Could Virginia uphold estimated individual income tax assessments based on bank deposits when the taxpayer claimed she was not working?

Subject

Bank-deposit evidence supported estimated individual income tax assessments

Plain-English summary

Virginia upheld the individual income tax assessments for 2004 through 2006. The Department found that the taxpayer, who was president of a corporation, deposited proceeds from unreported sales into her personal bank accounts. She had filed Virginia returns for 2004 and 2005 but not for 2006.

Auditors subpoenaed corporate and personal bank records, analyzed deposits and disbursements, and issued assessments from the information available. Virginia law permits the Department to estimate tax, penalty, and interest when a required return is missing or incorrect.

The taxpayer said she did not work during the three years. The record showed, however, that the corporation issued her W-2s for each year, state corporate records listed her as president, and she signed the corporation's 2004 and 2005 income tax returns as president. She did not provide evidence showing that the resulting assessments were incorrect, so the request for abatement was denied.

What this means for you

• When returns or records are missing or unreliable, Virginia can reconstruct income from bank deposits and other available information.
• A taxpayer challenging an estimated assessment needs evidence showing why the Department's computation is wrong.
• W-2s, corporate-office records, signed returns, and personal-account deposits can collectively contradict a claim of having no work or income.
• This ruling upheld the estimates; it did not establish that every bank deposit is taxable income.

Common questions

Why could Virginia estimate the tax?

Virginia law authorizes estimates from information in the Department's possession when a taxpayer fails or refuses to file a correct return.

What evidence did the auditors use?

They used subpoenaed corporate and personal bank records, monthly deposits, W-2s, corporate-office records, and the taxpayer's signed corporate returns.

Why was abatement denied?

The taxpayer's claim that she was not working was inconsistent with the records, and she did not show that the assessments were incorrect.

Citations and references

• Va. Code § 58.1-103.
• Va. Code § 58.1-111.
• Va. Code § 58.1-216.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-163

Original ruling text

October 16, 2009

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 assessments issued to * (the "Taxpayer"), for the taxable years ended December 31, 2004 through 2006.

FACTS

The Taxpayer was the president of * (the "Corporation"). The Taxpayer filed individual Virginia income tax returns for the 2004 and 2005 taxable years, but did not file for the 2006 taxable year.

Under audit, the Department determined that the Taxpayer was depositing money from unreported sales into her personal bank accounts. The Department assessed tax, penalty and interest against the Taxpayer for the 2004 through 2006 taxable years. The Taxpayer appeals the assessments, contending she was not working during the taxable years at issue.

DETERMINATION

In conducting an audit, the Department may examine a taxpayer's accounting records, when possible, to determine the nature of income and expense items. See Va. Code § 58.1-103. Further, Va. Code § 58.1-111 states:

Whenever any taxpayer liable under the law to file a state tax return with the Department shall fail or refuse on demand to file a correct and proper return, the Department may make an estimate of the amount of taxes due the Commonwealth by such taxpayer, from any information in its possession, and assess the taxes, penalties and interest due the Commonwealth by such taxpayer.

When a taxpayer is required to file an income tax return and fails or refuses to file the return, or files an improper return, the Department may estimate the tax, penalty and interest based on any information, including subpoenaed record, in its possession.

In the instant case, the auditors subpoenaed the corporation and Taxpayer bank account records, pursuant to Va. Code § 58.1-216. An analysis was made of deposits and disbursements from these bank accounts, and an audit report based on information available was issued to the Taxpayer.

The Taxpayer contends she did not work during 2004, 2005, or 2006. However, the Corporation issued Form W-2 statements to the Taxpayer for each of the taxable years at issue. In addition, the Taxpayer was the president of the Corporation during the taxable years at issue according to the State Corporation Commission. 'She also signed the Corporation's 2004 and 2005 income tax returns in her capacity as president. These activities are indicative of an individual fully engaged in operating a business.

Based on a review of the information provided, the Taxpayer had income for the taxable years at issue. The assessments of tax liabilities for the years at issue are based on the best information available, including monthly deposits made to the Taxpayer's individual bank account. The Taxpayer has not shown that the assessments are not correct. Accordingly, the Taxpayer's request for an abatement of the tax assessments is denied. Revised bills, with accrued interest, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessments are paid within 30 days from the date of the revised bills. The Taxpayer should remit payment to; Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 21203, Richmond, Virginia 23261, Attn: *.

The Code of Virginia sections and public document cited, along with other reference documents, 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

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