Could taxpayers defeat Virginia assessments by disagreeing with final IRS audit adjustments to their 2010-2012 federal income?

Subject

Virginia followed the IRS's final audit adjustments

Plain-English summary

Virginia upheld assessments based on the IRS's final audit changes. The IRS increased the couple's federal adjusted gross income for 2010-2012 after deciding that the husband's securities activity did not qualify as a trading business. The taxpayers did not amend their Virginia returns and disputed the federal conclusion.

Virginia law required taxpayers to report a final federal-income change within one year. If they did not file the required amended return, the Department could assess the resulting Virginia tax at any time.

The Commissioner would not look behind the IRS's final determination to decide the federal securities-trader issue again. No evidence showed that Virginia had incorrectly applied the federal information.

Result: the assessments remained due. If the IRS later changed its findings and issued a new final determination, the taxpayers could file amended Virginia returns.

What this means for you

• Report final federal taxable-income changes to Virginia within the required period.
• Disputing an IRS conclusion does not by itself stop Virginia from using the final federal determination.
• Preserve the federal audit record and any later IRS revision.
• A later federal change may permit a corresponding amended Virginia return.

Common questions

Q: Would Virginia independently decide whether the husband was a securities trader?

A: No. The Commissioner treated the IRS's final determination as controlling for the federal-income adjustment.

Q: Why could Virginia assess after the original returns?

A: The taxpayers did not report the federal changes, and the cited statute allowed assessment at any time in that circumstance.

Q: Was there any path to reduce the Virginia liabilities later?

A: Yes. A new final IRS determination could support amended Virginia returns under the cited provisions.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312(A)(3), and 58.1-1823(A)(ii).
• IRC § 475.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-223

Original ruling text

December 8, 2015

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 assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2010 through 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and a wife, were audited by the Internal Revenue Service (IRS) for the 2010 through 2012 taxable years. The IRS adjusted the Taxpayers' federal adjusted gross income (FAGI). The Taxpayers did not amend their Virginia income tax returns to report the IRS changes. As a result, the Department issued assessments. The Taxpayers appeal the assessments, contending they have not agreed with the IRS adjustments.

DETERMINATION

Virginia Code § 58.1-311 requires individuals 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 taxpayers fail to file an amended return, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

The Taxpayers state that they do not agree with the IRS adjustment, contending the husband met the standards under Internal Revenue Code (IRC) § 475. This section of the IRC sets forth the requirements for individuals considered to be investors, dealers, or traders in securities for federal income tax purposes. The IRS reviewed the Taxpayers trading activities and determined the Taxpayers were not in the business of trading securities, thus the income and expenses derived from such activity were subject to certain limitations.

Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination. See Public Document (P.D.) 11-107 (6/14/2011). The Department adjusted the Taxpayers' 2010 through 2012 Virginia income tax returns based on federal information available from the IRS as permitted by statute. No evidence has been presented to demonstrate the Department's adjustments are erroneous.

Based on the foregoing, the assessments are upheld and remain due and payable. The Taxpayers will receive updated bills with accrued interest to date. The bills should be paid within 30 days of the bill date to avoid the accrual of additional interest.

If the IRS later adjusts its audit findings for the 2010 through 2012 taxable years and issues a new final determination, the Taxpayers may file amended returns to correct their liabilities as permitted under Va. Code § 58.1-311 and § 58.1-1823 A(ii).

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5988474514.D