Was a Virginia nonfiler's assessment unsupported when the Department relied on wage, dividend, and interest data from the IRS?

Plain-English summary

Virginia upheld the 2008 assessment because IRS records supplied a factual income basis and the taxpayer provided no evidence that the records were wrong. The Department had wage, dividend, and interest information sent to the taxpayer's Virginia address. After the taxpayer did not answer a request for information, Virginia assessed tax from the available data.

Virginia begins resident taxable-income calculations with federal adjusted gross income. A resident required to file federally generally must also file in Virginia, and federal law lets the Department obtain IRS information when a proper Virginia return is missing.

The assessment was not “naked”: it rested on identified third-party income. Virginia assessments are presumed correct, so the taxpayer had to produce objective contrary evidence or corrected IRS documentation. None was provided. The ruling also warned that intentionally refusing to file solely because one claims income is not taxable can carry a 100% fraud penalty and can restrict court relief, but it did not state that such a separate fraud penalty had been assessed here.

Common questions

Q: Can Virginia use IRS information to assess a resident who did not file?
A: Yes. This ruling treated federal wage, dividend, and interest data as sufficient factual support.

Q: Who had to prove the assessment was wrong?
A: The taxpayer, because Virginia law made the Department's assessment prima facie correct.

Citations and references

• Va. Code §§ 58.1-205, 58.1-301, 58.1-308, 58.1-321, 58.1-322, 58.1-341, and 58.1-1826.
• IRC § 6103(d).
• Virginia Public Document 08-3.

Subject

Failure to file income tax return

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-53

Original ruling text

April 24, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter requesting correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2008.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that third-party financial documents for the 2008 taxable year were sent to the Taxpayer at a Virginia address. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When the Taxpayer failed to respond, an assessment was issued based on the available information. The assessment has been paid.

The Taxpayer filed an appeal, stating the assessment lacks basis as there are no source documents that appear to support the assessment. Therefore the assessment is a "naked assessment" not authorized by law. Further, the Taxpayer contends the burden of proof is on the Department and, therefore, it should be required to withdraw the assessment if it cannot be substantiated.

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 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.

The Taxpayer cites federal court cases that state that the IRS may not make a "naked assessment" even though there is a presumption that the assessment against a taxpayer is prima facie correct. A naked assessment is an assessment that has no basis in fact.

In the instant case, the Department's assessment was based on information provided by the IRS showing that the Taxpayer had wage, dividend and interest income for the 2008 taxable year. Such income is includable in the FAGI. Because Virginia starts with FAGI, the IRS information is sufficient documentation to make an assessment. If the Taxpayer believes the IRS information is not correct, he must obtain documentation from the IRS showing the correct amount of his FAGI. See Public Document (P.D.) 08-3 (1/07/2008).

Although the Taxpayer does not deny that he had income in 2008, he contends the Department's assessment is invalid. 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.

In addition, 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 assessment was attributable to the taxpayer's willful failure or refusal to provide the Department with necessary information as required by law.

Based on the applicable law cited above and the information presented, there is no basis to abate the Department's assessment for the 2008 taxable year. Accordingly, the assessment for the taxable year at issue is correct.

The Code of Virginia sections, regulation and public document 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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5018308177.E