Could Virginia expand a contractor's use-tax audit from three years to six when it found untaxed purchases and no filed returns?

Subject

Taxpayer incurred use tax liability and failed to file sales and use tax returns

Plain-English summary

Virginia upheld expansion of a construction contractor's use-tax audit from three years to six. During the initial audit period, the contractor had untaxed purchases, failed to accrue and remit use tax, and filed no sales-and-use-tax returns. That gave the auditor reasonable cause under Va. Code § 58.1-634 to examine older records and assess tax on untaxed fixed assets purchased in 2011 and 2012.

The fact that this was the contractor's first audit did not limit the Department's statutory authority.

The contractor also asserted that paying the assessment would cause financial hardship but provided no supporting documents. The Department said it could seek an offer in compromise based on doubtful collectability by submitting the specified business settlement and financial-information forms within 30 days. Without them, the assessment balance would become immediately due.

What this means for you

Failing to file required sales-and-use-tax returns can expose older purchase records to examination beyond the ordinary three-year period. A claim that payment is unaffordable is separate from whether the tax was properly assessed and requires financial evidence.

Common questions

Did a first audit protect the contractor from the six-year lookback? No. The ruling relied on the unfiled returns and untaxed purchases, not the taxpayer's audit history.

Did the hardship claim erase or reduce the assessment? No. The Department offered a process to request a collectability-based compromise, subject to documentation and review.

Citations and references

• Va. Code § 58.1-634.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-29

Original ruling text

March 23, 2017

Re: § 58.1-1821 Appeal: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the period of February 2010 through January 2016.

FACTS

The Taxpayer is a construction contractor primarily in the business of site preparation and excavation. The auditor performed an audit of expense purchases based on a sample of calendar year 2015. Because the Taxpayer incurred use tax liability during 2015 and failed to file sales and use tax returns, the auditor expanded the audit period an additional three years in accordance with Va. Code § 58.1-634. As a result of the expanded audit period, the auditor assessed use tax on untaxed fixed asset purchases in 2011 and 2012. The Taxpayer believes that the expansion of the audit from a three-year period to a six-year period is unreasonable in light of the fact that this is the first audit of the Taxpayer. The Taxpayer also asserts that payment of the audit assessment would pose a financial hardship for the Taxpayer.

DETERMINATION

Statute of Limitations

Virginia Code § 58.1-634 provides, in part that, “the Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.” In this case, the Taxpayer failed to accrue and remit Virginia use tax, i.e. , file a return, on untaxed purchases during the initial three years of the audit period. This being the case, the auditor was well within the Department's statutory authority to expand the audit period to six years.

Financial Hardship

You contend that paying the audit assessment will create a financial hardship for the Taxpayer's business. However, no documentation has been provided to support this claim.

The Taxpayer may wish to request an offer in compromise based on doubtful collectability. The Taxpayer must present evidence of doubtful collectability to support a claim of financial hardship. If the Taxpayer wishes to pursue a settlement based on doubtful collectability, please complete and return the enclosed Offer in Compromise Business Request for Settlement and Financial Information Statement for Business forms. These forms will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based upon the information provided. The completed forms should be sent to: Tax Commissioner, Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, Virginia 23218-2475. You may also fax the forms to (804) 786-2645. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based on doubtful collectability. In that case, the balance of the assessment will become immediately due and payable.

The Code of Virginia sections cited in this letter are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If there are any questions regarding this matter, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/834.Q