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ROBERT E. MCKENZIE, ESQ.

ARNSTEIN & LEHR


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By: Robert E. McKenzie

It Switches to IRS Only If Taxpayer Proves Four Eligibility Requirements Met!

Under prior law, there is a rebuttable presumption that IRS's determination of tax liability is correct, and therefore (with some exceptions
such as fraud), the burden of proof is on the taxpayer to show that the IRS's determination was wrong, and to show the merit of his or her
claims by a preponderance of evidence. The Bill provides that the Secretary shall have the burden of proof in any court proceeding with
respect to a factual issue related to income, estate, gift, and generation-skipping transfer taxes if the taxpayer introduces credible
evidence relevant to ascertaining the taxpayer's income tax liability. To be eligible, the taxpayer must prove that he or she

1. has complied with present-law statutory and regulatory substantiation requirements of any item,

2. has met present-law recordkeeping requirements;

3. has cooperated with reasonable IRS requests for meetings, interviews, witnesses, documents, and information; and

4. met the net worth limitations if not an individual, (i.e., qualifies under net worth limitations for awarding attorneys' fees such as
a corporation, trust, or partnership, whose net worth does not exceed $7 million). Therefore, corporations, trusts, and
partnerships whose net worth exceeds $7 million aren't eligible to shift the burden of proof (Act §3001(a); Code §7491(a)).

What is cooperation? Cooperation encompasses: providing reasonable assistance to the IRS in accessing witnesses, information, and
documents not within the taxpayer's control, including providing English translations for witnesses or documents located in foreign
countries; exhausting administrative remedies, including IRS appeal rights; and establishing the applicability of a privilege.
Cooperation does not require that the taxpayer agree to extension of the limitations period.

What is credible evidence? Credible evidence is the quality of evidence which, after critical analysis, the court would find sufficient
upon which to base a decision on the issue if no contrary evidence were submitted, without regard to the judicial presumption of IRS
correctness. Implausible factual assertions, frivolous claims, or tax protestor-type arguments are not credible evidence. The IRS has not
met its burden if the court finds that the evidence is equally balanced.
Query: Will IRS become more intrusive because of desire to collect information from taxpayer at the very beginning of the audit
process?

Query: Clearly, litigation costs will increase because the IRS will require the taxpayer to prove they have met the four conditions for the
shift to occur. For example, to what extent will taxpayers have to prove they have met the substantiation and recordkeeping rules?

IRS Must Prove Statistically Computed Income.

When the IRS uses statistical information from unrelated taxpayers solely to reconstruct an individual taxpayer's income (such as found in
life-style or financial status audits), the burden of proof is also on the IRS with respect to the income items reconstructed (Act §3001(b),
Code §7491(b)).

Use of Financial Status Audits Limited

The Bill prohibits the IRS from using financial status or economic reality examination techniques to determine the existence of unreported
income unless there is a "reasonable indication" that there is a likelihood of unreported income (Act §3412; Code §7602; effective on
July 22, 1998).

When IRS Wishes to Impose Penalty, Burden of Proof Is on IRS.

In any court proceeding the IRS must initially come forward with evidence that it is appropriate to apply a particular penalty before the
court can impose the penalty. If the taxpayer believes the penalty is not appropriate due to reasonable cause, substantial authority, or a
similar provision, the taxpayer must raise those issues (Act §3001; new Code §7491; effective date: applicable to court proceedings
arising in connection with examinations commencing after July 22, 1998. If there is no examination, it applies to court proceedings
arising in connection with taxable periods or events beginning or occurring after July 22, 1998).

Send us a message! Email us at remckenzie@arnstein.com.


Last update: Jan. 19, 2000