The Burden of Proof in Tax Court: When the IRS Must Prove Its Case

The General Rule

Tax Court Rule 142(a) places the burden of proof on the petitioner, except as otherwise provided by statute or determined by the Court. The rule reflects a long-standing principle. In Welch v. Helvering, 290 U.S. 111 (1933), the Supreme Court described the Commissioner’s determination as having “the support of a presumption of correctness,” with the taxpayer bearing the burden of proving it wrong.

In practical terms, the Tax Court’s guidance for petitioners explains that a taxpayer needs to bring evidence to court, such as documents and the testimony of witnesses, to show that the IRS’s determination is not correct and that the taxpayer’s position is.

New Matters and Increased Deficiencies

Under section 6214(a), the IRS may ask the Tax Court to determine a deficiency larger than the one in the notice, if it asserts the claim at or before the hearing. Rule 142(a) places the burden of proof on the IRS for any new matter, increase in deficiency, or affirmative defense that it pleads in its answer. A new theory or a larger adjustment raised after the notice of deficiency therefore generally must be proven by the IRS.

Section 7491(a): Shifting the Burden on Factual Issues

Section 7491(a) shifts the burden of proof to the IRS on a factual issue if the taxpayer introduces credible evidence on that issue and also meets several conditions. The taxpayer must have complied with substantiation requirements, maintained required records, and cooperated with the IRS’s reasonable requests for witnesses, information, documents, meetings, and interviews. Partnerships, corporations, and trusts must also meet net worth limits.

These conditions are demanding. The Tax Court’s guidance notes that in most cases the burden of proof does not shift to the IRS.

A related rule, section 7491(b), places the burden on the IRS when it reconstructs an individual’s income solely through statistical information on unrelated taxpayers.

Penalties: The IRS’s Burden of Production

For individuals, section 7491(c) gives the IRS the burden of production in any court proceeding regarding a penalty, addition to tax, or additional amount. The IRS must come forward with evidence showing that the penalty applies. Taxpayers should still be prepared to present evidence supporting any defense they raise, such as reasonable cause and good faith.

Fraud

Section 7454(a) places the burden of proof on the IRS when it alleges fraud with intent to evade tax. Under Rule 142(b), the IRS must carry that burden by clear and convincing evidence, a higher standard than applies to most issues in a tax case.

Other Statutory Allocations

The rules allocate the burden in certain other situations as well. For example, in a transferee liability case the IRS must show that the petitioner is liable as a transferee, although it does not have to show that the original taxpayer was liable for the tax (Rule 142(d)).

What This Means in Practice

Because the taxpayer usually bears the burden, records matter. Receipts, invoices, bank statements, contemporaneous logs, contracts, and credible testimony from people with first-hand knowledge are typically the evidence that carries a case.

For example, if the IRS disallows a business expense deduction, the taxpayer generally needs to show that the expense was paid, that it was an ordinary and necessary business expense, and that any specific substantiation rules for that type of expense were met. If the IRS also asserts an accuracy-related penalty against an individual, the IRS must produce evidence supporting the penalty, and the taxpayer may present evidence of a defense.

Stipulations also matter. Facts the parties agree on in a stipulation do not need to be proven at trial, which allows the evidence to focus on the issues that remain in dispute.