The Department disallowed my itemized deductions and applied the standard deduction instead because I never sent in documentation -- can I still get them reinstated?

Plain-English summary

A taxpayer filed a 2018 Virginia resident income tax return claiming itemized deductions carried over from her federal return. When the Department audited that return, it asked for documentation to support those deductions -- and kept asking, sending three separate written requests over roughly six months (in June, October, and December 2020). The taxpayer never responded with any of the requested documentation. The Department disallowed the itemized deductions entirely, applied the standard deduction instead, and issued an assessment for the resulting additional tax and interest.

Virginia's individual income tax generally follows federal itemized-deduction rules, but the Department retains authority to look behind a return's claimed deductions when it has reason to question them, and taxpayers are separately required (under both federal recordkeeping rules and Virginia's own statute allowing the Department to demand supporting schedules) to be able to substantiate what they claim. Because a Department tax assessment is legally presumed correct, the burden falls on the taxpayer to prove it wrong -- and a taxpayer who simply never responds to repeated documentation requests hasn't met that burden.

The Tax Commissioner upheld the assessment, but wasn't entirely final about it: recognizing the taxpayer still hadn't had a chance to make her case with actual evidence, the ruling gave her one more 30-day window to submit the substantiating documentation. If she does, the Department will review it and adjust the assessment if warranted; if she doesn't, the assessment becomes final and collection proceeds.

What this means for you

Anyone claiming itemized deductions on a Virginia return

Keep the underlying receipts, invoices, and other substantiating records for as long as your return could be audited -- claiming a deduction on your federal return (and carrying it to Virginia) doesn't protect you if you can't later document it when asked.

Taxpayers who receive repeated Department requests for supporting documentation during an audit

Respond -- even a partial or delayed response is better than none. Here, three separate requests over six months went completely unanswered, which is itself powerful evidence against the taxpayer regardless of whether the underlying deductions might have been legitimate.

Taxpayers who've already received an assessment disallowing deductions for lack of documentation

You may still get one final opportunity to provide the missing substantiation before the assessment becomes truly final -- but don't count on it being offered indefinitely, and act within whatever deadline the Department's letter specifies.

Common questions

Q: The Department disallowed my itemized deductions because I didn't send documentation during an audit -- is that final?
A: Not necessarily immediately -- the Department may give you one last, time-limited opportunity to submit the missing documentation before the assessment becomes final. But you must actually respond within that deadline; the assessment stands as issued if you don't.

Q: Who has to prove an assessment disallowing my deductions is wrong?
A: You do. A Department tax assessment is legally presumed correct, and the burden is on the taxpayer to show it's incorrect -- typically by producing the substantiating records for whatever was disallowed.

Q: Does claiming a deduction on my federal return protect it from being challenged on my Virginia return?
A: Not automatically -- while Virginia generally relies on the accuracy of your federal return, the Department retains authority to look behind it and ask for supporting documentation, especially during an audit.

Citations and references

• Treas. Reg. § 1.6001-1(a) -- general federal requirement that taxpayers maintain records sufficient to determine correct tax liability
• Va. Code § 58.1-310 -- Department may require a taxpayer to provide their federal return and all supporting statements, inventories, and schedules when necessary to properly audit a Virginia return

Subject

Deduction : Itemized - Failure to Provide Information

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-97

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 year ended December 31, 2018.

FACTS

The Taxpayer filed a Virginia resident income tax return for the 2018 taxable year and claimed itemized deductions. Under audit, the Department requested supporting documentation to substantiate the deductions. When the information was not received, the Department disallowed the deductions, applied the standard deduction and issued an assessment for additional tax and interest. The Taxpayer appeals, contending the itemized deductions should be allowed.

DETERMINATION

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 Chapter 3 of Title 58.1 of the Code of Virginia .

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 the FAGI and itemized deductions 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 § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes. Taxpayers, however, must maintain records sufficient to allow the IRS to determine the correct 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.

In the Taxpayer’s case, the Department requested information sufficient to confirm the basis of the Taxpayer’s itemized deductions. The Department requested documentation by letters date June 17, 2020, October 19, 2020 and December 10, 2020 and mailed to the return address indicated on the Taxpayer’s appeal. The Taxpayer has failed to provide the requested information.

Pursuant to Virginia Code § 58.1-205 any assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect. Further, 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 erroneous assessment is attributable to the taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

Because the Taxpayer has failed to furnish information required by law, I must uphold the Department’s assessment for the 2018 taxable year. I will, however, grant the Taxpayer one more opportunity to provide the information required to substantiate her claim. The documentation must be provided within 30 days from the date of this letter. Please send the additional information to the Department’s Office of Tax Policy, Appeals and Rulings, P.O. Box Richmond, Virginia 23261-7203, Attn: *.

The information will be reviewed and the assessment will be adjusted as warranted. If the information is not provided within the time allotted, the assessment will be considered to be correct and collections actions will result.

The Code of Virginia sections 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/3594.B