Who bears the burden of proof in tax proceedings and why is it important to know?

The questions of who bears the burden of proof in tax proceedings and when has plagued many a taxpayer and even tax administrators. The burden of proof is distributed between them and during tax proceedings usually shifts from one to the other. The proper understanding of how the burden of proof works is therefore central to the choice of an appropriate strategy and can often be the key to success.

The burden of proof generally lies with taxpayers as they have the primary obligation to prove their assertions, most often in their tax returns and other submissions to the tax authorities. The provision of evidence first involves the provision of relevant documentation, i.e., the taxpayer’s accounting books are the primary means of proof.

If at this stage the taxpayer fails to bear their burden of proof, i.e., does not prove the facts stated in their tax assertions, the burden of proof cannot be shifted to the tax administrator. It is therefore important that taxpayers keep their accounting documents in good order.

If the tax administrator has doubts regarding the credibility, relevance, accuracy or completeness of the mandatory files and accounting records of the taxpayer, they must provide the proof of such doubts, i.e., identify the specific facts based on which they believe that the documents submitted by the taxpayer are insufficient to prove the taxpayer’s assertions.

If the tax administrator manages to bear their burden of proof, the burden shifts back to the taxpayer who must then refute the tax administrator's doubts. Logically, at this stage the taxpayer will no longer prove their assertions with accounting documents, as it is these documents that the tax authority has doubts about. Other evidence may include, for example, various other records, deeds, witness statements or photographs.

The burden of proof can thus be thought of as a ping-pong ball that the tax administrator and the taxpayer exchange until the game is over. To not lose the game, the taxpayer should remember that they must prove only what they assert while also carefully considering what information and documents they provide to the tax authority.

When less is more in this respect or, contrariwise, when you should be prepared for consistent demonstration of proof will be discussed in Tax and Legal Update’s next issues. In the future, we will also look at the operation of the burden of proof in some specific situations, for example, when proving a VAT deduction, tax deductible costs or transfer pricing.

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