Could Virginia residents defeat an assessment based on IRS adjustments by arguing the federal assessment was not lawful?

Subject

Virginia assessment based on IRS adjustment upheld

Plain-English summary

Virginia upheld an individual income-tax assessment based on information that the IRS had adjusted the taxpayers' 2001 federal return. The Department asked the taxpayers to supply the IRS final determination if they believed the adjustment was wrong, but they did not show that the federal information or Virginia calculation was incorrect.

Virginia starts resident taxable income with federal adjusted gross income, subject to Virginia modifications. IRC § 6103(d) permits the Department to obtain federal information when determining state liability. The taxpayers argued that the IRS had not made a “lawful assessment,” but the Commissioner held that this did not limit Virginia's separate authority to issue its own assessment.

Virginia assessments are presumed correct, and the taxpayers supplied no factual basis for excluding the income. The assessment therefore remained due with accrued interest. The ruling also warns that refusing to file solely on a claim that income is not taxable can support the 100% fraud penalty described in Va. Code § 58.1-308; it does not state that a new fraud penalty was imposed in this determination.

What this means for you

• Virginia may use IRS information to adjust a resident return when federal changes were not reported to the state.
• Federal conformity supplies the federal adjusted-gross-income starting point; it does not erase Virginia's assessment authority.
• A taxpayer challenging IRS-based state adjustments should provide the final federal determination or other evidence showing the information is wrong.
• General objections to the legality of federal documents did not rebut the presumed correctness of the Virginia assessment here.

Common questions

Did the taxpayers prove there was no additional federal income?

No. The ruling says they failed to show that the IRS information or Virginia assessment was incorrect.

Could Virginia legally obtain the IRS information?

Yes. The Commissioner cited IRC § 6103(d).

Did federal conformity prohibit Virginia's assessment?

No. Virginia used federal adjusted gross income as its starting point but issued its own assessment under Virginia law.

Was the assessment abated?

No. It remained due and payable with interest.

Citations and references

• Va. Code §§ 58.1-205, 58.1-301, 58.1-308, 58.1-321, 58.1-322, and 58.1-341.
• IRC § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-186

Original ruling text

November 21, 2007

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter concerning the Virginia individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2001.

FACTS

The Taxpayers are Virginia residents. The Department received information from the Internal Revenue Service ("IRS") that they had adjusted the Taxpayers' 2001 federal individual income tax return. The Department had no record of receiving an amended 2001 taxable year Virginia return to report the federal changes. The Taxpayers were requested to provide a copy of the final determination letter received from the IRS if they believed that the Department's adjustments were incorrect, or to pay the balance due if they agreed with the changes. An assessment was issued after the Taxpayers failed to show that the adjustments were incorrect.

The Taxpayers contest the assessment, asserting there was no additional federal income and, therefore, no additional federal income tax liability for 2001. They contend that the federal adjustment to their federal tax return is fraudulent and unsupported by any required "lawful assessment" documents or debt instrument. Further, they contend that under the conformity provisions of Va. Code § 58.1-301 (A), there is no additional income for Virginia income tax purposes. As such, the Taxpayers request that the assessment be abated

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Va. Code will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI"). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Va. Code § 58.1-321. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine the resident's tax liability.

The Taxpayers claim the IRS failed to make a lawful assessment and, therefore, is prohibited from assessing additional tax. Because Virginia conforms to the IRC, the Taxpayers believe the Department is also prohibited from assessing additional tax.

Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Conformity does not extend to terms, concepts or principles not specifically provided or that have an expressly different meaning in Title 58.1 of the Code of Virginia . See Va. Code § 58.1-301.

In this case, the Department assessed additional tax and mailed a bill to the Taxpayers pursuant to Va. Code § 58.1-308, based on information obtained legally from the IRS under IRC § 6103(d). The Taxpayers argument that the assessment documents issued by the IRS are illegal is not relevant to Virginia's authority to assess additional tax. Furthermore, Va. Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The Taxpayer has not shown that the assessment issued by the Department or the information provided by the IRS is incorrect.

The Taxpayers' claim that their income is not subject to Virginia taxation has no basis in fact or Virginia law. In addition, a person who fails to file income tax returns based solely on such a claim has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308.

Accordingly, the assessment for the 2001 taxable year is correct and remains due and payable. An updated bill, with accrued interest, will be issued shortly. Payment of the outstanding assessment must to be sent within 30 days of the bill date to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have further questions, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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