Could a Virginia resident defeat IRS-based assessments by filing self-created corrected 1099s and claiming the income was not constitutional income?

Subject

Taxpayer's claim that his income is not subject to Virginia taxation

Plain-English summary

Virginia upheld the resident's assessments because state taxable income began with federal adjusted gross income and IRS data showed income for the years at issue. General claims that the receipts were not “constitutional” income did not establish a Virginia exemption.

The taxpayer's self-prepared corrected Forms 1099-MISC were insufficient. Virginia required documents from the IRS clearly confirming that the original forms were incorrect and the amendments had been accepted.

The 2001, 2003, and 2004 assessments remained due.

What this means for you

• Virginia resident returns generally start with federal adjusted gross income.
• Correct federal payer information through the payer and IRS process before relying on it in Virginia.
• Self-created information-return corrections do not override IRS records.
• Identify a specific Virginia statutory modification if claiming federal income is excluded.

Common questions

Q: Why could Virginia use IRS information?
A: Federal law authorized information sharing, and Virginia conforms to federal adjusted gross income.

Q: What proof was needed for the corrected 1099s?
A: IRS confirmation that the originals were wrong and the corrected forms were accepted.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-107

Original ruling text

June 20, 2008

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letters contesting the individual income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2000, 2001, 2003, and 2004.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer, a Virginia resident, had income for the taxable years at issue. Letters were sent requesting that the Taxpayer file the proper Virginia individual income tax returns or provide an explanation concerning why the income was not taxable. When an adequate response was not received, the Department issued assessments.

The Taxpayer contests the assessments, asserting that his income was not "constitutional" income, he had no federal adjusted gross income (FAGI) and, therefore, he owes no Virginia income tax for the taxable years at issue. The Taxpayer further argues that the information upon which the Department relied was a false claim, made up solely of information returns filed against the Taxpayer by third parties alleging that he received taxable income in 2000, 2001, 2003, and 2004. The Taxpayer has submitted copies of "corrected" Form 1099-MISC statements showing no nonemployee compensation. He requests that the Department accept the forms as filed and abate the assessments.

DETERMINATION

With regard to the arguments that he did not have any income subject to Virginia tax for the taxable years at issue, the Tax Commissioner has previously addressed the merits of these arguments in Public Document (P.D.) 04-117 (9/9/2004). That determination, issued to the Taxpayer, clearly sets forth the Department's position with regard to the Taxpayer's arguments and is the Department's final determination with regard to the taxable year ended December 31, 2000. This letter, therefore, will only address the assessments for the 2001, 2003, and 2004 taxable years.

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 (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 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 individual income tax return, is also required to file a Virginia individual 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 help in determining the resident's tax liability.

The Taxpayer claims that requiring approval or acceptance by the IRS is inconsequential and arbitrary. The assessments issued to the Taxpayer resulted from information acquired from the IRS. Virginia's conformity with federal law dictates that FAGI reported by a taxpayer on a Virginia income tax return matches the FAGI reported by the same taxpayer on their federal income tax return.

In this case, the information provided by the IRS indicates the Taxpayer received income for the taxable years at issue. As such, in order for the Department to accept the Taxpayer's corrected information returns, the Taxpayer will have to provide documents from the IRS clearly confirming that the original forms were incorrect and that the amended forms were accepted as correct.

Based on the applicable law cited above and the information presented, I find that the Taxpayer is subject to Virginia income tax on his income. Accordingly, the assessments for the 2001, 2003, and 2004 taxable years are upheld. Payment of the outstanding assessments, as shown on the enclosed schedule, should be made immediately.

Further, the Taxpayer's claim that his income is not subject to Virginia taxation has no basis in fact or Virginia law. Because the Taxpayer has intentionally understated his income tax liability by failing to file accurate income tax returns based solely on trivial claims, the Department will assess the 100% fraud penalty on each of the assessments as prescribed by Va. Code § 58.1-308.

In addition, the Taxpayer is hereby requested to file other delinquent individual income tax returns for taxable years he received income as a Virginia resident. The tax returns and payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *.

This letter constitutes the Department's final determination with regard to the taxable years ended December 31, 2001, 2003, and 2004. The Code of Virginia sections cited in this letter, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have further questions concerning this determination, please contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1949135877E