Could a taxpayer overturn years of Virginia assessments by claiming he had no federal adjusted gross income under his reading of federal law?

Plain-English summary

Virginia rejected the taxpayer's attempt to avoid assessments by asserting that his income was not federal adjusted gross income. The Department had obtained income information from the IRS after no Virginia returns or adequate explanations were provided.

The administrative appeals for 1995, 1996, 1998 through 2001, and 2005 were filed after the 90-day deadline and could not be considered. Only the December 30, 2010 assessment for 2007 was timely appealed.

For 2007, Virginia began with FAGI and required residents meeting federal or Virginia thresholds to file. The taxpayer did not deny receiving income and supplied no objective evidence that the IRS information was wrong. The assessment therefore remained due.

The ruling also warned that intentionally failing to file solely on a baseless claim that income is not taxable can support Virginia's 100% fraud penalty.

What this means for you

• Calendar the 90-day Virginia administrative-appeal deadline separately for each assessment.
• Answer IRS-information notices with returns or objective contrary records.
• Legal assertions do not substitute for evidence of the correct income.
• Baseless intentional nonfiling can create fraud-penalty exposure.

Common questions

Q: Which years were time-barred?
A: 1995, 1996, 1998-2001, and 2005.

Q: Why was 2007 considered?
A: Its assessment was appealed within 90 days.

Q: Did the taxpayer disprove the 2007 income?
A: No.

Citations and references

• Va. Code §§ 58.1-205, 58.1-301, 58.1-308, 58.1-321, 58.1-322, 58.1-341, and 58.1-1821.
• 23 VAC 10-20-165.
• IRC § 6103(d).

Subject

Taxability of Income

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-136

Original ruling text

July 27, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letters concerning the Virginia individual income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 1995, 1996, 1998 through 2001, 2005 and 2007.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayer had income for taxable years at issue. In cases in which an individual income tax return was not on file, the Department requested that the Taxpayer file the proper Virginia income tax return or provide an explanation concerning why his income was not taxable. When an adequate response was not received, the Department issued assessments.

The Taxpayer filed an appeal requesting information concerning the basis of the assessments. In addition, the Taxpayer contends that he had no "federal adjusted gross income" under Internal Revenue Code (IRC) statutes defining such "income" and was therefore not required to file a federal tax return for the taxable years at issue.

DETERMINATION

Assessment Information

The information requested by the Taxpayer will be provided under a separate cover. If you have any questions about the information provided, contact * in the Department's Office of Compliance at ***.

Statute of Limitations

Virginia Code § 58.1-1821 provides that "[a]ny 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.] Title 23 of the Virginia Administrative Code (VAC) 10-20-165 provides additional requirements regarding the timely filing of administrative appeals. This regulation provides information to taxpayers about the process for appealing tax assessments, including how to file a complete and timely administrative appeal.

The Taxpayer filed an appeal for the taxable years at issue with the Department by letter dated February 16, 2011. The most recent assessment issued for the taxable years 1995, 1996, 1998 through 2001 and 2005 was issued on May 19, 2009. The statutory period for filing an appeal for those taxable years under the provisions of Va. Code § 58.1-1821 expired well before the appeal was filed. As such, the Taxpayer's administrative appeal for those taxable years are barred by the statute of limitations.

The assessment for the taxable year 2007 was issued on December 30, 2010. The appeal for this taxable year was filed within the statutory period for filing an appeal and will be addressed below.

Taxability of Income

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 IRC 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 properly 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, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine the resident's tax liability.

Although the Taxpayer does not deny that he had income in 2007, he contends that he had no income for federal income tax purposes. 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 Taxpayer to show he was not subject to income tax in Virginia. In this case, the Taxpayer has provided no objective evidence to show that the information properly obtained by the Department from the IRS is incorrect.

Further, the claim that the Taxpayer's income is not subject to Virginia taxation has no basis in fact or Virginia law. An individual who fails to file income tax returns based solely on such a claim has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308.

Based on the applicable law cited above and the information presented, there is no basis to abate the Department's assessment for the 2007 taxable year. Accordingly, the assessments for the taxable years at issue are correct and remain due and payable. Updated bills will be issued shortly, which will include accrued interest. Payment of the assessments should be made within 30 days of the bill date in order to avoid the accrual of additional interest.

The Code of Virginia and regulation 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 * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-44681442513.E