Taxpayers have a distinct disadvantage under the law vis-à-vis the IRS, since the law creates a “presumption of correctness” in favor of the IRS determination of taxes owing by any particular taxpayer.
This concept is decades old and is found in U.S. Supreme Court precedence at least as far back as 1933, where the Court in Welch v. Helvering (290 U.S. 111 (1933)) explained:
The Commissioner of Internal Revenue resorted to that standard in assessing the petitioner’s income, and found that the payments in controversy came closer to capital outlays than to ordinary and necessary expenses in the operation of a business. His ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong. Wickwire v. Reinecke,275 U. S. 101; Jones v. Commissioner, 38 F.2d 550, 552. [emphasis added]
This continues to be the law to this day.
What this means for taxpayers, particularly United States citizens and lawful permanent residents (“LPRs”) who reside outside the U.S., is that the IRS will often make erroneous tax determinations; yet the calculation of the amount of tax owing is presumptively correct.
The individual has the burden of proving the government wrong.
As an international tax practitioner, I have seen some of the most farfetched tax assessments by the IRS in the international context. If the IRS uses bad or incomplete information and then produces a tax assessment result, it is like the old computer saying; “junk in junk out.”
The IRS almost always, by definition, has incomplete information for taxpayers residing overseas. For that reason, it is not uncommon for them to make statutory notices of deficiency that are not supported by the law or the facts. See, the IRS explanation of a Notice of Deficiency CP3219N (“90-day letter”) proposing a tax assessment. Understanding Your CP3219N Notice
This power of the IRS under the law, is also compounded by the ability of the IRS to file a “substitiute return” for those USCS and LPRs residing overseas. See a prior post from November 2014, How the IRS Can file a “Substitute Return” for those USCs and LPRs Residing Overseas.