Could Virginia assess additional 2014 tax from a final IRS income adjustment when the taxpayers filed no amended Virginia return?

Plain-English summary

Virginia upheld additional 2014 individual income tax after IRS information showed an increase in the couple's federal adjusted gross income. Virginia starts its resident-income-tax calculation with federal adjusted gross income, subject to specific Virginia modifications.

The taxpayers were required to report a final federal change by filing an amended Virginia return within one year. Because they did not amend, Virginia could assess the corresponding state tax without the usual time limit described in the ruling.

The Department had notified the taxpayers and received no response. It relied on the IRS information, including the taxpayers' federal payment plan, and would not reexamine the IRS's final determination. The assessment and accrued interest remained due.

Common questions

Why did the federal adjustment affect Virginia tax? Virginia resident taxable income begins with federal adjusted gross income.

Did the taxpayers have to amend their Virginia return? Yes, after the federal determination changed their income.

Would Virginia retry the federal tax dispute? No. The Department said it does not look behind the IRS's final determination.

Citations and references

• Va. Code § 58.1-301
• Va. Code §§ 58.1-322.01 through 58.1-322.04
• Va. Code §§ 58.1-311, 58.1-312 A 3, and 58.1-1821
• IRC § 6103(d)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-178

Original ruling text

October 24, 2018

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 assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2014.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayers, a husband and a wife, failed to include all their income in federal adjusted gross income (FAGI) on their federal individual income tax return for the 2014 taxable year. Because the Taxpayers had not filed an amended Virginia income tax return to report the federal change, an assessment was issued for additional tax due. The Taxpayers filed an appeal, contending that the Department did not explain what income the Taxpayers failed to report and that in any event, they had no unreported income.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, 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. 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 (VTI) with 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 § 58.1-322.01 through § 58.1-322.04.

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 a taxpayer fails to file an amended return, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

In addition, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will assist in determining any additional tax liability. In this case, information obtained by the Department indicates the Taxpayers' FAGI was increased and they have set up a payment plan with the IRS to satisfy the assessment.

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 issued a letter dated April 26, 2018 (copy enclosed) notifying the Taxpayers of the change and providing further instructions to the Taxpayers. When no response was received, the Department adjusted the Taxpayers’ 2014 return based on the federal information available from the IRS. Based on the circumstances, I find no basis to revise the assessment.

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.

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/1732.A