Introduction

The general principle of ‘he who asserts must prove’ is the civil burden of proof imposing an obligation to sustain an assertion or proposition by positive argument.  This principle is entirely logical in many tort or contractual disagreements but questionable in certain tax disputes with the Revenue Commissioners (Revenue). The default position in tax litigation requires the taxpayer to provide sufficient evidence to reduce or displace a tax assessment. This obligation can be onerous and in some cases impossible.

Recently in a case involving Menolly Homes Limited v The Appeal Commissioners and the Revenue Commissioners , the High Court conclusively determined that in general tax litigation the burden of proof is on the taxpayer. Prior to Menolly Homes, the burden of proof in tax litigation was an infrequent visitor to the Irish courts. While there have been some cursory references, the issue has only had a thorough outing in cases where the responsibility for bearing the burden of proof was actually contained within the statute.

Despite the ruling in Menolly Homes, the issue of whether a taxpayer in litigation with Revenue should always be responsible for bearing the burden of proof may be in some doubt. Jurisprudence from the European Courts, the European Convention on Human Rights and certain Supreme Court decisions has determined that if the burden of proof on the asserting party is too onerous or palpably unfair, the burden can be reversed.

The Appeal Process

Section 934 of the Taxes Consolidation Act 1997 permits a revenue official to attend every hearing of an appeal, be entitled to produce any lawful evidence and to give reasons in support of the assessment. After examination of the appellant, the Appeal Commissioners will thereafter determine whether the assessment should be increased, stand or be reduced.

The view of Revenue is that the burden of proof is on the taxpayer to demonstrate that the tax assessment is incorrect .  This perception assumes that there is no requirement on Revenue to produce lawful evidence or give reasons in support of the assessment. In such cases, a taxpayer would be quite justified in having the decision of Revenue judicially reviewed.

Judicial review is a supervisory function. It allows a court to review the manner in which a decision is made rather than the substance or the merits of the decision. The court determines whether proper procedures were followed, whether the public body or tribunal had proper jurisdiction to make the decision and whether the correct legal principles were applied.

Review of the Jurisprudence

In civil litigation there is an obligation on the claimant to persuade the court or tribunal where appropriate of the truth or the sufficient probability of every essential fact in issue for the purposes of establishing a prima facie case. A prima facie case is established when there is sufficient evidence for a judgment to be made unless the evidence is contested. Therefore a significant onus is placed on the party bearing the burden of proof.

In O’Flynn Construction , Smyth J. noted that the general anti-avoidance provision imposed an obligation on the taxpayer to satisfy the Court that a transaction was not a tax avoidance transaction . The learned judge also cited Doorley  as the authority for placing the obligation on the taxpayer when seeking to avail of an exemption from tax to show that the exemption applies. Correspondingly where a liability to tax is imposed, it is settled law that the charge to tax must be in accordance within the strict letter of the law. Therefore in determining whether a liability to tax arises, it is submitted that the burden of proof should be on Revenue where the taxpayer has kept proper books and records.

Difficulties however can arise where the taxpayer has not kept proper books and records. There are statutory obligations requiring taxpayers to keep all records for a period of at least six years to ensure that a full and detailed tax return can be made . Where the required records have been kept, it should be incumbent upon Revenue to prove that a liability to tax exists in the first place or provide evidence that income or sales have been suppressed.  To place the responsibility on a compliant taxpayer to disprove a revenue assessment in such circumstances would be contrary to the accepted basis upon which Irish taxing statutes should be interpreted, disproportionate and extremely onerous.

It is acknowledged that the success of Revenue in collecting €2.6 billion from the Special Investigations would have been severely hampered if Revenue had to prove that the relevant income or capital were derived from undeclared sources. In such cases there is ample justification for imposing the burden of proof on taxpayers where proper books and records have not been kept. Furthermore if it can be established that the burden of proof in tax litigation can be reversed, it would be prudent for taxpayers to retain for an indefinite period the requisite documentary evidence that verifies the legitimacy of accumulated funds.

In some cases there will be disagreement as to whether proper records have been retained. However in such cases, prior to the main proceedings before an Appeal Commissioner or the Court, a preliminary hearing should take place to decide if proper books and records have been kept or in the absence of such records, the materiality of any omissions before deciding on which party should bear the burden of proof.

There is now a considerable amount of jurisprudence that questions the validity of placing the burden of proof on a party where that party is unable to provide evidence to prove his/her case. In Hanrahan , the Supreme Court held that it would be palpably unfair to require the plaintiff to prove something which is beyond his reach and which is peculiarly within range of the defendant's capacity of proof. This view is also endorsed by the European Court of Justice in cases involving unjust enrichment , theft  and missing traders  where the burden of proof was held to be too onerous an obligation for the taxpayer.

The European Court of Human Rights has held that the lack of domestic remedies to protect any natural or legal person constitutes a breach of human rights .  While recourse to the Appeal Commissioners or the Courts could offer a sufficient remedy, the placing of the burden of proof on a taxpayer will not ameliorate the position where the default position requires a compliant taxpayer to disprove a tax assessment.

The recommendation of the Court in Menolly Homes to seek judicial review in challenging the basis upon which the Revenue Commissioners raise an assessment would be a regressive step in the administration of taxation. The cost associated with High Court litigation together with the public nature of those proceedings would act as major obstacles in contesting the imposition of a tax charge upon compliant taxpayers.

Conclusion

In seeking to avail of an exemption from tax, a taxpayer must prove entitlement. Correspondingly, in imposing a tax liability, the Revenue Commissioners must show that the charge is appropriate. Therefore the burden of proof should fall on the party claiming the entitlement or justifying the charge respectively. 

A taxpayer in disputing a tax assessment may seek judicial review. However this procedure would be a regressive step in the administration of tax to the extent that a substantial number of taxpayers would be denied access to fiscal justice. Therefore the Appeal Commissioners should be the appropriate forum in the resolution of the preliminary stages of a tax dispute.

The obligation on a taxpayer to provide evidence to disprove a tax assessment can be disproportionate and palpably unfair. Therefore to preserve the level of fairness and to adhere to the developing jurisprudence in this area, it is submitted that the burden of proof should not automatically apply to the taxpayer. Where the obligation on a compliant taxpayer to provide evidence to reduce or abate a tax assessment is too onerous, the Appeal Commissioners and indeed the Courts should consider reversing the burden of proof.

Conor Kennedy
Barrister-at-Law
www.conorkennedy.ie