Could Virginia residents defeat assessments based on IRS changes when they filed no timely state amendments and supplied no proof the federal data was wrong?

Subject

Late appeal and unrebutted IRS changes left Virginia assessments in place

Plain-English summary

Virginia upheld the residents' 2003-2005 income-tax assessments. The 2003 assessment was issued June 8, 2007, but the appeal was not mailed until March 25, 2008, outside the 90-day period quoted in the ruling. That year was time-barred.

For 2004 and 2005, the IRS had increased federal taxable income. Virginia began with federal adjusted gross income, and the residents had not reported the federal changes within the cited one-year period. The Department was authorized to use IRS information and assess additional Virginia tax when the residents did not file amended returns or otherwise report the changes.

The residents asserted that income was overreported and challenged their filing status and the federal assessments, but supplied no evidence that the IRS data was incorrect or that the IRS had withdrawn the deficiencies. Because Virginia assessments were presumed correct, those unsupported arguments did not meet the burden of proof.

What this means for you

• Track the final determination date of every IRS change and the corresponding Virginia reporting deadline.
• File the required Virginia amended return or report even when disputing other issues.
• Appeal each Virginia assessment within the applicable state deadline.
• Support any claim that federal data changed or was withdrawn with final IRS documentation.

Common questions

Why was 2003 treated differently?

The appeal itself was filed too late, so the assessment was time-barred from review.

Why did Virginia rely on IRS data for 2004 and 2005?

The cited statutes authorized federal conformity and assessment from federal changes not reported by the taxpayers.

Did the taxpayers prove the IRS changes were wrong?

No. They supplied assertions but no supporting evidence.

Citations and references

• Va. Code §§ 58.1-1821, 58.1-301, 58.1-322, 58.1-341, 58.1-311, 58.1-312, and 58.1-205.
• IRC § 6103(d).
• P.D. 06-140.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-26

Original ruling text

February 13, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter concerning the Virginia individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2003, 2004 and 2005. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers are Virginia residents. Their federal individual income tax returns for the 2003 through 2005 taxable years were audited by the Internal Revenue Service (IRS), resulting in a change to federal taxable income and assessments of additional tax. The Taxpayers failed to file timely amended Virginia individual income tax returns after the IRS adjusted their federal returns, or after the Department notified them that, in light of IRS information, that such filings were required. Based on the IRS information, the Department assessed additional tax for the 2003 through 2005 taxable years.

The Taxpayers submitted letters of appeal to the Department and to the IRS, contending: (1) the income was over reported, (2) the Taxpayers were not required to file individual income tax returns because they are not "individuals," (3) the federal assessments are not valid because they are not backed by a summons by a federal court, and (4) the Department has not provided them with proof that they owe the IRS.

DETERMINATION

Taxable year 2003

Virginia Code § 58.1-1821 states, "Any person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner." [Emphasis added.] Pursuant to the Department's Administrative Appeal Guidelines (the "guidelines") § 3 A, "The 90-day limitations period begins on the calendar day after the date of assessment and continues for 90 consecutive calendar days (including weekends and holidays)." See Public Document (P.D.) 06-140 (11/29/2006).

In this case, the assessment for the 2003 taxable year was issued to the Taxpayer on June 8, 2007 and appealed by letter postmarked March 25, 2008. Pursuant to Va. Code § 58.1-1821, the Taxpayer failed to file a complete administrative appeal with the Department within the 90-day limitations period for the 2003 taxable year. Therefore, the Taxpayer's application for correction of the 2003 taxable year assessment is barred by the statute of limitations. The Virginia individual income tax assessment for the 2003 taxable year is correct and remains due and payable.

Taxable years 2004 and 2005

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 IRS 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 IRS, 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 have not provided evidence to show that the information properly obtained by the Department from the IRS is incorrect or that their income is not subject to taxation by Virginia. In one letter, they indicate that the IRS is no longer seeking payment of deficiencies, but have failed to provide any evidence to that effect.

Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayers to show that the assessment is incorrect. The Taxpayers have not met this burden.

CONCLUSION

Accordingly, the assessments for the 2003 through 2005 taxable years are upheld. 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, interest will accrue on the outstanding balance and collection action will resume.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2206548348.E