Could a Virginia resident overturn a 1998 assessment by claiming the Department illegally obtained erroneous IRS information?

Subject

IRS information lawfully supported Virginia assessment

Plain-English summary

Virginia upheld the taxpayer's 1998 assessment based on IRS adjustment information. The taxpayer argued that the Department obtained the information illegally and that two fields on the printout were wrong.

The Commissioner found that federal law authorized the IRS to provide information needed to determine Virginia liability and that the agencies had a written coordination agreement. More importantly, the taxpayer did not claim that he had not received the additional income or that the federal and Virginia calculations were wrong. The two disputed fields did not affect Virginia taxable income or tax, and an IRS transcript supported the assessment.

The ruling also explains that a taxpayer must report final federal changes to Virginia within one year. If the taxpayer does not file the required amended Virginia return, the Department may assess additional tax based on the federal adjustment at any time under the cited statute.

What this means for you

• Virginia can receive federal tax information to determine state income-tax liability.
• An objection to peripheral data does not defeat an assessment if those fields did not affect taxable income or tax.
• A successful challenge needs evidence that the income, federal adjustment, or Virginia computation itself is wrong.
• Taxpayers audited by the IRS or filing a federal amended return must report final changes to Virginia within the statutory period described in the ruling.

Common questions

Was the IRS information obtained illegally?

No. The Commissioner found that federal law and the agencies' written coordination agreement authorized the exchange.

Did the taxpayer dispute receiving the added income?

No. The ruling expressly notes that he did not make that claim.

Did the alleged errors change Virginia tax?

No. The disputed fields had no bearing on Virginia taxable income or the amount due.

Was the 1998 assessment abated?

No. It remained due, and the taxpayer was also asked to file any other delinquent individual returns.

Citations and references

• Va. Code §§ 58.1-301, 58.1-311, 58.1-312, 58.1-321, 58.1-322, and 58.1-341.
• IRC § 6103(d).
• IRC § 6013(d), cited in the ruling as the authority for the written coordination agreement.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-187

Original ruling text

November 21, 2007

Re: § 58.1-1821: Individual Income Tax

Dear *:

This will reply to your letter concerning the Virginia individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 1998.

FACTS

The Taxpayer is a Virginia resident. The Department received information from the Internal Revenue Service (I.R.S.) that it had adjusted the Taxpayer's 1998 federal individual income tax return. The Department had no record of receiving an amended 1998 taxable year Virginia return to report the federal changes. The information from the I.R.S. was used to prepare an adjusted Virginia return for 1998. The Taxpayer was requested to provide a copy of the final determination letter received from the I.R.S. if he believed that the Department's adjustments were incorrect, or to pay the balance due if he agreed with the changes. An assessment was issued after the Taxpayer failed to show that the adjustments were incorrect.

The Taxpayer states that the information from the I.R.S. was obtained illegally and erroneous. As such, the Taxpayer requests that the assessment for the 1998 taxable year be abated.

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code 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, Internal Revenue Code § 6103(d) authorizes the Department to obtain information from the I.R.S. that will enable the Department to determine the resident's tax liability.

Under Va. Code § 58.1-311, a taxpayer audited by the I.R.S. or who files a federal amended return is required to report the changes to the Department within one year of the final determination of the change. If such amended returns are not filed, the Department may make an assessment of additional tax based on the federal adjustments at any time pursuant to Va. Code § 58.1-312.

Prior to filing this appeal, the Taxpayer requested a copy of the information received from the I.R.S. The Department supplied the Taxpayer with a printout of information obtained from the I.R.S.

The Taxpayer's appeal does not claim that he did not receive the additional income upon which the I.R.S. adjustment was based, or that the I.R.S. and Department's adjustments were incorrect. Instead, the Taxpayer asserts that the information from the I.R.S. was obtained illegally and that two fields on the information printout were incorrect.

Under I.R.C. § 6013(d), the Department and the I.R.S. have entered into a written coordination agreement. A copy of this document can be found at the Virginia Regulations Town Hall web site, located at www.townhall.virginia.gov, under the guidance documents of the Finance Secretariat. This document authorizes the I.R.S. to release federal tax information to the Department.

In addition, the portion of the information reported as erroneous by the Taxpayer had no bearing on the computation of Virginia taxable income or the tax due. The Department obtained a copy of the Taxpayer's I.R.S. transcript that supports the assessment issued by the Department.

Based on the applicable law cited above and the information presented, there is no basis to find the Taxpayer is not subject to Virginia income taxation on his income. Accordingly, the assessment for the 1998 taxable year is correct. Payment of the outstanding assessment, as shown on the enclosed schedule, should be made within 30 days from the date of this letter. Collection action will be suspended during this period, pending payment of the balance due. In addition, you are hereby requested to file any other delinquent individual income tax returns within 30 days from the date of this letter.

Delinquent income tax returns and payment should be sent to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *.

The Code of Virginia sections cited, along with other reference documents, are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have further questions, please contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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