Could taxpayers reverse Virginia assessments after failing to report an IRS deduction change and failing to document later itemized deductions?

Plain-English summary

Virginia refused to reopen the couple's 2010 assessment because their administrative appeal rights had already been exhausted. It upheld the 2011 assessment because they did not file an amended Virginia return reporting the IRS's final reduction of their federal itemized deductions.

For 2014 through 2016, the Department had requested records supporting the deductions, but the couple supplied none. Because assessments are presumed correct and taxpayers must substantiate claimed deductions, Virginia gave them one final 30-day opportunity. Without timely documentation, those assessments would be treated as correct and collections would resume.

Common questions

Must a taxpayer report a final federal income change to Virginia? Yes, within the period stated in Va. Code § 58.1-311.

Could the Department revisit the 2010 appeal again? No.

Were the 2014-2016 deductions finally denied immediately? No. The ruling allowed one last 30-day substantiation period.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312 A 3, 58.1-301, 58.1-219, and 58.1-322 D 1
• Va. Code §§ 58.1-310, 58.1-205, 58.1-1826, and 58.1-1823 A (ii)
• Treas. Reg. § 1.6001-1(a)
• P.D. 17-78, P.D. 17-154, and P.D. 11-107

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-144

Original ruling text

July 17, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letters in which you seek correction of the individual income tax assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2010, 2011 and 2014 through 2016.

FACTS

The Taxpayers, a husband and wife, were audited by the Internal Revenue Service (IRS) for the 2010 and 2011 taxable years. The IRS reduced the itemized deductions the Taxpayers claimed on their federal income tax returns and notified the Department of the adjustments it made. The Taxpayers failed to file amended Virginia income tax returns reflecting the IRS adjustments, and an assessment was issued for each taxable year .

The Department also selected for audit the Taxpayers’ joint resident Virginia income tax returns for the 2014 through 2016 taxable years. The Department requested documentation to substantiate the deductions. When the Taxpayers failed to provide the documentation requested, the Department issued assessments. The Taxpayers contest all of these assessments.

DETERMINATION

Taxable Year 2010 Assessment

The Department previously addressed the Taxpayers’ appeal of the assessment for the 2010 taxable year in Public Document (P.D.) 17-78 (5/23/2017) and P.D. 17-154 (8/25/2017). The Taxpayers have exhausted their administrative appeal rights for this assessment in accordance with Virginia’s law, regulations, and policies. Therefore, the Department will not issue another determination with regard to the 2010 taxable year.

Taxable Year 2011 Assessment

The assessment for the 2011 taxable year was issued when the Taxpayers failed to file an amended Virginia income tax return to report changes the IRS made to their federal return. 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 reflecting the federal adjustment, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

Under circumstances where the IRS has audited the FAGI of an individual, the Department does not look behind the IRS’s final determination. See P.D. 11-107 (6/14/2011). The Department adjusted the Taxpayers’ 2011 return based on the federal information available from the IRS as permitted by Virginia statute.

Taxable Years 2014 through 2016 Assessments

Conformity

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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly 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 Virginia Code § 58.1-322.

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219. Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from their Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes.

Taxpayer Records

Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:

Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof of any individual, estate, trust, partnership or corporation in order to properly audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.

By letter dated July 17, 2017, the audit staff requested documentation to substantiate the Taxpayers’ itemized deductions for each of the 2014 through 2016 taxable years. The Taxpayers did not respond to the information request or include any documentation concerning the deductions with their appeal.

Under the provisions of Virginia Code § 58.1-205 any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayers to show that the assessments were erroneous. In addition, Virginia Code § 58.1­-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the assessment was attributable to a taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

CONCLUSION

The Department adjusted the Taxpayers’ 2011 return in accordance with the federal changes as permitted under Virginia law. Therefore, the 2011 assessment is upheld. If the IRS adjusts its audit findings for the 2011 taxable year, the Taxpayers will be permitted to file an amended return to correct their liability pursuant to Virginia Code § 58.1-311 and Virginia Code § 58.1-1823 A (ii). The Taxpayers will receive an updated bill as to the 2011 assessment, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and the resumption of collections actions.

In addition, the Taxpayers have failed to provide the information requested by the Department to substantiate the itemized deductions claimed on their 2014 through 2016 Virginia individual income tax returns. The Taxpayers, however, will be granted one last opportunity to provide the information required to support the deductions. The documentation must be provided within 30 days from the date of this letter. Please send the requested information to the Department’s Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *. If the information is not received within the allotted time, the Department’s assessments for the 2014 through 2016 taxable years will be considered to be correct and collection actions will resume.

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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1620.M