The Incredible Taxpayer: The U.S. Tax Court and I.R.C. §7491

In 1998, Congress passed a new law that says if a taxpayer has good evidence for why they don’t owe taxes, and they have kept good records, then the burden of proof is on the IRS to show that the taxpayer does owe taxes. There have been few cases that interpret this law, but one case in 2002 and another in 2003 give us an idea of how this law might affect taxpayers, their lawyers, and the IRS in tax court. When Congress made I.R.C. §7491 into law, they tried to make the tax dispute process fairer for individual and small business taxpayers. They changed the rules so that the IRS has to prove their case, instead of the taxpayer having to disprove it. This should level the playing field and make the process more fair for everyone involved. In the past, the Tax Court has been able to dismiss testimony from taxpayers if it seems biased or not believable. However, a new law shifts the burden of proof to the IRS if the taxpayer presents credible evidence. Credible evidence is defined broadly as evidence that a court would find sufficient to base a decision on, if no contrary evidence was submitted. The courts must now determine what counts as credible evidence. In a recent case, the Appeals Court overturned the Tax Court’s decision, signaling a potential change in how the Tax Court and the IRS evaluate taxpayer testimony. The IRS audited a taxpayer who owned stock in a corporation that owned partnerships with real estate. The taxpayer personally guaranteed loans for the partnerships and paid real property taxes, which he claimed as a tax deduction. The IRS said the payments were actually contributions to the corporation and deductible for the partnerships, so the taxpayer would only get 60% of the deduction. The taxpayer went to Tax Court, where he argued that he had been in the construction and land development business for a long time, and that the tax payments were necessary to protect his business. The IRS didn’t present any evidence. The Tax Court didn’t believe the evidence the taxpayer provided about their business activities and the reasons they made tax payments. They said the evidence wasn’t enough to support the taxpayer’s position. The taxpayer appealed the decision. The U.S. Court of Appeals for the Eighth Circuit reviewed a Tax Court decision and said that “credible evidence” means evidence that a court would find enough to make a decision if there was no contrary evidence. They found that the taxpayer did produce enough credible evidence to support their deductions, and the Tax Court was wrong not to make the IRS prove otherwise. The Eighth Circuit said the Tax Court needs to explain how it reached its decision if it doesn’t hold a new hearing or get more evidence. The Eighth Circuit’s interpretation of a new tax law might change the way the IRS and taxpayers argue in court. The Tax Court and other appeals courts will have to see how this plays out. The new law could make the Tax Court more strict about how they look at taxpayer evidence. It might also make the IRS be more active in proving their case. The new law says that taxpayer evidence should be taken seriously unless it’s really unbelievable or doesn’t make sense. In court, both the taxpayer’s lawyer and the IRS lawyer should not rely solely on the taxpayer’s testimony without other evidence to support it. Taxpayer lawyers should also not rely solely on a new law that shifts the burden of proof to the IRS. They need to make sure the taxpayer’s testimony makes sense and is supported by other evidence. The IRS also has to follow certain rules when examining the taxpayer’s records and asking for information. If these rules are followed, then the burden of proof may shift to the IRS. This text talks about how the tax court works and the burden of proof for taxpayers. The IRS can assume their notice of deficiency is correct, and then the taxpayer has to provide evidence to prove otherwise. The court will not just accept the taxpayer’s testimony without other evidence to back it up. If a taxpayer wants to dispute their taxes in court, they usually have to pay them first. The Tax Court usually doesn’t consider a taxpayer’s testimony as evidence if it’s labeled as self-serving or uncorroborated. There are exceptions to the rule, but the taxpayer has to show that paying someone else’s expenses directly affects their own business. This was upheld in the Griffin v. Comm’r case.

Source: https://www.floridabar.org/the-florida-bar-journal/the-incredible-taxpayer-the-u-s-tax-court-and-i-r-c-7491/