Taxpayer Bill of Rights 2 Allows Challenge to Statutory Notice
As a general rule the Notice of Deficiency issued by the Service, which allows the taxpayer to petition the Tax Court, is presumptively valid and correct, and the court will not look into whether it is valid. This presumption of validity and correctness puts the taxpayer in the position of having to prove that the adjustments asserted by the Service are incorrect. On rare occasion, the courts have looked behind the Notice of Deficiency to determine whether it was valid, mostly where the Notice of Deficiency alleges omitted income. One such case concerned the IRS's right to impose tax and penalties where the taxpayer's income tax return did not reflect income shown on an information return, Form 1099, which was submitted to the Service by a third-party.
Relying on a Form 1099 from a third-party, the Service asserted that a taxpayer failed to report $24,000 of income. After the taxpayer complained, the Service approached the third-party, who was unable to produce records to justify the figures shown on the Form 1099 he issued. Nevertheless, the Service took the position that it could rely on the Form 1099 even though the person who issued it could not support the figures he showed on the form, and the Service issued a Notice of Deficiency to the taxpayer. In Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), the court held that the presumption of correctness did not attach to the Notice of Deficiency because the IRS had information before it issued its Notice of Deficiency which cast serious doubt upon the correctness of the Form 1099 and the IRS failed to investigate the matter adequately. Accordingly, the burden of proof was imposed on the IRS.
Computer matching of Forms 1099 with income tax returns has enabled the IRS routinely to assert additional tax liability if a taxpayer fails to report the income. In order to curb potential IRS abuses in the area, Congress, as part of the recently enacted Taxpayer Bill of Rights 2, added IRC §6201(d), which places on the IRS "the burden of producing reasonable and probative information concerning" a deficiency which is alleged on the basis of an information return submitted to the Service. This burden on the IRS only arises where the taxpayer has notified the IRS of a dispute and fully cooperated with the Service with respect to its investigation of the disputed income item.
The statute does not specify a remedy if the Commissioner does not produce reasonable and probative information. Consistent with Portillo, failure by the Commissioner to produce such information in a Tax Court proceeding should result in the Notice of Deficiency being held to be arbitrary and devoid of a presumption of correctness as to that issue. However, this conclusion is not mandated by the literal words of the statute.
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