Could a taxpayer reverse a paid Virginia assessment without providing records substantiating the itemized deductions claimed?

Subject

Information insufficient to confirm the basis of the multiple itemized deductions claimed.

Plain-English summary

Virginia upheld the paid 2007 assessment because the taxpayer did not substantiate the itemized deductions. The auditor and appeals analyst made multiple requests for supporting information, but the taxpayer only stated that documents would be provided.

Virginia generally starts from federal adjusted gross income and federal itemized deductions, but it may examine returns and adjust unsupported amounts. An assessment is presumed correct, placing the burden on the taxpayer to show it is wrong.

The Department nevertheless gave the taxpayer one final 30-day opportunity. Because the assessment had already been paid, satisfactory documentation could support a refund.

What this means for you

• Keep records tying each itemized deduction to its federal and Virginia treatment.
• Respond to audit and appeal requests with the actual documentation, not only a promise to provide it.
• Paying an assessment does not itself prove entitlement to a refund; the taxpayer still bears the substantiation burden.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322 D(1), 58.1-219, 58.1-310, 58.1-205, and 58.1-1826.
• IRC § 211 and Treas. Reg. § 1.6001-1(a), as cited in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-28

Original ruling text

February 28, 2011

Re: § 581-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to you, * (the "Taxpayer"), for the taxable year ended December 31, 2007.

FACTS

For the taxable year at issue, the Taxpayer claimed multiple itemized deductions on his Virginia individual income tax return. Under audit, the Department requested supporting documentation to substantiate the deductions claimed. When the information was not received, the Department disallowed the deductions and issued an assessment for additional tax and interest. The Taxpayer appealed the assessment, stating that he would provide documentation to substantiate the deductions.

DETERMINATION

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 (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 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.

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust income and deduction where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the Internal Revenue Code (IRC). See Va. Code § 58.1-219.

Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income, the amount allowed for itemized deductions for federal income tax purposes. IRC § 211 allows additional itemized deductions for individuals, such as expenses for the production of income (nonbusiness expenses), medical and dental expenses, alimony, moving expenses and contributions to IRAs. Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Va. Code § 58.1-310 provides:

Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof of any individual, estate, trust, partnership or corporation in order to properly audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.

In the Taxpayer's case, the Department requested information sufficient to confirm the basis of the deductions claimed. Multiple requests were made by the auditor and the appeals analyst. The Taxpayer has failed to provide the requested information.

Pursuant to Va. Code § 58.1-205 any assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect. Further, Va. Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayer's willful failure or refusal to provide the Department with necessary information as required by law.

Because the Taxpayer has failed to furnish information required by law, I must uphold the Department's assessments of tax and interest issued to the Taxpayer for the 2007 taxable year. I will, however, grant the Taxpayer one more opportunity to provide the information requested to substantiate his claim. The documentation must be provided within 30 days from the date of this letter. Our records indicate that the assessment has been satisfied, and a refund may be issued upon substantiation. Please send the additional information or payment to the Department's Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4547833077.D