The IRS Has the Burden of Proof for Items of Income

Even the IRS sometimes forgets that it has the burden to prove that a taxpayer earned more income than reported. The Allman v. Commissioner case provides an example of what happens where the IRS attorney shows up to court with no evidence of additional income.

Facts & Procedural History

The taxpayer worked as an employee for eleven and a half months in 2003. He worked for a construction company for the remainder of the year and he was paid “under the table” for this work.

On audit by the IRS, the IRS asserted that the taxpayer failed to report interest income from two insurance policies, underreported his income, and failed to pay self-employment taxes.

The IRS did not agree with the taxpayer and tax litigation ensued. This seems to be a regular case–one that the taxpayer would lose. But he didn’t lose.

The Taxpayer’s Evidence

The taxpayer testified that he did not own insurance policies and he did not receive interest income from an insurance policy and, therefore, he did not report the interest income on his tax return.

The taxpayer then argued that his employer, the construction company that paid him “under the table,” had overstated the amount it paid to him on the Form 1099 that it reported to the IRS.

The taxpayer was paid cash, so there were no records of how much he was paid. The taxpayer testified that he worked 35 hours per week for 27 days at a $12.50 per hour (with two weeks off for the holidays).

The taxpayer argued that he was an employee of the construction company and not an independent contractor. As such, he was not responsible for paying self-employment taxes. The taxpayer testified that his manager directed him as to what to do for this position, he used the construction company tools, and he did not sign a employment agreement with the construction company.

The net result was income lower than that determined by the IRS and no self-employment tax on the earnings.

The IRS’s Evidence

The IRS attorney presented no evidence to counter the taxpayers testimony.

The IRS attorney cited only the amount listed on the construction company’s Form 1099. The IRS attorney did not present any evidence that the taxpayer worked more than the hours that he had testified to.

Because the IRS attorney failed to put on any of this evidence, the court held for the taxpayer on each issue.

The IRS Has the Burden

Why did the court reach this conclusion? The IRS attorneys lack of evidence was a factor. It was a factor as the IRS has the burden of proof for items of income.

Compare this to tax deductions, which were not at issue in this case. Taxpayers have the burden of proof for deductions.

Because the IRS has the burden on income and it presented no evidence, the taxpayer was able to win his case in court.

According to this case, the IRS also has the burden on showing that a worker was a contractor rather than an employee. Taxpayers who are facing employment tax adjustments from the IRS should take heed of this case.