Could taxpayers avoid Virginia assessments based on final IRS changes merely because they were still contesting the federal audit?

Subject

Unreported IRS audit changes supported Virginia assessments

Plain-English summary

Virginia upheld the 2009-2011 assessments based on IRS audit changes because the taxpayers had not filed amended Virginia returns. Their continuing disagreement with the IRS did not permit the Department to disregard the federal final determination available to it.

Va. Code § 58.1-311 requires an individual to report a federal taxable-income change by amended Virginia return within one year after the final federal determination. If the taxpayer does not do so, Va. Code § 58.1-312 A 3 allows Virginia to assess the corresponding tax at any time.

The Department received the audit information directly from the IRS and adjusted the Virginia returns. The ruling says Virginia does not look behind the IRS's final determination. The assessments therefore remained due and payable with interest.

If the IRS later changed its findings, the taxpayers could file amended Virginia returns under Va. Code §§ 58.1-311 and 58.1-1823 A(ii) to correct their state liability.

What this means for you

• A final federal income adjustment can create a separate Virginia amended-return obligation.
• Contesting the IRS does not by itself stop Virginia from acting on the federal determination it has received.
• Failure to report the federal change removes the ordinary time barrier described in this ruling for the related Virginia assessment.
• A later favorable IRS revision can be carried into Virginia through a properly documented amended return.

Common questions

Q: Would Virginia independently re-decide the federal audit issues?

A: No. The ruling says the Department does not look behind the IRS's final determination.

Q: Were the assessments currently payable?

A: Yes. Updated bills with accrued interest were to be paid within 30 days to avoid more interest.

Q: What if the IRS later reduced the adjustments?

A: The taxpayers could file amended Virginia returns to correct the state liability.

Citations and references

• Va. Code §§ 58.1-1821, 58.1-311, 58.1-312 A 3, and 58.1-1823 A(ii).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-27

Original ruling text

February 24, 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, 2009 through 2011.

FACTS

The Internal Revenue Service (IRS) audited the Taxpayers for the 2009 through 2011 taxable years and made a number of adjustments to their returns. The Taxpayers failed to file amended returns based on the federal changes. The Department subsequently received the audit information from the IRS and issued assessments. The Taxpayers appeal the assessments, contending that they are contesting the adjustments with the IRS.

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 Taxpayers assert that they disagree with the IRS audit adjustments. 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' 2009 through 2011 returns based on federal information available from the IRS as permitted by Virginia statute. As such, the assessments issued for the taxable years ended December 31, 2009 through 2011 remain due and payable.

The Taxpayers 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 2009 through 2011 taxable years, the Taxpayers will be permitted to file amended returns to correct their 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/1-5776736561.B