Could a Virginia resident avoid filing by claiming the Department unlawfully received insufficient IRS income information?

Subject

Taxpayer believes he is not required to file Virginia income tax returns

Plain-English summary

Virginia upheld the assessment and rejected the taxpayer's claim that IRS information was unlawfully obtained or too weak to support tax. The resident had not filed the requested 2003 return or explained why the income was nontaxable.

The federal statute required a written request by the Tax Commissioner before IRS disclosure. Virginia's standing Exchange Agreement was signed by the Commissioner and authorized periodic IRS transmissions, satisfying that requirement.

The assessment was not a fact-free or “naked” assessment. IRS information showed federal adjusted gross income, which Virginia uses as its starting point. If the federal amount was wrong, the taxpayer needed IRS documentation showing the correct figure.

Because the taxpayer supplied no objective evidence, the assessment remained correct. Virginia directed him to file the 2003 return, other delinquent returns, and amendments to returns based on the same claims. The ruling warned that continued refusal could justify a 100% fraud penalty and other collection action.

What this means for you

• Virginia can use IRS information received under its authorized exchange agreement.
• Correct federal information through the IRS and provide documentation if the reported federal amount is wrong.
• Unsupported filing objections do not overcome the presumption that an assessment is correct.
• The fraud-penalty statement here was a prospective warning, not a penalty imposed by this ruling.

Citations and references

• Va. Code §§ 58.1-321, 58.1-341, and 58.1-205.
• I.R.C. § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-3

Original ruling text

January 7, 2008

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the 2003 taxable year.

FACTS

The Taxpayer is a Virginia resident. The Department obtained information from the Internal Revenue Service (IRS) indicating that the Taxpayer received taxable income for the 2003 taxable year. The Department requested that the Taxpayer file the proper Virginia returns or provide an explanation concerning why his income was not taxable. The Taxpayer did not respond to the Department's request. Because an adequate response was not received, assessments were issued based on the available information.

The Taxpayer contends the information received from the IRS, indicating that the Taxpayer received taxable income for the 2003 taxable year, was unlawfully obtained because it was not made by a written request and the information provided by the IRS was inadequate to make an assessment. Consequently, the Taxpayer believes he is not required to file Virginia income tax returns.

DETERMINATION

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. When a resident does not file a Virginia return, Internal Revenue Code (IRC) § 6103(d) authorizes the Department to obtain information from the IRS that will help in determining the resident's tax liability. This section allows the disclosure of information only upon the written request by the Tax Commissioner. The Agreement on Coordination of Tax Administration (the "Exchange Agreement") governs the exchange of tax information between the IRS and the Department. To implement the Exchange Agreement, the IRS is authorized to periodically transmit to the Department reports indicating the federal audits or examinations that have been conducted. The Department obtained information from the IRS on the Taxpayer's account in this manner. Because the Exchange Agreement is a written request for tax information that is signed by the Tax Commissioner, the requirements of IRC § 6103(d) have been met. As such, the Taxpayer's information was lawfully obtained.

The Taxpayer has also cited several federal court cases that state that the IRS may not make a "naked assessment" even though there is a presumption that the assessment against a taxpayer is prima facie correct. A naked assessment is an assessment that has no basis in fact. In the instant case, the Department's assessment was based on information provided by the IRS showing that the Taxpayer had Federal Adjusted Gross Income (FAGI) for the 2003 taxable year. Because Virginia starts with FAGI, the IRS information is sufficient documentation of fact to make an assessment. If the Taxpayer believes the IRS information is not correct, he must obtain documentation from the IRS showing the correct amount of his FAGI.

CONCLUSION

Virginia 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 IRS is incorrect. Further, he has failed to provide objective evidence as to the correct liability for the taxable year at issue. Consequently, I find no basis to abate the Virginia individual income tax assessment for the 2003 taxable year.

The Taxpayer is requested to file an accurate Virginia individual income tax return for the 2003 taxable year, along with payment of the balance due, within 30 days from the date of this letter. The Taxpayer should also (1) file any other delinquent income tax returns, and (2) amend income tax returns filed based on the claims set forth in the application for correction. Refusal to file the requested returns or any future returns in accordance with Virginia law by continuing to make the claims you have stated in your letter would justify the 100% fraud penalty and other legal actions to collect the proper tax.

Returns and payments should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261­7203, 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 any questions regarding this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1374096337B