The IRS told Virginia I underreported income, and Virginia assessed me for two years based on that. Can I fight the assessment by arguing the IRS was wrong, and does it matter that I appealed one of the years late?

Plain-English summary

The IRS notified the Department that a taxpayer had failed to include all of his income in federal adjusted gross income (FAGI) on his 2016 and 2017 federal returns. Because the taxpayer never filed amended Virginia returns reflecting those federal changes, the Department issued Virginia assessments for both years based on the IRS-reported increase. The taxpayer appealed, arguing the Department never told him specifically what income he'd failed to report, and that he actually had no unreported income at all.

The 2016 assessment failed on a hard deadline, regardless of merits. Virginia law gives a taxpayer only 90 days from the date of an assessment to file a complete appeal, and an assessment is legally considered "made" when the written notice is mailed to the taxpayer's last known address. Here, the 2016 assessment was issued on October 3, 2019, but the taxpayer's appeal letter was dated October 27, 2020 -- more than a year after the 90-day window had closed. That alone is fatal to the 2016 appeal, independent of whatever the taxpayer's actual arguments were.

Both years failed on the merits too, because Virginia doesn't relitigate the IRS's own determination. Virginia law requires reporting a federal income change to the Department within one year of its "final determination" (by filing an amended return); if that doesn't happen, the Department can assess the correct tax at any time. Separately, federal law lets the Department pull income information directly from the IRS to help determine additional Virginia tax owed. Once the IRS has made its own final determination of a taxpayer's federal income, the Department's longstanding practice is NOT to look behind that determination and re-decide it -- it simply applies the IRS's own numbers. Here, the IRS had already notified the taxpayer of the FAGI increase for both years (in August 2019 for 2016, and July 2019 for 2017), and had provided the Department a schedule showing the adjusted FAGI. Because the taxpayer never disputed the underlying federal determination WITH THE IRS, and the Department doesn't independently second-guess it, the Tax Commissioner found no basis to revise either year's assessment -- even setting aside the separate, independently fatal timing problem with the 2016 appeal.

What this means for you

Taxpayers who receive an assessment based on IRS-reported federal income changes

If you disagree with the IRS's own determination of your federal income, that fight needs to happen with the IRS itself (through the federal audit/amended-return process) -- Virginia generally won't independently relitigate the IRS's final determination once it's been made, it will simply apply the resulting numbers.

Anyone appealing any Virginia tax assessment

Track the 90-day appeal deadline carefully from the DATE THE ASSESSMENT NOTICE WAS MAILED, not from when you personally became aware of it or decided to respond -- a late-filed appeal fails on timing alone, no matter how strong the underlying argument might otherwise be.

Taxpayers whose federal income was adjusted by the IRS

File the required Virginia amended return within ONE YEAR of the federal change's final determination, even if you plan to separately dispute the federal number -- failing to file lets the Department assess Virginia tax based on the IRS information at any time, with interest continuing to accrue.

Common questions

Q: The IRS said I had unreported income and Virginia assessed me based on that -- can I argue to Virginia that the IRS was wrong?
A: Generally no. Once the IRS has made its own final determination of your federal income, the Department doesn't look behind that determination -- any dispute over the underlying federal number needs to be resolved with the IRS directly.

Q: How much time do I have to appeal a Virginia tax assessment?
A: 90 days from the date the assessment notice is mailed to your last known address -- not 90 days from when you actually see or respond to it. Missing this deadline is fatal to an appeal regardless of its merits.

Q: What happens if I don't file an amended Virginia return after the IRS adjusts my federal income?
A: The Department can assess the correct Virginia tax at any time based on the IRS-reported information, with no statute of limitations protecting you, since Virginia law requires reporting the federal change within one year of its final determination.

Citations and references

• Public Document 11-107 (6/14/2011) -- where the IRS has audited a taxpayer's federal taxable income, the Department does not look behind the IRS's final determination

Subject

Administration : Assessment - Federal Information; Appeal - Timely Filed

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-93

Original ruling text

July 20, 2021

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 assessments issued to * (the “Taxpayer”) for the taxable years ended December 31, 2016 and 2017.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayer failed to include all his income in federal adjusted gross income (FAGI) on his federal individual income tax returns for the 2016 and 2017 taxable years. Because the Taxpayer had not filed amended Virginia income tax returns to report the federal changes, assessments were issued for additional tax due. The Taxpayer appealed, contending that the Department did not explain what income he failed to report and that in any event, he had no unreported income.

DETERMINATION

2016 Taxable Year

Virginia Code § 58.1-1821 states, “Any person assessed with any tax administered by the Department of Taxation may, within 90 days from the date of such assessment, apply for relief to the Tax Commissioner. Such application shall be in the form prescribed by the Department and shall fully set forth the grounds upon which the taxpayer relies and all facts relevant to the taxpayer’s contention.” Pursuant to Virginia Code § 58.1-1821 and Title 23 of the Virginia Administrative Code (VAC) 10-20-165, a complete appeal must be filed with the Department within 90 days from the date of assessment. In addition, Virginia Code § 58.1-1820 provides that assessments made by the Department are deemed to be made when a written notice of assessment is mailed to a taxpayer at his last known address.

The assessment for the 2016 taxable year was issued on October 3, 2019. The Taxpayer filed an appeal for the taxable years at issue with the Department by letter dated October 27, 2020, well after the 90 day period had expired.

2017 Taxable Year

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 Chapter 3 of Title 58.1 of the Code of Virginia .

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 IRS notified the Taxpayer of the increase to his FAGI for the 2017 taxable year on July 29, 2019. When the Department did not receive an amended return to report the change within a year, an assessment was issued.

CONCLUSION

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). A schedule showing the Taxpayer’s FAGI as reported by the IRS has been attached.

The Department issued letters dated August 20, 2019, for the 2016 taxable year and August 17, 2020 (copies enclosed), notifying the Taxpayer of the changes and providing further instructions. When no response was received, the Department adjusted the Taxpayer’s 2016 and 2017 returns based on the federal information available from the IRS and issued assessments. In the case of the 2016 assessment, the Taxpayer filed his appeal well after the expiration of the 90 day deadline to file an appeal. Even if the appeal had been timely filed as to that year, however, I find no basis to revise that assessment, nor do I find any basis to revise the assessment for the 2017 taxable year.

The Taxpayer will receive updated bills with accrued interest to date. The bills should be paid within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections, regulation 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/3609.B

Related Documents

11-107