The IRS never questioned my Schedule C vehicle expense deduction -- can Virginia still audit and disallow it if I can't produce documentation when asked?

Plain-English summary

A couple claimed vehicle expense deductions on their federal returns -- Schedule C for 2018, Form 2106 for 2019 -- and carried those same amounts through to their Virginia returns, since Virginia's tax starts from federal adjusted gross income (FAGI). When the Department audited them and asked for documentation supporting the deductions, the taxpayers never responded, so the auditor disallowed the deductions and assessed additional tax for both years. On appeal, the taxpayers argued the Department simply had no authority to second-guess numbers that came straight off a federal tax form.

The Department disagreed. While it generally accepts federal return figures at face value, Virginia law (§ 58.1-219) specifically preserves the Department's authority to adjust FAGI and itemized deductions whenever there's clear evidence the reported amounts don't actually line up with the Internal Revenue Code -- and the ruling cites six prior published rulings where the Department has exercised exactly this authority. Separately, both federal regulations and Virginia Code § 58.1-310 require taxpayers to keep and produce records adequate to verify their return positions. Because a Virginia assessment is presumed correct once issued, and the taxpayers provided nothing to rebut that presumption, the Department upheld both years' assessments -- while still leaving the door open for the taxpayers to submit documentation within 30 days before the assessments become truly final.

What this means for you

Anyone claiming vehicle expenses (or any deduction) that flowed from a federal form onto your Virginia return

Don't assume that because the IRS didn't flag something, Virginia can't ask about it. Virginia independently reserves the right to request documentation and adjust your return if the numbers don't hold up -- keep mileage logs, receipts, and other substantiation on hand regardless of what the federal side required.

Anyone who receives a documentation request during a Virginia audit

Silence is the worst response. This ruling shows an assessment becomes very hard to undo once it's issued for lack of a response, because the burden shifts to you to prove the assessment wrong, not to the Department to prove it right.

Anyone whose audit assessment already became final for lack of documentation

Check whether the ruling or notice you received offers a final window (as this one did, 30 days) to submit late documentation before pursuing a formal appeal -- providing the records directly to the audit unit can be faster than a full administrative appeal.

Common questions

Q: Can Virginia disallow a deduction that the IRS already accepted on my federal return?
A: Yes. Virginia generally relies on federal figures, but Va. Code § 58.1-219 lets the Department independently adjust FAGI or itemized deductions when there's clear evidence the reported amounts aren't consistent with the Internal Revenue Code -- IRS acceptance doesn't bind Virginia.

Q: What happens if I don't respond to a Virginia auditor's request for documentation?
A: The auditor can disallow the unsupported items and issue an assessment. Because a Department assessment is presumed correct (Va. Code § 58.1-205), the burden then falls on you to prove it wrong, which is much harder to do after the fact than simply responding to the original request.

Q: Can a court fix an assessment that resulted from my own failure to provide requested information?
A: Not according to Va. Code § 58.1-1826, which bars court relief where the erroneous assessment stems from the taxpayer's willful failure or refusal to provide required information.

Citations and references

• Va. Code § 58.1-301 (Virginia conforms to IRC terminology and starts VTI computation with FAGI)
• Va. Code § 58.1-219 (Department may adjust FAGI/itemized deductions inconsistent with the IRC)
• Va. Code § 58.1-310 (Department may require a taxpayer to produce federal returns and supporting schedules)
• Va. Code § 58.1-205 (an assessment is prima facie correct; burden of proof on the taxpayer)
• Va. Code § 58.1-1826 (no court relief where an erroneous assessment stems from the taxpayer's willful failure to provide required information)
• Treas. Reg. § 1.6001-1(a) (taxpayers must maintain records sufficient to determine correct tax liability)

Subject

Administration : Audits - Taxpayer Records

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-13

Original ruling text

January 25, 2022

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 “Taxpayers”) for the taxable years ended December 31, 2018, and 2019.

FACTS

The Taxpayers filed Virginia resident income tax returns for the 2018 and 2019 taxable years claiming deductions for vehicle expenses on federal Schedule C in 2018 and on federal Form 2106 in 2019. Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessments for both taxable years. The Taxpayers appeal the assessments, contending the Department lacks authority to adjust amounts reported on federal tax forms.

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. The Department, however, 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. The Department has consistently exercised this authority in conducting its audit programs. See Public Document (P.D.) 10-126 (07/07/2010), P.D. 12-141 (08/29/2012), P.D. 14-155 (08/28/2014), P.D. 16-53 (04/11/2016), P.D. 19-27 (04/08/2019), and P.D. 21-67 (05/25/2021).

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 properly to 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.

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 Taxpayers have failed to furnish information required by law, I must uphold the Department’s assessments for the 2018 and 2019 taxable years. I will, however, give the Taxpayers one last opportunity to provide adequate documentation. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Compliance, Desk Audit, RAP, P.O. Box 5610, Richmond, Virginia 23220-0610, Attention: *, Tax Auditor. Upon receipt, the documentation will be reviewed and the assessments may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessments will be considered correct.

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/3939.X

Related Documents

10-126

12-141

14-155

16-53

19-27

21-67