Could a Virginia resident defeat a 2005 nonfiler assessment by arguing that IRS data sharing was illegal and that his income was not federal adjusted gross income?

Plain-English summary

Virginia upheld the 2005 assessment based on income information obtained from the IRS. A Virginia resident generally must file a Virginia return when required to file federally or when Virginia adjusted gross income exceeds the state threshold.

Federal law authorized the Department's written information-sharing arrangement with the IRS. The taxpayer's argument that the Tax Commissioner needed a separate request for each person's data did not defeat the standing agreement or the Department's secure access procedures.

The taxpayer did not deny receiving the income and supplied no evidence showing that the IRS information was wrong. Virginia therefore calculated taxable income from the information available and treated the assessment as presumptively correct.

The ruling also warned that intentionally failing to file solely on the claim that one's income is not taxable can constitute an intentional understatement aimed at evasion and can trigger a 100% fraud penalty. It upheld the assessment and accrued interest.

Common questions

Q: Was Virginia allowed to use IRS information?
A: Yes. The ruling relied on federal authorization and the Department's written coordination agreement with the IRS.

Q: Did the taxpayer prove the reported income was wrong?
A: No. He did not provide information contradicting the federal data.

Citations and references

• Va. Code §§ 58.1-111, 58.1-205, 58.1-301, 58.1-308, and 58.1-320 through 58.1-322.
• Va. Code § 58.1-341.
• IRC §§ 61 through 63 and 6103(d).
• Colonial Pipeline Co. v. Commonwealth, 206 Va. 517, 145 S.E.2d 227 (1965).
• New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937).

Subject

Taxpayer believes he was not required to file a federal or VA income tax return.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-121

Original ruling text

July 26, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letters concerning the Virginia individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2005.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayer had income for the taxable year at issue. 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 an assessment. The Taxpayer filed an appeal, contending the information from the Internal Revenue Service (IRS) was illegally obtained and the information agreement between the IRS and the Department exceeds the authority of the Internal Revenue Code (IRC).

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 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.

Agreement on Coordination of Tax Administration

Under IRC § 6013(d), the Department and the IRS have entered into a coordination agreement. 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 that resident's tax liability. According to the federal documents obtained, you had income that was included in FAGI. Because you did not file Virginia income tax returns, the Department made assessments based on the information it had available pursuant to Va. Code § 58.1-111.

The Taxpayer argues that IRC § 6103(d) requires the Tax Commissioner to make a separate request for each individual's tax return or return information. However, I must disagree. The Department has a written agreement with the IRS to disclose federal tax information on all Virginia taxpayers. The availability of such information is limited to designated employees and is maintained separately and securely from other records under guidelines established by the IRS. The agreement also authorizes the IRS to oversee the Department's usage of federal information and enforce the guidelines.

Taxability of Income

In this case, the Taxpayer does not deny having the income at issue, but states he had no FAGI as defined under IRC §§ 61 through 63. Based on this reasoning, the Taxpayer believes he was not required to file a federal or Virginia income tax return.

Virginia Code § 58.1-320 imposes a tax "on the Virginia taxable income for each taxable year of every individual . . . ." (Emphasis added). The Virginia Supreme Court has held "the power of the State of Virginia to levy taxes is not derived from the Constitution of the United States as interpreted by the Supreme Court. On the contrary, the State has the inherent and unlimited power of taxation unless restrained by its Constitution or the Constitution of the United States." See Colonial Pipeline Company v. Commonwealth of Virginia , 206 Va. 517, 145 S.E.2d 227 (1965). Thus, the fact that Virginia starts with the IRC to determine Virginia taxable income does not in any way inhibit the Commonwealth's authority to impose an income tax on its citizens.

Further, it has been well-established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." Thus, any individual who has Virginia taxable income as determined under Virginia's statutes is subject to Virginia income tax.

In addition, the information legally obtained from the IRS contradicts your argument. The information shows that the Taxpayer received income while a Virginia resident. Because the computation of an individual's Virginia income tax starts with FAGI, the Department appropriately computed the, Taxpayer's Virginia taxable income based on information within its possession. The Taxpayer has provided no information that would show the IRS information is in error.

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.

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 2005 taxable year. Accordingly, the assessment for the 2005 taxable year is correct and remains due and payable. An updated assessment will be issued shortly, which will include accrued interest. Payment of the assessment should be made within 30 days of the bill date in order 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 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/1-5030466778.E