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How Tax Reform Can
Work Against You

NEW YORK -- "Sound-bite politics" are designed to inflame, not to inform -- and nothing fits better than this fire-breathing charge from Rep. Bill Archer, R-Texas, chair of the House Ways and Means Committee. "Criminals have more rights than taxpayers!" he thunders. "We're going to change that!"

He's talking about a portion of the IRS reform bill that passed the House last month. It's expected to whiz through the Senate and has President Clinton's support.

Under present law, Archer says, taxpayers in Tax Court are "guilty until proven innocent" -- meaning that it's up to you to prove that your tax returns are right. The reform bill shifts the burden of proof to the IRS, if certain requirements are met.

But remember that old saying: Beware of what you wish for, because you might get it. If you're fighting an IRS assessment, shifting the burden of proof could complicate your life.

First, let me clarify one thing. If you've been charged with tax fraud or criminal tax evasion, the legal system already holds you innocent until proven guilty.

In civil cases -- where money, not jail is at stake -- "guilt" and "innocence" don't apply. Instead, you're either liable or not liable, depending on what the evidence shows. In a civil tax case, where you control the records, it's logical for you to have to prove you're right.

Under Archer's reform bill, however, the IRS would have to prove that your returns were wrong.

This change would apply only to Tax Court cases, not to everyday audits. And there are two conditions. First, you'd have to have a reasonable, factual dispute (in other words, not a frivolous case); and second, you'd have to cooperate with the IRS' reasonable request for supporting data. Here's what the change is likely to mean:

(1) Nothing, for the average taxpayer undergoing an audit. You'll still have to document any deductions and income shown on your tax return.

Archer's spokesperson, Ari Fleischer, thinks the reform law would produce more settlements in the taxpayer's favor. But most tax lawyers think it would merely lead to more aggravating requests for data. The IRS will want the record to show how cooperative you were.

(2) A temptation to stall, for stubborn or dishonest taxpayers. For example, they might make only token efforts to document the income and deductions they claimed. The law doesn't condone this, but who knows how tax-resisters might react?

(3) More cases going to Tax Court, "involving even more time and money," predicts tax attorney Stuart Seigel in the New York office of the law firm, Arnold & Porter. Taxpayers who want to delay will have even more to argue about. You could litigate whether the IRS' requests for data were "reasonable." Or whether the case meets the standard for forcing the burden of proof on the IRS.

(4) More intrusive tax investigations. If the IRS feels you've haven't produced enough information, it would have to hunt for evidence itself. That could involve calling your customers and clients, and you're not going to like that.

While fishing around, the IRS "may unearth damaging items that would not have come out in the course of a regular audit," says tax accountant Ed Slott in Rockville Centre, N.Y. Fleischer threatens congressional action if the IRS starts to delve more deeply into taxpayers' lives. But what are the tax collectors to do, if "reform" abets more tax resistance?

(5) Help for a small number of taxpayers with honest disagreements with the IRS. For example, if you and the IRS differ over the value of a charitable gift, you might have a better chance of winning than you do now. If you were assessed for a payment you say you never received, the IRS (not you) might have to get the payor to prove that the money was sent.

Even so, tax cases are rarely decided according to who bears the burden of proof, says Sheryl Stratton, law correspondent for the publication, Tax Notes, in Arlington, Va. "They're decided on the facts and the law, which usually favor one party over the other."

Ironically, the harrowing stories of tax abuse that were aired in Senate hearings last September had little to do with which party carries the burden of proof. Most involved unjust property seizure and bullying audits.

"What we really need is better training of revenue agents," says Lee Sheppard, a Tax Notes contributing editor, "but that's not nearly as interesting as bashing IRS agents over the head."

Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.