In most litigation, the party initiating the case has the burden of convincing the court that he or she is correct with respect to the issue. In most civil tax cases, however, the IRS placed the burden of proofburden of proofThe IRS is required to provide a court with convincing evidence on factual income tax issues. on the taxpayer. With the IRS Restructuring and Reform Act of 1998, the tax law was changed to place the burden of proof on the IRS.

The IRS now has the burden of proof on factual issues in cases dealing with income, gift, estate, or the generation skipping tax, providing the taxpayer (1) introduces credible evidence of the factual issues, (2) maintains records and substantiates items required under the IRC and regulations, and (3) cooperates with reasonable IRS requests for meeting, witnesses, interviews, information, and documents. For corporations, trusts, and partnerships with net worth exceeding $7 million, the burden of proof remains on the taxpayer. The new rules apply only to those IRS-taxpayer disputes arising in connection with audits started after the 1998 Act was signed into law.

The burden of proof also automatically shifts to the IRS in two situations:

The 1998 Act also extended the existing attorney-client privilege of confidentiality in tax matters to nonattorneys authorized to practice before the IRS (e.g., CPAs and enrolled agents). The nonattorney-client privilege may be asserted only in noncriminal court and IRS proceedings, and it does not extend to written communications between a tax practitioner and a corporation in connection with the promotion of any tax shelter.

CPAs and enrolled agents need to understand the rules regarding tax confidentiality as they have been applied to lawyers to be aware of the tax privilege limits. For example, tax privileged communication usually does not apply to the preparation of tax returns, the giving of accounting or business advice, or to tax accrual workpapers. Also, unlike the general attorney-client privilege, the nonattorney-client privilege does not automatically apply to state tax situations.