Could taxpayers dispute IRS changes to federal adjusted gross income through a Virginia tax appeal, and was the resulting assessment timely?

Subject

Taxpayers must contact the IRS to dispute any discrepancies in their FAGI.

Plain-English summary

The IRS reported that a married couple had underreported wages, pension income, and gambling income on their 2013 federal return. Virginia changed its record to match the IRS federal adjusted gross income and assessed additional tax.

Virginia refused to reconsider the federal figures. Its longstanding policy was not to look behind the IRS's final determination, so any dispute about federal adjusted gross income had to be taken to the IRS. If the IRS later changed its findings, the couple could file an amended Virginia return.

The assessment was also timely. The 2013 return was due May 1, 2014, making the ordinary three-year deadline May 1, 2017; Virginia issued the assessment in January 2017. Separately, failure to report an IRS change allowed Virginia to assess beyond the general three-year period.

What this means for you

• Challenge federal income discrepancies with the IRS, not through a Virginia appeal.
• Report a final federal change to Virginia within one year.
• Virginia generally starts resident taxable income from federal adjusted gross income.
• A later favorable IRS adjustment can support an amended Virginia return.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-311, 58.1-312 A 3, 58.1-104, and 58.1-1823 A(ii).
• P.D. 11-107, P.D. 15-204, P.D. 88-307, P.D. 11-105, and P.D. 17-66.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-143

Original ruling text

August 23, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers” ) for the taxable year ending December 31, 2013.

FACTS

The Taxpayers, a husband and a wife, timely filed a 2013 Virginia resident individual income tax return. The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayers' federal adjusted gross income (FAGI) was adjusted and did not match the FAGI reported to the Department. The Department adjusted its records to match the IRS records and issued an assessment for additional tax. The Taxpayers filed an appeal, requesting an explanation of the additional income and contending the assessment was issued four years after the taxable year at issue.

DETERMINAITON

Virginia Code § 58.1-301 provides, with certain exceptions, 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. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles not specifically included in Virginia tax statutes. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income 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.

Further, Va. 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 information received from the IRS indicates it adjusted underreported wages, pension income, and gambling income. The Department has a long standing policy that 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 merely adjusted the Taxpayers' FAGI to match the amount on the federal record. Because the Department's assessment was based on the information received from the IRS, the Taxpayers must contact the IRS to dispute any discrepancies in their FAGI. See P.D. 15-204 (10/20/2015).

The Taxpayers assert that the Department did not provide an explanation for the assessment. By letter dated March 14, 2017, the Department informed the Taxpayers that the IRS had made changes to their 2013 federal income tax return and detailed the adjustments.

The Taxpayers also argue that the assessment was issued four years after the 2013 taxable year. Generally, pursuant to Va. Code § 58.1-104, the Department has authority to issue an assessment within three years of the due date of a timely filed return. The 2013 return was due on May 1, 2014. Thus, under the general rule, the Department had until May 1, 2017 to make corrections or issue and assessment of additional tax. As indicated above, when an individual fails to report changes made by the IRS, Va. Code § 58.1-312 A 3 also permits the Department to assess the appropriate tax beyond the general three year statute of limitations. See (P.D.) 88-­307 (11/7/1988), P.D. 11-105 (6/10/2011) and P.D. 17-66 (5/10/2017). The Department timely issued the assessment for the 2013 taxable year in January 2017.

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 taxable year at issue, 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 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1180.D