Could federal income tax withheld from an IRA distribution reduce the Virginia tax due after an IRS audit adjustment?

Subject

The Department considers the information provided by the IRS to be correct.

Plain-English summary

The IRS reported that a married couple had underreported a 2013 IRA distribution, interest, and a state income tax refund. Because the couple did not file an amended Virginia return reflecting the federal changes, Virginia assessed tax using the IRS information.

The couple argued that federal income tax withheld from the IRA distribution should cover the additional liability. Virginia disagreed. The distribution was included in federal adjusted gross income, no Virginia income tax was withheld, and Virginia law did not provide a deduction for the federal withholding.

Without objective evidence showing a different federal adjusted gross income, the Department accepted the IRS information and denied the requested Virginia refund.

What this means for you

• Report a final federal income adjustment to Virginia within one year.
• Federal withholding does not count as Virginia withholding.
• Retirement income included in federal adjusted gross income remains taxable by Virginia unless a specific Virginia modification applies.
• To challenge an assessment based on IRS data, provide objective evidence that the federal figure changed or was incorrect.

Citations and references

• Va. Code §§ 58.1-301, 58.1-311, 58.1-312 A 3, and 58.1-322.
• P.D. 11-107.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-144

Original ruling text

August 23, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of individual income tax paid by * (the “Taxpayers”) for the taxable year ended December 31, 2013.

FACTS

The Taxpayers, a husband and wife, were audited by the Internal Revenue Service (IRS) for the 2013 taxable year. The IRS notified the Department of adjustments it made to the Taxpayers' federal income tax return. The Taxpayers failed to file an amended Virginia income tax return reflecting the IRS adjustments. As a result, the Department issued an assessment based on the IRS information. The Taxpayers paid the assessment and filed an appeal, contending that federal income tax was deducted from the additional income.

DETERMINATION

Virginia Code § 58.1-301 provides that the 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 the federal adjusted gross income (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.

Virginia Code § 58.1-311 requires an 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.

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' 2013 Virginia income tax returns based on federal information available from the IRS as permitted by statute. The documentation provided showed that the Taxpayers underreported income the wife received as a beneficiary of a distribution from a traditional, SEP or SIMPLE Individual retirement Account (IRA). Interest and a state income tax refund were also underreported. The Taxpayers assert that adequate federal income tax was withheld from the IRA distribution to cover any additional tax liability.

In this case, federal income tax was withheld from the distribution. However, no Virginia income tax was withheld. The distribution was included in FAGI and, therefore, subject to Virginia income tax. Virginia does not provide a deduction for federal income taxes withheld for retirement plan income. Absent objective evidence of FAGI reported by the Taxpayer, the Department will consider the information provided by the IRS to be correct. Accordingly, the Taxpayer's request for a refund cannot be granted.

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 website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1259.B