Could a Virginia taxpayer reverse an audit assessment for itemized deductions without providing the requested supporting records?

Subject

Itemized deductions disallowed for lack of supporting records

Plain-English summary

Virginia upheld additional tax and interest because the taxpayer did not substantiate itemized deductions claimed for 2007 and 2008. The taxpayer said documentation existed, but did not provide it after the Department requested supporting information.

Virginia generally starts with federal adjusted gross income and relies on a reasonable federal return, but it may look behind the return when amounts appear inconsistent with federal law. Taxpayers must keep records supporting their deductions, and a Virginia assessment is presumed correct until the taxpayer proves it wrong.

The Department therefore upheld both assessments. It still gave the taxpayer one final opportunity: provide the requested documentation within 30 days of the ruling or pay the assessed tax and interest within that period to avoid additional interest.

What this means for you

• Keep receipts, statements, returns, schedules, and other records supporting itemized deductions.
• Saying that documentation exists is not enough; provide it when the Department requests it.
• The taxpayer bears the burden of overcoming a Virginia assessment.
• Missing a document deadline can leave the assessment in place and allow interest to continue accruing.

Common questions

Why did Virginia uphold the assessments?

The taxpayer had not supplied the requested records supporting the deductions.

Did the taxpayer receive another chance?

Yes. The ruling allowed 30 more days to provide the information.

Does Virginia always accept deductions reported on a federal return?

No. The Department may adjust the Virginia starting point when there is clear evidence that reported amounts are inconsistent with federal law.

Citations and references

• Va. Code §§ 58.1-205, 58.1-219, 58.1-301, 58.1-310, and 58.1-322(D)(1).
• Treas. Reg. § 1.6001-1(a).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-89

Original ruling text

June 2, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable years ended December 31, 2007 and 2008.

FACTS

As a result of an audit for the 2007 and 2008 taxable years, the Department disallowed unsubstantiated itemized deductions and issued an assessment for additional tax and interest. The Taxpayer appeals the assessment, contending he has documentation to support 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).

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 FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the 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. The IRC permits itemized deductions, subject to amounts exceeding a certain percentage of FAGI, for medical expenses and miscellaneous itemized deductions, including unreimbursed employee expenses. Itemized deductions not subject to these limitations are permitted for certain taxes, mortgage interest, and charitable contributions.

Under Treas. Reg. § 1.6001-1(a), taxpayers are required to maintain records sufficient to allow the IRS to determine their correct tax liability. 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 ail statements, inventories, and schedules in support thereof.

By letter dated February 3, 2011, the Department requested the Taxpayer to provide information to substantiate certain itemized deductions reported on his 2007 and 2008 Virginia income tax returns. To date, no such documentation has been provided.

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 a taxpayer to establish that an assessment is incorrect. Because the Taxpayer has failed to furnish information requested, I must uphold the Department's assessments for the 2007 and 2008 taxable years.

I will, however, grant the Taxpayer one more opportunity to provide the information requested to substantiate the itemized deductions at issue. The documentation must be provided within 30 days from the date of this letter. Otherwise, the Taxpayer should remit payment of the assessed tax and interest within 30 days to avoid the accrual of additional interest. Please send the additional information or payment to: Virginia Department of Taxation, 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 at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4642782322.D