Did Virginia properly assess additional tax when taxpayers failed to report final IRS changes to their federal income?

Subject

Federal taxable income changed by the I.R.S., taxpayer is required to report it to TAX

Plain-English summary

Virginia upheld the additional assessments because the taxpayers did not report final IRS changes to their 2000 and 2001 federal income. State taxable income began with federal adjusted gross income, subject to Virginia modifications.

Virginia required a taxpayer to report an IRS change within one year after the final federal determination. If the taxpayer did not file amended Virginia returns or otherwise report it, the Department could assess additional state tax using the federal adjustment.

The taxpayers argued that the IRS information was not a valid liability or debt instrument. They supplied no objective evidence that the federal information was incorrect, so Virginia found no basis to invalidate the assessments.

What this means for you

• Track final federal audit changes and the separate state reporting deadline.
• File amended Virginia returns or otherwise report the change as required.
• If the federal figure is wrong, provide objective corrected federal documentation rather than only challenging the form of the IRS information.

Common questions

How long did the cited Virginia rule allow to report the federal change? One year after the final determination.

Why did the taxpayers lose? They neither reported the changes nor proved the IRS information wrong.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-321, 58.1-341, 58.1-311, and 58.1-312.
• I.R.C. § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-5

Original ruling text

January 7, 2008

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 years ended December 31, 2000 and 2001.

FACTS

The Taxpayers' federal individual income tax returns for the taxable years ended December 31, 2000 and 2001 were audited by the Internal Revenue Service (I.R.S.), resulting in a change to federal taxable income and assessments of additional tax. The Taxpayers did not notify the Department of such changes. Based on the I.R.S. information, the Department assessed additional tax for 2000 and 2001.

The Taxpayers assert that the information from the I.R.S. was not a valid liability instrument and the Department's assessments are not supported by any lawful documents or debt instrument. As such, the Taxpayers request that the assessments for the 2000 and 2001 taxable years 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, if a taxpayer's federal taxable income is changed or corrected by the I.R.S., the taxpayer is required to report the changes to the Department within one year after the final determination of the change or correction. If Virginia amended returns are not filed or the changes to federal taxable income are not otherwise reported, the Department is authorized to make an assessment of additional tax based on the federal adjustments pursuant to Va. Code § 58.1-312.

The Taxpayers contend that they had no additional income for 2000 and no additional liability for 2000, on the basis that the information from the I.R.S. is unsupported by any required "lawful assessment documents or debt instrument." The Taxpayers have provided no objective evidence to show that the information properly obtained by the Department from the I.R.S. is incorrect.

Based on the applicable law cited above and the information presented, there is no basis to invalidate the Department's assessments. Accordingly, the assessments for the 2000 and 2001 taxable years are correct. Payment of the outstanding assessments, as shown on the enclosed schedule, should be made within 30 days from the date of this letter. 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: *. If payment is not received within the allotted time, collection action will resume on the outstanding balance.

The Code of Virginia sections cited 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 any questions about this determination, please contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1132468446E