Did a filed federal return transcript prove that Virginia wage income was not taxable and require cancellation of an estimated 2003 assessment?

Subject

Insufficient documentation to demonstrate income was not taxable by Virginia

Plain-English summary

Virginia upheld the estimated 2003 assessment because the taxpayer's federal return and transcript did not show that the wage information received from the IRS was wrong or that the income escaped Virginia tax.

The taxpayer had not filed the requested Virginia return or provided an adequate explanation, so the Department estimated the tax. The federal transcript confirmed only that a return had been filed; it did not reflect an IRS decision about whether the omitted income was taxable.

The record also showed continuing wage income from a Virginia employer and prior final Department determinations on similar years. The taxpayer did not supply sufficient contrary documentation, so collection was not suspended.

If the IRS later changed or corrected the 2003 federal return, the ruling allowed a Virginia amended return within one year of the IRS final determination, accompanied by the full IRS review and supporting income detail.

What this means for you

• A return transcript proves filing, not the substantive tax treatment of every income item.
• Answer Department information requests with wage statements, residency proof, IRS adjustments, and complete returns.
• Estimated assessments remain presumed correct until evidence shows otherwise.
• A later federal correction may open a limited state amendment period without pausing current collection.

Common questions

Did the transcript show zero taxable income? It showed income was not reported, but not an IRS determination that it was nontaxable.

Was collection paused while seeking federal review? No.

Could the taxpayer amend later? Yes, under the stated one-year procedure after a final IRS change or correction.

Citations and references

• Va. Code § 58.1-111, § 58.1-312, § 58.1-205, and § 58.1-311.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-129

Original ruling text

August 17, 2007

Re: Individual Income Tax

Taxable Year 2003

Dear *:

This will reply to your letter in which you seek correction of the Virginia individual income tax assessment issued for the taxable year ended December 31, 2003.

The Department received information from the Internal Revenue Service (I.R.S.) indicating that you had income for the 2003 taxable year. A letter was sent to you requesting that you file the proper Virginia income tax return or provide an explanation concerning why your income was not taxable. When an adequate response was not received, the Department issued an assessment.

You state that you were not liable for income tax in Virginia in 2003 and, therefore, do not owe any money. You have provided a copy of your 2003 federal individual income tax return and a federal transcript of that tax return. The transcript shows that income was not reported on the 2003 federal income tax return. The transcript only confirms that the federal tax return was filed. It does not reflect a determination by the I.R.S. that the income in question was not subject to federal or Virginia individual income taxation.

Pursuant to Va. Code § 58.1-111, the Department has the authority to estimate the amount of taxes due when a taxpayer fails to file a valid state tax return. Virginia Code § 58.1-312 further provides that an assessment can be issued at any time if a return is not filed. Finally, Va. Code § 58.1-205 provides that any assessment of a tax by the Department shall be deemed prima facie correct. The Taxpayer has not shown that the assessment issued by the Department or the information provided by the I.R.S.

is incorrect.

The Tax Commissioner's letters of April 8, 2002 and September 4, 2002, with respect to the taxable years 1996 through 2000, determined that the Taxpayer's income from employment was subject to income taxation by Virginia and clearly explained the Department's authority for the assessments. A review of the information at hand shows that, while you contend that you are not liable for income tax in Virginia for the 2003 taxable year, you continue to have wage income from a Virginia employer.

I have carefully reconsidered your situation, but again, must respectfully disagree with your conclusions of law. You have not provided sufficient documentation to demonstrate that your income for the taxable year at issue was not taxable by Virginia. While I recognize your continuing disagreement with the validity of these assessments, the Tax Commissioner's letter of September 4, 2002, constitutes the Department's final determination on this issue. The outstanding assessment remains due and payable.

In conformity with Va. Code § 58.1-311, if the Taxpayer's 2003 taxable year federal income tax return is changed or corrected by the I.R.S., the Taxpayer may file an amended Virginia income tax return within one year of the final determination by the I.R.S. Such amended return must include a complete copy of the I.R.S. review or audit, along with supporting documentation from the I.R.S. detailing each item of the Taxpayer's income and the amount included in federal adjusted gross income. As noted above, however, collection activity will not be suspended in the interim.

The Code of Virginia and other reference documents are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this response, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1239596648E