Did a letter and amended pass-through return satisfy Virginia's duty to report an IRS change to an individual's income?

Plain-English summary

Virginia upheld the assessment because the taxpayer did not properly report the IRS adjustment on an amended individual return or provide enough information to compute the tax. The taxpayer sent a letter and an amended pass-through entity return, but the letter only said income had been "moved" and did not show how the change affected federal adjusted gross income or Virginia liability.

Virginia generally has three years to assess underpaid tax. But Va. Code § 58.1-311 required this taxpayer to report the final federal change within one year, and § 58.1-312 allowed the Department to assess at any time when the required amended return was not filed.

The Department acknowledged that a formal return may be unnecessary when it already has enough information to calculate the additional tax and the taxpayer has paid it. Those conditions were not met here. Because Virginia begins with federal adjusted gross income and the IRS information showed a change, the assessment was timely and remained due with interest.

What this means for you

• Report a final IRS income change to Virginia within the required period.
• Use the prescribed amended return unless the Department already has sufficient computation details and payment.
• A general explanatory letter may not keep the ordinary assessment limitation period in place.
• Show exactly how the federal change affects Virginia taxable income.

Citations and references

• Va. Code §§ 58.1-104, 58.1-202(7), 58.1-301, 58.1-311, 58.1-312, 58.1-322, and 58.1-1823.
• P.D. 10-260 (Dec. 2, 2010).

Subject

Taxpayer failed to file an amended return tax as required by law

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-105

Original ruling text

June 10, 2011

Re: 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you contest the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2006.

FACTS

The Taxpayer was audited by the Internal Revenue Service (IRS) for the 2006 taxable year. As a result of the audit, the Taxpayer's federal adjusted gross income (FAGI) was increased. The Taxpayer reported the federal changes in a letter along with an amended pass-through entity return. However, the Taxpayer did not file an amended individual income tax return.

The IRS notified the Department of the change in the Taxpayer's FAGI, and the Department issued an assessment for additional tax and interest. The Taxpayer appeals the assessment, contending the Department's assessment was issued beyond the statute of limitations.

DETERMINATION

Virginia Code § 58.1-104 generally requires the Department to make an assessment of underpaid tax within three years from the last day prescribed by law for the timely filing of the return. Virginia law, however, provides an exception to the three-year statute of limitations for assessing tax when an individual fails to report a change or correction in federal taxable income.

Under Va. Code § 58.1-311, a taxpayer audited by the IRS is required to file an amended return and report the changes to the Department within one year of the final determination of the change. Further, under Va. Code § 58.1-1823, a taxpayer has three years from the last day prescribed by law for the timely filing of the return, or one year from the final determination of a federal change or correction to file an amended return to request a refund. If such amended returns are not filed, the Department may make an assessment of additional tax based on the federal adjustments at any time pursuant to Va. Code § 58.1-312.

The Taxpayer states he believed the adjustments to his FAGI would not have an affect on his Virginia taxable income. Virginia Code § 58.1-301 provides that for individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with the 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. In this case, the information received from the IRS clearly indicates a change to the Taxpayer's FAGI.

The Taxpayer also asserts that he complied with the statutory requirement when he sent a letter explaining the federal adjustments. He avers that Va. Code § 58.1-311 does not require taxpayers to file a Form 760 in order to report changes in FAGI. Virginia Code § 58.1-311 specifically states ..."the Taxpayer shall file an amended return, or such form as the Department may prescribe." [Emphasis added.] Further, the Department is authorized to prescribe forms to be used in the assessment of state taxes pursuant to Va. Code § 58.1-202 7.

Generally, if the Department has sufficient information to compute the proper additional tax and the Taxpayer has paid such tax, then the Taxpayer is not required to file a return to report the change in FAGI. See Public Document (P.D.) 10-260 (12/2/2010). The Taxpayer sent a letter indicating the income had been "moved" but gave no information as to how the income affected his FAGI. The Department does not consider the Taxpayer's submission to be of sufficient detail to accurately recompute his Virginia income tax liability for the 2006 taxable year.

Because the Taxpayer failed to file an amended return or provide sufficient information on which to compute the proper amount of tax as required by law, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time. As such, the assessment for the 2006 taxable year was timely issued and is upheld.

An updated bill, with interest accrued to date, will be issued shortly. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.

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 about this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4647959405.D