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Dispatches

Burden of Proof Is on Taxpayer When Documentation Is Missing

The Tax Court ruled in favor of a taxpayer who lacked documentation for, but was able to provide evidence supporting, his assertion about the timing and amount of an IRA contribution.

The Tax Court ruled in favor of a taxpayer who lacked documentation for, but was able to provide evidence supporting, his assertion about the timing and amount of an IRA contribution.

The case involved a non-deductible IRA contribution made 20 years ago. The petitioner, Andrew Shank, established an IRA in the late 1990s and made non-deductible contributions to it. He no longer had any tax records for that period. In addition, he moved his account to two different brokerage firms since making those contributions.

In 2014, Shank took a distribution of the entire account balance, withdrawing $27,745. The Form 1099-R issued by his brokerage firm categorized the taxable amount of the distribution as being not determined. Shank did not report the distribution on his tax return for that year. The IRS subsequently flagged his return, determined the full distribution was in effect taxable and issued a notice of deficiency.

Under prior tax court rulings, IRS determinations of a notice of deficiency are generally presumed to be correct. In such circumstances, the burden of proof is on the taxpayer to show that the IRS was in error.

Shank no longer had his tax returns for those years and his lawyer was unable to obtain copies of them. Shank did have a 2006 brokerage statement showing the assets held in the account as being purchased sometime before 2006 for an aggregate cost of $4,760. Shank’s lawyer was also able to retrieve IRS database copies of Form 5498 showing no contributions being made to the account between 2007 and 2013, as well as the account’s balances for those years.

In issuing its opinion, the tax court referenced past cases where estimates were formed for taxpayers who had “inadequate business records.” When such instances occur, it is up to the taxpayer to provide “some ‘reasonable evidentiary basis’ for the estimate.” In this particular case, the tax court found Shank’s testimony to be credible. As such, it ruled that the contribution of $4,760 could be withdrawn tax-free, while the remaining account balance was taxable because it consisted of “reinvested dividends and capital gains that accumulated free of federal income tax inside the IRA.”

“Andrew G. Shank v. Commissioner of Internal Revenue,” United States Tax Court, T.C. Memo. 2018-33, March 20, 2018.

Discussion

Gene Howe from AL posted over 8 years ago:

This poor guy is challenged by the IRS to produce tax returns from 20 years ago to show he did not deduct his IRA contribution and therefore it is it is not deductible IRA with taxable distributions. My question is why does the IRS not have his returns from 20 years ago? That would resolve the issue. He's supposed to hold on to returns for 20 years to absolve the IRS from that responsibility? Was he informed of this responsibility 20 years ago? Do you have your tax returns from 20 years ago? Do you want to subjected to legal and accounting expenses to challenge the IRS? This is a ridiculous abuse of power. Drain the swamp!


Barry Tolle from WA posted over 8 years ago:

He could have avoided all this if he simply reported the distribution the year he took it. The IRS has copies of all tax documents and they are computer matched. An unreported distribution is a red flag and the IRS automatically assumes the maximum taxable amount in these instances. Had he reported the distribution as non-taxable or partially taxable it is unlikely the IRS would have taken any action. Always, always report any amounts received on a tax document (in this case, probably a 1099R) to avoid problems with the IRS.


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