests for information.
- There is some concern that, despite the explicit requirements that the taxpayer
substantiate items and cooperate with the Service, taxpayers may interpret the burden of
proof standard as meaning that they no longer need to do these things. Service personnel
thus should make the record maintenance and production requirements clear to taxpayers at
E. Necessary Actions
- Actions/Procedures: Revisions to the IRM and CCDM will need to be made to implement and
explain this provision. Additional guidance and training as to the impact of these
provisions will be necessary.
- The public and Service personnel must understand that these new standards do not, in any
way, detract from or minimize the responsibilities of taxpayers to properly determine, and
document, their tax liabilities. Local outreach, and individualized discussions, will be
necessary to continually underscore this point.
General Burden of Proof:
- Things we CANT do: The Service can no longer rely on the taxpayers failure
to satisfy the burden of proof in court cases where the taxpayer has a reasonable factual
dispute with the Service (provided the taxpayer has complied with the section 7491
- Things we CAN do: The Service can emphasize its examination procedures to further stress
good auditing techniques. Evidence should be gathered and preserved from the earliest
stage of a case, documenting whether the taxpayer has cooperated and the extent to which
he or she did cooperate and produce information. All requirements of the law with respect
to the treatment of an item for tax purposes should be explored and documented. Counsel
can similarly emphasize good trial preparation and evidence production practice to satisfy
the governments evidentiary burden.
- Things we CANT do: The Service cannot rely solely on statistical information such
as Bureau of Labor Statistics or Consumer Price Indexes to demonstrate unreported income.
Additional investigation and documentation of unreported income is required. Note that
this provision does not require direct evidence of income; however, the simple assertion
that the taxpayer must have income equal to the average of the areas population will
not be sufficient, without other evidence supporting that finding.
- Things we CAN do: The Service can use statistical information and this should be
sufficient to satisfy this provision and the general burden of proof, if, in addition to
the statistical information, the Service can show evidence that the taxpayers life
style or expenditures of funds was consistent with the statistical information. There is
no reason to abandon all usage of statistical information; rather a thorough examination
will likely produce other circumstantial evidence that will support the income
determination. In these instances, the use of statistical information will not be the sole
means to demonstrate income.
- Things we CANT do: We cannot assert penalties arbitrarily and without a firm
- Things we CAN do: Assert penalties when they objectively apply. Generally, workpapers
should demonstrate the applicability of the penalties asserted. That is, if the return was
delinquent or not filed, a printout of the module should be in the file attesting to the
date filed or that no return was filed. The taxpayer should always be requested to submit
an explanation of reasonable cause, if applicable for that penalty, and this response
should be documented in the file. At trial, the Service should obtain a stipulation of the
objective facts (e.g., late or nonfiling) or produce official Service records of that
F. Other Special Comments: Additional guidelines and instructions will be
provided. In the interim, Service personnel should use the guidelines above.