The IRS flagged me to Virginia as a possible non-filer, and I proved I actually live in another state -- am I completely off the hook, or could I still owe Virginia something?

Plain-English summary

The Department learned from the IRS that a taxpayer may have needed to file a 2017 Virginia return, but no return was on file. When the Department's initial request for more information went unanswered, it issued an assessment treating him as a Virginia resident who hadn't reported his income. He appealed, arguing he was actually a resident of a different State A that year.

On the residency question, he won outright. Virginia recognizes two kinds of taxable resident -- a "domiciliary" resident (whose permanent home base is Virginia) and an "actual" resident (someone physically present in Virginia more than 183 days in the year), and the burden of proving you're neither rests on the taxpayer. Based on the information he provided with his appeal, the Department agreed he wasn't a Virginia domiciliary for 2017 and hadn't spent enough days physically present in Virginia to qualify as an actual resident either. That meant he wasn't taxable as a Virginia RESIDENT and had no obligation to file a resident return for that year.

But the story didn't end there. Separately from residency, Virginia taxes NONRESIDENTS on income sourced to Virginia -- including wages earned from work carried on in Virginia -- once that income exceeds the ordinary filing threshold. The Department's own records showed this taxpayer had received wage income from an employer that had actually withheld Virginia income tax on his behalf, a strong signal the wages were Virginia-connected. While his appeal was pending, the Department sent him two separate letters (in November 2021 and January 2022) specifically asking him to explain the nature and source of that income. He never responded to either one. With no explanation offered to the contrary, the Department reasonably treated the wages as Virginia-source income -- and since his adjusted gross income exceeded the filing threshold, he was required to file a Virginia NONRESIDENT return reporting it, a completely separate obligation from the resident-filing question he'd just won. The Department gave him 30 days to submit that nonresident return (along with a full copy of his federal return and all W-2s), with the assessment to be adjusted based on the best information available if he didn't.

What this means for you

Anyone who successfully proves they weren't a Virginia resident for a given year

That doesn't automatically eliminate all Virginia tax exposure. If you had Virginia-source income during that same year -- most commonly wages from work performed in Virginia, or income from Virginia real property or a Virginia business -- you may still owe a NONRESIDENT return reporting that income, a completely separate filing obligation from the resident question.

Anyone whose employer withheld Virginia income tax from their wages

That withholding is a strong signal the Department will treat as evidence the wages are Virginia-source income, especially if you don't respond to a request to explain otherwise. If your wages genuinely weren't Virginia-connected despite the withholding, be ready to explain why when asked -- don't let the request go unanswered.

Anyone who receives Department letters asking about the "nature and sourcing" of specific income while an appeal is pending

Respond to every one. This taxpayer's silence on two separate document requests -- even after winning the core residency argument -- left the Department with no basis to conclude anything other than that the wages were Virginia-source income, extending his filing obligation even after the original non-filer theory had been resolved in his favor.

Common questions

Q: If I prove I wasn't a Virginia resident for a tax year, am I completely done with Virginia for that year?
A: Not necessarily. You may still owe a Virginia NONRESIDENT return if you had Virginia-source income that year (like wages from Virginia-based work), separate and apart from the resident-filing question.

Q: My employer withheld Virginia income tax from my paycheck even though I don't think I owe Virginia anything -- does that matter?
A: Yes -- Virginia withholding is treated as meaningful evidence the wages are Virginia-source income. If you disagree, you need to respond to any Department request explaining the actual nature and source of the income; staying silent lets the Department reasonably assume Virginia sourcing.

Q: What Virginia-source income triggers a nonresident filing requirement?
A: Generally, income from owning real or tangible property in Virginia, from a business/trade/profession/occupation carried on in Virginia, or from Virginia Lottery prizes/in-state gambling winnings -- once your Virginia adjusted gross income exceeds the filing threshold.

Q: What happens if I don't respond to the Department's request to explain income sourcing?
A: The Department can reasonably treat unexplained income (especially wages with Virginia withholding) as Virginia-source income and assess accordingly, using the best information available if you never provide a nonresident return or other clarifying documentation.

Citations and references

• Va. Code § 58.1-302 (domiciliary resident, actual resident, and Virginia-source income definitions)
• Va. Code § 58.1-325 (nonresidents with Virginia-source income taxed as nonresidents unless a filing exception under § 58.1-321 applies)
• Va. Code § 58.1-321 (filing threshold and exceptions)
• Va. Code § 58.1-341(A)(2) (nonresident filing requirement)
• Va. Code § 58.1-322.01; § 58.1-322.02 (modifications used to compute Virginia adjusted gross income for the filing-threshold comparison)

Subject

Residency: Nonresident - Income from Virginia Sources, Wages

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-78

Original ruling text

April 19, 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 assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2017.

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 2017 taxable year. Because no return was on file, the Department requested additional information in order to determine if his income was taxable in Virginia. When a response was not received, the Department issued an assessment. The Taxpayer appeals, contending he was a resident of * (State A).

DETERMINATION

Residency

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.

In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change.

In determining domicile, consideration may be given to the individual’s expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, situs of real or tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person’s domicile. A person’s true intention must be determined with reference to all the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.

The Department determines a taxpayer’s intent through the information provided. A taxpayer has the burden of proving that he or she has abandoned his or her Virginia domicile. If the information is inadequate to meet this burden, the Department must conclude that he or she intended to remain indefinitely in Virginia.

Based on the information provided with the Taxpayer’s appeal, the Taxpayer was not a domiciliary resident of Virginia for the 2017 taxable year. Further, the information provided indicated that he was not in Virginia for enough days in 2017 to qualify as an actual resident. The Taxpayer, therefore, was not taxable as a Virginia resident and was not required to file a 2017 Virginia resident income tax return.

Nonresidents

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents, unless the individual meets the filing exception described in Virginia Code § 58.1-321. See Virginia Code § 58.1-325. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident) by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deductions from all sources. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss, and deductions attributable to (1) the ownership of any interest in real or tangible personal property in Virginia, (2) a business, trade, profession or occupation carried on in Virginia, or (3) prizes paid by the Virginia Lottery Department, and gambling winnings from wagers placed or paid at a location in Virginia. Thus, a nonresident with Virginia source income is required to file a nonresident Virginia income tax return unless the filing exemption applies. See Virginia Code § 58.1-341 A 2.

The Department’s records indicate that the Taxpayer received wage income from an employer that withheld Virginia income tax. While the appeal was pending, the Department requested further information from the Taxpayer by letters dated November 19, 2021, and January 7, 2022, regarding the nature and sourcing of this income. To date, the Taxpayer has not responded to the information requests. As such, it is reasonable for the Department to assume this income was from Virginia sources. In addition, the Taxpayer’s Virginia adjusted gross income, defined as federal adjusted gross income with the modifications specified in Virginia Code § 58.1-322.01 and § 58.1-322.02, exceeded the filing threshold set forth in Virginia Code § 58.1-321. The Taxpayer, therefore, was required to file a Virginia nonresident income tax return.

CONCLUSION

Although the Taxpayer was not a resident of Virginia during the 2017 taxable year, it appears he was required to file a nonresident Virginia income tax return to report income from Virginia sources.

The Taxpayer, therefore, will be given the opportunity to file a nonresident Virginia income tax return for the 2017 taxable year. In addition, the Taxpayer should include a complete copy of his 2017 federal return and all Forms W-2. The return should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Attn: *, Appeals & Rulings Unit, P.O. Box 27203, Richmond, Virginia 23261-7203. Upon receipt, the return will be reviewed and the assessment will be adjusted, as appropriate. If the return is not received within the allotted time, the assessment will be adjusted based on the best information available.

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/3822.X