Who Has to Prove What in an IRS Audit: Burden of Proof and IRC 7491

Let's clear up the biggest misconception about audits first. The IRS is not a prosecutor who has to prove your guilt. In a civil audit, the return is your claim, and you are expected to support it.

That is not unfair once you see the logic. You know your income and expenses; the IRS does not. The Code puts the recordkeeping duty on you (IRC 6001), and the examiner's job is to test whether your records support what you filed. See IRC 6001 recordkeeping.

In the audit itself: you substantiate

During the exam, the practical burden sits with you. The IRM's report-writing rules show how examiners think about it. To support disallowing a business expense, the examiner cites IRC 162(a), which allows ordinary and necessary business expenses, and IRC 6001, for lack of substantiation (IRM 4.10.8.12.4). No records, no deduction. For travel, gifts and vehicles, section 274(d) makes the standard even stricter. See section 274(d).

For income, the IRS starts from information returns, your books and its own analysis. When your books cannot be relied on, it can reconstruct income through indirect methods, and you then have to explain the difference. See bank deposits analysis.

IRC 7491(a): the burden shift in court

In 1998 Congress added section 7491. Subsection (a)(1) says that if, in any court proceeding, a taxpayer introduces credible evidence on any factual issue relevant to the taxpayer's income, estate or gift tax liability, the IRS has the burden of proof on that issue.

Read the conditions in (a)(2) before you get excited. The shift applies only if:

1. You complied with the substantiation requirements of the Code for the item.
2. You maintained all records required by the Code and cooperated with reasonable IRS requests for witnesses, information, documents, meetings and interviews.
3. For a partnership, corporation or trust, the taxpayer meets the net worth limits referenced in section 7430(c)(4)(A)(ii).

And subsection (a)(3) says it does not apply where another provision sets a specific burden for the issue.

Notice what that means. The burden shifts only for taxpayers who already did what the burden would require: kept the records, substantiated the items and cooperated. It is not a rescue for a taxpayer without records. It is a reward for one with them.

Also notice where it applies: "in any court proceeding." Section 7491 governs litigation. It does not change what the examiner will ask you to produce at the audit stage. But your conduct during the audit, especially cooperation with reasonable requests, is exactly what determines whether 7491(a) is available later.

IRC 7491(b): statistical income reconstructions

For individuals, the IRS has the burden of proof in any court proceeding on any item of income it reconstructed solely through the use of statistical information on unrelated taxpayers (IRC 7491(b)).

The IRM knows this rule. Examiners use Bureau of Labor Statistics data to estimate personal living expenses in a financial status analysis, and the IRM has a section on when to use statistical data and the case law around it (IRM 4.10.4.5.1.3). The word that matters is "solely." An income adjustment built only on averages from other people is vulnerable. One supported by your own bank records is not covered by this rule.

IRC 7491(c): penalties

In any court proceeding, the IRS has the burden of production on an individual's liability for any penalty, addition to tax or additional amount (IRC 7491(c)). In practice, that means the IRS must come forward with evidence that the penalty applies. Penalty defenses themselves are a separate topic, but know this much: a penalty on your audit report is not self-proving.

IRC 6201(d): disputed information returns

A related rule applies to CP2000-type disputes. In any court proceeding, if you assert a reasonable dispute about income reported on a third-party information return and you fully cooperated with the IRS, the IRS has the burden of producing reasonable and probative information about the deficiency in addition to the information return (IRC 6201(d)). Again: reasonable dispute, full cooperation, court proceeding. See when the 1099 is wrong.

What "cooperated" looks like

Both 7491(a) and 6201(d) turn on cooperation. The statutes describe it: providing, within a reasonable time, access to and inspection of witnesses, information and documents within your control, as reasonably requested, and attending reasonable meetings and interviews. In audit terms:

• Respond to IDRs completely and on time, or explain promptly why you cannot. See IDR deadlines.
• Keep appointments, or reschedule in advance.
• Produce records you have rather than forcing third-party contacts.
• Keep a log of what you provided and when.

Exercising your rights is not a failure to cooperate. Asking for time to get a representative, recording an interview with proper notice, or sending a representative instead of attending are all provided by statute. See interview rights under section 7521. Refusing reasonable requests is different.

Two taxpayers, same deduction

Consider a simple illustration. Two consultants each deduct $12,000 of business travel. Both are audited.

The first kept a calendar showing each trip, saved hotel and airline receipts, and wrote client names in the calendar entries. When the examiner asked for records, she produced them in two weeks, with a one-page summary. If the examiner disallows part of the deduction and the case goes to court, she is the taxpayer section 7491(a) was written for: she complied with the substantiation rules, kept the required records and cooperated.

The second has card statements and a memory. He missed two IDR deadlines and produced a partial response after a follow-up letter. Section 274(d) already requires adequate records or corroborated detail for travel. Section 7491(a) will not help him, because its conditions are the very things he lacks.

Same deduction. Same examiner. Different law, in effect, because of what each of them did before and during the audit.

Credible evidence in practice

Section 7491(a) turns on "credible evidence," and the statute does not define it. Practically, the evidence that persuades examiners, managers and Appeals officers has the same features at every level:

• It was created at or near the time of the transaction, not for the audit.
• It comes from someone other than you when possible: banks, vendors, customers, public records.
• It is consistent with your return, your interview answers and your other documents.
• It addresses the specific fact in dispute, not the general topic.

The regulation under section 274 says it in its own context: written evidence has considerably more probative value than oral evidence alone, and its value is greater the closer in time it relates to the expense (Treas. Reg. 1.274-5T(c)(1)). That is good advice for any issue.

Why this matters before you are ever in court

Most audits never reach a courtroom. So why care about burdens that apply only there? Because the examiner, the manager and Appeals all know where a case would land if it went further. A taxpayer with complete records, a documented history of cooperation and credible evidence on each disputed fact is a taxpayer whose case looks expensive to litigate for the government. That changes conversations at every level.

The burden of proof is not a technicality. It is a description of what wins. Records, substantiation and cooperation win. Everything else is an argument about why you do not have them.