Would Virginia suspend 2010 and 2011 assessments while a taxpayer continued contesting the IRS audit that produced the federal adjustments?

Subject

Virginia assessments based on a contested IRS audit

Plain-English summary

Virginia refused to hold the 2010 and 2011 assessments in abeyance while the taxpayer contested the IRS audit. The taxpayer had not filed Virginia returns, and the Department used federal adjustment information received from the IRS to determine the state liabilities.

The Department said it does not look behind the IRS's final determination of federal taxable income. Based on the federal data then available, the 2010 and 2011 assessments were correct and remained due and payable. No assessment had been issued for 2009.

The taxpayer was not left without a correction path. If the IRS later revised its findings for 2010 or 2011, the taxpayer could file amended Virginia returns under the cited statutes to conform the state liabilities to the changed federal result.

Result: an updated bill would include accrued interest and should be paid within 30 days of the bill date to avoid additional interest.

What this means for you

• Virginia can use IRS adjustment information when state returns were not filed.
• Continuing to dispute an IRS audit does not necessarily suspend related Virginia assessments.
• If the federal result later changes, file the required Virginia amended return within the applicable deadline.
• Keep the final federal determination and adjustment schedules needed to reconcile the state return.

Common questions

Q: Did Virginia independently decide whether the IRS was correct?

A: No. The Department said it would not look behind the federal determination.

Q: Were assessments issued for all three years?

A: No. The ruling addressed assessments for 2010 and 2011 and stated that none had been issued for 2009.

Q: Could the taxpayer correct Virginia tax later?

A: Yes, if the IRS changed the audit findings, the taxpayer could file amended Virginia returns.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312(A)(3), and 58.1-1823(A)(ii).
• Virginia Public Document 11-107 (June 14, 2011).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-232

Original ruling text

December 16, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2009 through 2011. You request that the assessments be held in abeyance pending the result of an Internal Revenue Service (IRS) audit.

FACTS

The Taxpayer was audited by the Internal Revenue Service (IRS) for the taxable years at issue. The IRS notified the Department of adjustments it made to the Taxpayer's federal income tax return. A review of the Department's records showed that the Taxpayer had not filed Virginia individual income tax returns. The Department requested that the Taxpayer file returns or provide information to verify that he was not subject to Virginia income tax.

In response, the Taxpayer notified the Department that the IRS was in error and that he was not liable for any federal or Virginia income tax. Based on the IRS information, the Department adjusted the Virginia returns for the 2010 and 2011 taxable years and issued assessments. No assessment has been issued for 2009. The Taxpayer appeals the assessments, requesting that the assessments be held in abeyance and adjusted in accordance with the outcome of the contested IRS audit.

DETERMINATION

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.

The Taxpayer asserts that he has no federal income tax liability, and he is contesting the IRS audit. 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 Taxpayer's 2010 and 2011 income tax liability based on federal information available from the IRS as permitted by Virginia statute. As such, the 2010 and 2011 assessments are correct and remain due and payable.

The Taxpayer will receive an updated bill with accrued interest to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest. If the IRS adjusts its audit findings for the 2010 and 2011 taxable years, the Taxpayer will be permitted to file amended returns to correct his liability pursuant to Va. Code § 58.1-311 and Va. Code § 58.1-1823 A(ii).

The Code of Virginia sections and public document 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/1-6141862019.B