How Do You Fight The IRS If The Government Loses Your Records?
Ordinarily, the burden of proof in a U.S. Tax Court case is on the taxpayer; the taxpayer must prove by a preponderance of the evidence that the IRS determination as set forth in the Notice of Deficiency is erroneous. Since the taxpayer normally has at his or her disposal all the relevant facts and documents relating to a disputed deduction or income item, it is reasonable to impose the burden of proof on the taxpayer. There are a number of exceptions to this rule which are provided for in the Internal Revenue Code and in the Tax Court rules. For example, where the Commissioner asserts fraud for the purpose of exacting a fraud penalty or for keeping the statute of limitations open, the Commissioner has the burden of proving fraud by clear and convincing evidence. Tax Court Rule 142.
What happens, however, when the government seizes and loses all the taxpayer's records needed to meet his burden proof? Both the Tax Court and the Second Circuit Court of Appeals declined to shift the burden of proof to the Commissioner. However, the Second Circuit ruled that where the government itself was responsible for the taxpayer's inability to produce documents necessary to prove some aspect of his entitlement to deductions, two modifications to the normal standards of proof are appropriate: (1) the trier of fact should be permitted to infer that the true facts are as alleged by the taxpayer to be set forth in the documents seized and lost, and (2) where the taxpayer can offer credible evidence that the seized and lost records were properly maintained by the taxpayer prior to their seizure and that they accurately reflected the facts that the taxpayer alleges those documents to reflect, the taxpayer is entitled to a presumption that the records, if available, would correctly reflect those alleged facts. Andrew Crispo Gallery, Inc. v. Commissioner, 16 F.3d 1336 (2d Cir. 1994). The available inference and the presumption, where warranted, would affect only the facts alleged to have been reflected in the documents lost by the government, and the ultimate burden of persuasion as to entitlement to a deduction would remain on the taxpayer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.