Accounting Small Business Tax Policy

Evidence Issues in Tax Litigation

When an individual or business receives a deficiency letter from the IRS stating more money is owed, they have the right to appeal.

When an individual or business receives a deficiency letter from the IRS stating more money is owed, they have the right to appeal. One of the primary places to appeal the deficiency letter is the United States Tax Court.

United States Tax Court

The US Tax Court applies the Federal Rules of Evidence, rules that determine what evidence may be presented to the judge to reach a verdict. The Federal Rules of Evidence are important hurdles to understand as they will create opportunities to win or lose a trial. Below are five of the common evidentiary rules that are used in Tax Court.


Plainly stated, any evidence that is presented in Tax Court must be relevant to the lawsuit. The opposing party may try to bring in beneficial evidence that is not relevant. The taxpayer, through his or her attorney, should object on grounds of relevancy.

Evidence is relevant if it tends to prove a fact is more or less probable.

For example, if a person believes he or she does not owe the amount the deficiency letter claims, relevant evidence to present in court would be business records or testimony from a knowledgeable person. However, evidence that a twin brother underpaid taxes will likely not be relevant to show the taxpayer owes more tax dollars.

Taxpayers must be aware of the power of the relevancy objection in order to gain a strategic advantage in their trial. Once relevancy is established, an evidence advantage such as judicial notice is now possible to use.

Judicial Notice

Court is very much a contentious environment, but often times certain relevant facts do not require an argument. A court may take judicial notice over certain facts.

A court may take judicial notice on facts that are generally known in the community or capable of accuracy that cannot reasonably be questioned. Once a court takes judicial notice, then the fact is admitted into evidence and no discussion from attorneys are required. This is important to save time and guarantee the fact is heard in court.

For example, the tax court may take judicial notice on prior rulings from the tax court. In addition, the tax court may take judicial notice on a report that establishes the average expenses of a particular industry.

When a witness forgets the intricacies of a fact, judicial notice will allow the evidence to still be heard. Forgetful witnesses can also have their memories refreshed to remember facts.

Refresh Witness Collection

Since tax court lawsuit often involve many numbers, witnesses sometimes forget all of the details. This could potentially threaten a case as it makes the witness looks less credible and the facts not as complete. One way to resolve this potential problem is to refresh the recollection of the witness.

If a witness forgets, his or her memory can be refreshed by 6 steps:

  1. Mark the document as an exhibit,
  2. Show the document to the witness,
  3. Ask the witness to read the document silently,
  4. Have the witness set aside the document,
  5. Ask the witness if the document refreshes his memory, and
  6. Have the witness testify from the now refreshed memory.

When asking a witness a question, it is important to avoid hearsay questions.


Hearsay is a powerful piece of evidence that can trap the best of attorneys. When used right, it can be advantageous for the taxpayer.

Hearsay is a verbal or written assertion, that was made out of court and is now being offered in court to prove the truth of matter asserted. That is an understandably difficult definition to grasp. However, it is a great tool to use during any tax trial to not allow beneficial evidence for the opposing party into court.

It is important to note that there are hearsay exceptions that allow otherwise inadmissible evidence to be admitted into court. Typical hearsay exceptions in tax court are the business record exception, former testimony, and present sense impressions.

Hearsay exceptions and other evidence are asked either through direct or leading questions.

Questions to Ask Witness

During tax court, witnesses are asked two types of questions in order for evidence to be brought into court: the taxpayer presents the lawsuit by asking direct questions, and the IRS attorney cross-examines the taxpayer with leading questions.

Direct Questions – Direct are open-ended questions. They are asked in a way that would allow the witness to talk a lot. For example, “What was the record keeping process of your company?” is a direct question because it allows the witness to talk.

Leading Questions – Leading questions take, or lead, the witness to answer the question in a way that the attorney wants them to answer. For example, “John was in charge of the record keeping for the company, right?” and, “John failed to adequately maintain records, correct?”


It is important to understand the significance of evidentiary issues in the US Tax Court. Taxpayers can lose their appeal simply based on their lack of knowledge of the Federal Rules of Evidence. Always consult an attorney before appearing before the US Tax Court.

*This post is for educational purposes only and is not to be used as legal advice.

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Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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