Could Virginia uphold estimated income-tax assessments when resident nonfilers ignored information requests and did not prove the IRS data wrong?

Subject

Refusal to file returns would justify the 100% fraud penalty and other legal actions to collect the proper tax.

Plain-English summary

Virginia upheld the estimated assessments because the residents did not file required returns, answer repeated requests, or show that the IRS data was wrong. When no valid return is filed, the Department may estimate liability and assess at any time.

The taxpayers were directed to file accurate returns and pay. The Commissioner warned that continued refusal could justify a 100% fraud penalty and other legal collection action; the ruling did not say that penalty had already been imposed.

What this means for you

• Virginia can use IRS information when a resident does not file.
• Estimated assessments are presumed correct until contrary evidence is supplied.
• Nonfilers should respond with records and accurate returns rather than unsupported objections.

Common questions

Was the fraud penalty imposed here? No. It was a warning about continued refusal.

Could Virginia assess without returns? Yes, using available information.

Citations and references

• Va. Code §§ 58.1-341, 58.1-111, 58.1-312, and 58.1-205; IRC § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-62

Original ruling text

May 19, 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 through 2005 taxable years.

FACTS

The Taxpayers are Virginia residents. They did not file Virginia income tax returns for the 2003 and 2005 taxable years. The Department obtained information from the Internal Revenue Service (IRS) indicating that the Taxpayers received taxable income in both years. The Department's auditors requested information to verify whether the Taxpayers were subject to Virginia income tax. The Taxpayers did not respond to the auditors' information requests. Therefore, assessments were issued based on the available information.

The Taxpayers filed their 2004 Virginia income tax return in February 2006. Their deductions exceeded their gross income so a refund of the income tax withheld was issued in April 2006. In August 2007, the Taxpayers filed an amended 2004 Virginia return reporting a net operating loss.

The Taxpayers contend that the assessment notices issued by the Department are vague and that they have no Virginia income tax liability.

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.

In the instant case, the Department's assessments were based on information provided by the IRS showing that the Taxpayers had taxable income from Virginia sources for the 2003 and 2005 taxable years, and that the Taxpayers inaccurately reported their 2004 taxable income. The Taxpayers failed to adequately respond to the Department's repeated requests for additional information that would verify their taxable income.

Pursuant to Va. Code § 58.1-111, the Department has the authority to estimate the amount of taxes due when a taxpayer fails to file a valid state tax return. Virginia Code § 58.1-312 further provides that an assessment can be issued at any time if a return is not filed. Finally, Va. 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 assessments issued by the Department or the information provided by the IRS is incorrect. Consequently, I find no basis to abate the Virginia individual income tax assessments for the 2003 through 2005 taxable years.

The Taxpayers are requested to file accurate Virginia individual income tax return for the 2003 through 2005 taxable years, along with payment of the balance due, within 30 days from the date of this letter. The Taxpayers 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 the Taxpayers have stated in their 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 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 any questions regarding this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2052509752B