Joint Committee on Taxation may recommend new IRS burden of proof in tax litigation.
As a companion to its road show designed to elicit grassroots support for abolishing the IRS and replacing the current tax system, the Republican leadership has interjected a new "wedge" issue in the IRS restructuring legislation debate. And the wedge will bear the imprimatur of the JCT, according to a congressional staffer.
House Ways and Means Committee Chair Bill Archer, R-Texas, announced October 11 that his mark of the legislation restructuring the IRS will contain a burden-shifting provision. "In tax controversies, the IRS's position is presumed to be correct and taxpayers bear the burden of proving themselves innocent. It's time to shift the burden of proof so the IRS has to demonstrate that the taxpayer was wrong," Archer stated in a radio address on IRS reform.
After studying the issue of burden shifting for several weeks, the JCT has developed, according to several sources, a provision that appears to be adapted from a bill (H.R. 367) proposed by Rep. James A. Trailcant Jr., D-Ohio, who has campaigned for a shift in the burden of proof in IRS audits for more than a decade. The JCT's version is said to be modeled on H.R. 367, which would still require taxpayers to document their deductions and positions at the examination and appeals level, but would shift the burden of proof to the IRS if a case goes to court. (For the text of H.R. 367, see Doc 97-1961 [4 pages]. For prior coverage, see Doc 97-25988 [2 pages]; also see Doc 97-25364 [4 pages].)
The JCT is said to be further refining the burden-shifting idea by limiting it to individual taxpayers whose net worth does not exceed $2 million, and by imposing a cooperation requirement on the taxpayer. The language explaining the taxpayer's obligation to cooperate at the administrative level is expected to follow the Taxpayer Bill of Rights 2 modification to section 6201(d) (regarding the IRS's duty to make a reasonable investigation into the accuracy of an information return reporting income that a taxpayer denies receiving). Section 602 of TBOR2 provided that:
Fully cooperating with the IRS indudes (but is not limited to) the following: bringing the reasonable dispute over the item of income to the attention of the IRS within a reasonable period of time, and providing (within a reasonable period of time) access to and inspection of all witnesses, information, and documents within the control of the taxpayer (as reasonably requested by the Secretary). (H. Rept. 104-506 for H.R. 2337; for the full text, see Doc 96-10000 [132 pages].)
Politicizing the JCT?
The JCT's treatment of burden-shifting as a practicable tax system reform measure is curious. Previously, proposals to shift the burden of proof to the government in tax cases have never been taken seriously by anyone - Republican or Democrat who has worked in the tax system. Apparently, not a single tax administrator, executive, or practitioner has ever supported burden shifting.
Before Bob Dole made shifting the burden of proof to the IRS part of his presidential campaign platform, burden-shifting's chief proponent was Trailcant, whose personal problems with the IRS include a civil determination of liability for fraudulently concealing income. (For prior coverage, see Doc 97-24806 [9 pages].) (Traficant's case is interesting in that the government bore and sustained its burden of proving that Traficant committed civil fraud by not reporting bribes as income, while Traficant failed to sustain his burden of proving that he did not receive the bribes, according to the Court of Appeals for the Sixth Circuit.)
In general, burden-shifting has been widely dismissed by tax experts and scholars as "disastrous, misguided," "an exceptionally bad idea," and "totally unworkable." When one of Traficant's wholesale burden-shifting bills garnered 290 House cosponsors in early 1995, the support prompted 10 former IRS commissioners to express their strong opposition to the idea in a letter to Archer and then-Sen. Bob Packwood, R-OR, chair of the Finance Committee. In contrast, Traficant's most recent bill, which would shift the burden in court only, has 66 cosponsors.
Among those signing the 1995 letter to Archer was Fred T. Goldberg Jr., who, in addition to being the Treasury assistant secretary for tax policy during the Bush administration, served as a special adviser for the "Kemp Commission" on entitlement and tax reform, and, more recently, as a member of the National Commission on Restructuring the IRS. Notably, neither of the commissions recommended tinkering with the burden of proof.
After a year-long study of IRS reform issues, the restructuring commission decided, however, to include a proposal in the IRS Restructuring and Reform Act (H.R. 2292) that would require the General Accounting Office to conduct a study of the differences between civil and criminal burdens of proof in IRS and nonIRS contexts and to report to Congress what impact changing the burdens would have on tax administration and taxpayer rights.
The noncommittal study provision was drafted with the goal of "laying the whole idea of shifting the burden to the government to rest once and for all" according to a restructuring commission staffer.
Legal scholars who have considered the allocation of the burden of proof to the taxpayer in civil cases have agreed that it would be short-sighted and simplistic to shift the burden, considering the government's presumption of correctness, its need for revenue, and the unique knowledge of the taxpayer as the possessor of the evidence. See L. Martinez, "Tax Collection and Populist Rhetoric: Shifting the Burden of Proof in Tax Cases" 39 Hastings L.J. 239 (1988).
For their part, Tax Court judges maintain that most cases are not decided on the burden of proof that the burden serves only as a tie-breaker in the rare instance that the evidence is in complete equilibrium. They, along with other tax experts, point out the vast state of confusion over the government's presumption of correctness and the difference between the taxpayer's burden of going forward, as distinct from the burden of persuasion.
The Internal Revenue Code and the case law are filled with exceptions that shift the burden to the government in specified circumstances. But in those cases where the burden has shifted to the government because its deficiency notice was "arbitrary and capricious," the ultimate burden of persuasion has never shifted to the government, according to one Tax Court scholar. Indeed, judges have expressed serious reservations about burden-shifting, even if only in court.
Under the burden-shifting proposal, it would ultimately fall to judges in each case to determine whether the taxpayer has fully cooperated at the administrative level. It would not appear to be an easy task to apply statutory language replete with the word "reasonable." For example, how should judges construe that language if the taxpayer's records are lost or otherwise unavailable?
Some speculation has it that the Republican leadership is working to weigh down the Internal Revenue Code with complexity and break the IRS's back, so that scrapping the entire system is the only practicable solution. Another explanation is that, as the inside-the-beltway debate over IRS governance begins to wane, lawmakers are looking for something to take home to their constituents. Some say intense pressure has been put on the JCT to come up with something - anything - that has the appearance of reversing the notion that the criminally accused are innocent until proven guilty while taxpayers must prove their "innocence" of a tax liability. And with all the refinements and limitations, appearance may be all that the proposal is aiming for.
Without having seen the language, former IRS commissioner Lawrence B. Gibbs worries that, as described, the proposal "will be a trap for the unwary" The unsophisticated taxpayers that the proposal is designed to help "may have a difficult time determining what is the right thing to do, and having done it, what are the consequences," said Gibbs, now with Miller & Chevalier in Washington.
Then again, all the details of the proposal have not been worked out yet, according to a Ways and Means Committee aide.
Courtesy of Tax Analysts
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|Title Annotation:||Internal Revenue Service|
|Publication:||The National Public Accountant|
|Date:||Jan 1, 1998|
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