Could Virginia estimate 2014-2016 income tax from available information when a resident failed to file returns, and did reliance on a preparer excuse penalties?

Plain-English summary

Virginia was entitled to estimate the taxpayer's 2014-2016 individual income-tax liabilities from information in its possession because he did not provide adequate information or file returns that allowed accurate liabilities to be calculated.

For a Virginia resident, the state calculation begins with federal adjusted gross income, subject to Virginia modifications. When a resident does not file a proper return, the Department may obtain federal information and make an estimated assessment.

The taxpayer argued that the estimates omitted expenses and deductions. The Department responded that he still had not supplied returns sufficient to calculate the correct amounts. It therefore upheld its authority to issue the assessments based on available information.

Reliance on a tax professional did not transfer the taxpayer's responsibility to ensure that returns were timely filed and accurate. The ruling explains that a taxpayer harmed by erroneous professional advice may have recourse against the adviser, but that reliance did not erase the state filing obligation or the penalties described in the letter.

The taxpayer received one final opportunity to file the 2014, 2015, and 2016 returns within 30 days. The Department would review them and adjust the assessments as appropriate. If they were not filed, the assessments would be considered correct and collection would resume.

What this means for you

Nonfilers receiving an estimated assessment

An estimate is not necessarily the final calculation, but disputing it requires usable tax returns and supporting information—not only a statement that deductions were omitted.

Taxpayers using a preparer

You remain responsible for filing and accuracy. A preparer's mistake may support a separate claim against the preparer, but this ruling did not treat it as a reason to remove the taxpayer's obligations.

Tax professionals

The Department's 30-day opportunity was case-specific. Submit complete returns and documentation within any appeal deadline rather than assuming the Department must reopen an estimate later.

Common questions

Q: Could Virginia use IRS information to estimate the tax?
A: Yes, when the resident failed to file proper Virginia returns.

Q: Did the taxpayer's claim of uncounted expenses invalidate the estimates?
A: No, because he had not provided sufficient returns to calculate accurate liabilities.

Q: Did reliance on a tax professional excuse the filing failure?
A: No.

Q: What was the final relief?
A: One last 30-day period to file all three returns so the assessments could be reviewed and adjusted as appropriate.

Citations and references

• Va. Code §§ 58.1-111, 58.1-1812, 58.1-301, 58.1-321, 58.1-322, 58.1-341, 58.1-347, and 58.1-492
• I.R.C. § 6103(d)
• P.D. 11-82, P.D. 12-93, P.D. 14-33, and P.D. 16-169

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-196

Original ruling text

November 30, 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 “Taxpayer”) for the taxable years ended December 31, 2014 through December 31, 2016.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia individual income tax return for the 2014, 2015 and 2016 taxable years. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When a response was not received, the Department issued assessments. The Taxpayer appealed, contending the assessments do not take into account expenses and deductions to which he is entitled. The Taxpayer also requests a waiver of penalties and interest.

DETERMINATION

Filing a Return

Virginia Code § 58.1-301 provides 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. 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 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.

Under Virginia Code § 58.1-341 a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Virginia Code § 58.1-321. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will help in determining the resident's tax liability. See Public Document (P.D.) 14-33 (3/7/2014).

The Taxpayer asserts that the assessments at issue do not take into account expenses and deduction to which he is entitled. Although the Department has made several requests, the Taxpayer has failed to file income tax returns sufficient to calculate accurate liabilities. Under such circumstances, Virginia Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to such taxpayer.

Penalty and Interest

The Taxpayer also requests that penalty and interest be waived for taxable years at issue based on his detrimental reliance on a tax professional to assist in preparing his income tax returns.

Pursuant to Virginia Code § 58.1-347, an individual who fails to file a return by the due date or extended due date of such return is subject to a penalty equal to 6% of the tax liability per month or fraction thereof during which such failure to file continues, not to exceed 30%, in the aggregate. In addition, Virginia Code § 58.1-492 provides for an “addition to tax” (commonly called the estimated tax underpayment penalty) in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year. The underestimated penalty and the late filed penalty were applied to the 2014, 2015, and 2016 assessments because the Taxpayer failed to make estimated payments.

A taxpayer’s reliance on a tax professional to prepare income tax returns, while understandable, does not relieve the taxpayer of the responsibility for ensuring that the return is filed and the information reported on the return is accurate. Further, in a situation where a taxpayer relies on an accountant, lawyer, tax preparer or other tax professional and such tax professional provides inaccurate or erroneous advice that results in liability, the taxpayer has recourse against the tax professional. See P.D. 11-82 (5/31/2011), P.D. 12-93 (6/8/2012), and P.D. 16-169 (8/29/2016).

CONCLUSION

Virginia’s taxing system is based largely on the theory of self-assessment. The taxpayer is given the responsibility to compute, file and pay their own income tax. Virginia has implemented a self-assessment system based on the federal system because it is less intrusive upon the taxpayer, and less costly to the administration of the tax. The Department has the authority to assess the additional tax plus any penalty and interest, as required by law, when it finds that any taxpayer “has failed to make a proper return or to pay in full any proper tax.” See Virginia Code § 58.1-1812. Thus, the Department was within its authority to issue an assessment based on the information it had in its possession.

I will, however, grant the Taxpayer one final opportunity to file his Virginia income tax returns for the 2014, 2015 and 2016 taxable years. The returns must be submitted within 30 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203: Attn: *. Upon receipt, the returns will be reviewed and processed, and the assessments will be adjusted as appropriate. If the returns are not filed within the allotted time, the assessments will be considered correct and collections action 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/1611.A