Could Virginia assess additional 2005 and 2006 income tax after the ordinary three-year period when taxpayers did not report IRS changes?

Subject

Taxpayers failed to report the changes on amended returns within allotted time frame.

Plain-English summary

Virginia upheld the assessments because the taxpayers did not report the IRS changes on amended Virginia returns. The IRS adjusted their 2005 and 2006 federal returns, with final changes occurring in August and October 2008. The taxpayers did not file corresponding amended Virginia returns.

Virginia generally had three years to assess underpaid tax. The ruling applied a specific exception for federal changes: an individual had to report a final change or correction in federal taxable income within one year by filing an amended Virginia return.

When the taxpayer did not file that amended return, Va. Code § 58.1-312(A)(3) allowed the Department to assess the appropriate tax at any time. The 2005 and 2006 assessments were therefore timely and correct.

What this means for you

• An IRS adjustment can create a separate Virginia amended-return obligation.
• Track the date the federal change becomes final; the ruling applied a one-year Virginia reporting period.
• The ordinary three-year assessment period may not apply when a required federal change is not reported.
• Delayed reporting can leave the state assessment period open indefinitely under the rule applied here.

Common questions

Did the taxpayers win because more than three years had passed?

No. Their failure to report the final IRS changes triggered the exception to the ordinary limit.

What years did the ruling address?

Only the taxpayers' 2005 and 2006 Virginia individual income tax assessments.

Citations and references

• Va. Code §§ 58.1-104, 58.1-311, and 58.1-312(A)(3).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-29

Original ruling text

February 28, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear ****:

This will reply to your letter concerning the Virginia individual income tax assessment issued to * (the "Taxpayers") for the taxable years ended December 31, 2005 and 2006.

FACTS

The Taxpayers were audited by the Internal Revenue Service (IRS) for the 2005 and 2006 taxable years. The IRS adjusted the Taxpayers' 2005 and 2006 federal income tax returns, resulting in a change to federal taxable income. The Taxpayers did not file amended 2005 and 2006 Virginia income tax returns reflecting the IRS adjustments. As a result, the Department issued assessments for the 2005 and 2006 taxable years. The Taxpayers appeal the assessments, contending they were not issued within the three-year limitations period.

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.

Virginia Code § 58.1-311 requires any individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the taxpayer fails to file an amended return, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

In this case, the IRS adjusted the Taxpayers' 2005 FAGI in August 2008 and their 2006 FAGI in October 2008. The Taxpayers failed to report the changes on amended returns within the limitations periods as required in Va. Code §§ 58.1-311. As such, the Department properly issued the assessments within the time permitted under Va. Code § 58.1-312.

Accordingly, the assessments for the 2005 and 2006 taxable years are correct. An updated bill, with interest accrued to date, will be sent to the Taxpayers. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill.

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/1-4500409450.B