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SALT TALK: Guitars and the Ever-Increasing Burden of Proof

Wayne Berkowitz CPA, J.D., LL.M. 10.02.2017 | SALT TALK

I can guarantee any taxpayer that has gone through an audit, whether as an individual or a business entity, “was feelin ‘bout half past dead” at some point through the process. As goes the audit process, the traveler in The Band’s song, The Weight, kept being asked for more and more as he went further along in his journey through Nazareth (Pennsylvania, home to C.F. Martin & Company, maker of the world renowned Martin guitar.)

When facing an audit, in almost all circumstances the taxpayer bears the burden of proof [1]. This means the taxpayer bears the weight of proving by clear and convincing evidence, the validity of items represented on the tax return as filed. Whether a deduction or a day spent outside of the jurisdiction, the taxpayer must be “clear” and “convince” the taxing authorities.

What constitutes clear and convincing evidence has been the subject of much litigation in the tax arena and many other areas of the law. Clear and convincing evidence is supposed to be a middle level burden of proof — more rigorous than a preponderance of the evidence, but less burdensome than beyond a reasonable doubt.

Intellectually, defining this level can be difficult enough. But practically, I can tell you the problem gets even more out of hand when you have an auditor who continually makes the standard needed for his own satisfaction, a moving target. The New York State Nonresident Audit Guidelines clearly instruct auditors to accept a pattern of behavior where there is no evidence to contradict this pattern. For example, if a taxpayer claims to be absent from the State for every weekend and has proof for the majority of these weekends, absent evidence of a presence in New York, the pattern should be accepted. 

While I have never had an auditor ask me to take (Jack) his dog, I have certainly had other absurd requests. These include:

  • Documenting days when the taxpayer’s passport and travel records clearly indicate he was out of the country for an extended period of time (Query: How do we know he didn’t go back and forth to Australia during the two weeks?);
  • Requests for bank statements to review ATM withdrawals when the taxpayer has already provided credit card records to document every day outside of New York; and
  • Inquiries requesting additional documentation to verify a European passport stamp indicating the date “24-10-06” really was valid as the auditor didn’t understand how there could be twenty four months in a year.

And the list goes on. The key point auditors need to be reminded of is that they can’t increase the load on the taxpayer (or Fannie) just because the journey isn’t leading them to an adjustment.  Many experienced auditors know better, but often it takes a watchful eye to rein others in.

If you are currently facing an audit, contact me at wberkowitz@berdonllp.com or your Berdon advisor.

[1] Two notable exceptions being fraud and changes of domicile.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP -New York Accountants, advises clients on the unique requirements of governments and municipalities across the nation.

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