The Department asked me to document my itemized deductions, employee business expenses, Schedule C expenses, and student loan interest deduction across two tax years, and I never responded -- can it disallow everything and assess me?

Plain-English summary

A taxpayer filed Virginia resident returns for 2018 and 2019 that carried over a full slate of federal deductions: itemized deductions from Schedule A and employee business expenses from Form 2106 in both years, Schedule C business expenses in 2018, and a student loan interest deduction in 2019. During an audit, the Department asked for documentation to substantiate all of it -- and simply never heard back. With no response, the Department disallowed every one of the deductions and issued assessments for both years. The taxpayer appealed, arguing the Department lacked authority to adjust figures that had already been reported on federal tax forms.

The Department explained that, while it generally trusts the numbers carried over from a federal return, it retains independent authority under Virginia Code § 58.1-219 to adjust FAGI and itemized deductions whenever there's clear evidence those numbers don't actually match what the Internal Revenue Code allows -- and that authority is entirely separate from anything the IRS itself has done, applied consistently in several published rulings going back to 2010. Taxpayers are required to keep the kind of records that would let the IRS (and by extension Virginia) verify their correct tax liability, and Virginia law specifically lets the Department demand a taxpayer's federal return and all supporting schedules when it's auditing a Virginia return. Because the burden of disproving an assessment always sits with the taxpayer -- and this taxpayer provided literally nothing, not during the audit and not with the appeal -- there was no way to meet that burden. The Department upheld both years' assessments, but as a final courtesy gave 30 days to submit real supporting documentation before treating the numbers as permanently correct.

What this means for you

Anyone whose federal deductions get questioned in a Virginia audit

Carrying a deduction over from your federal return doesn't shield it from Virginia review. The Department keeps independent authority to verify that a claimed deduction actually satisfies the underlying federal rule, and it can (and will) ask for documentation even though a matching federal return has already been filed and accepted.

Anyone who receives an audit document request and is tempted to simply not respond

Don't. Silence is treated the same as a failure to substantiate -- the Department will disallow the unsupported deductions and the resulting assessment is presumed correct, with the burden entirely on you to prove otherwise. Ignoring the request forecloses your best opportunity to keep the deduction.

Anyone claiming multiple types of deductions across multiple tax years in the same audit

A single unanswered documentation request can sweep across every deduction type at issue -- itemized deductions, employee expenses, business expenses, and other adjustments alike -- and across every year under audit, not just one. Responding promptly and completely protects each item separately.

Common questions

Q: If an expense is already on my federal return, can Virginia still ask me to prove it and disallow it if I don't?
A: Yes. Virginia generally relies on federal figures but keeps authority under Va. Code § 58.1-219 to adjust FAGI or a deduction where there's clear evidence it doesn't actually satisfy the IRC -- and that includes simply requesting documentation and disallowing the item if none is provided.

Q: What happens if I never respond to an audit's documentation request at all?
A: The deductions in question get disallowed, and the resulting assessment is presumed correct. The burden then falls entirely on you -- not the Department -- to prove the assessment wrong, including on appeal.

Q: Do I get a second chance to submit documentation after an assessment like this is upheld?
A: Sometimes -- here the Department gave the taxpayer one final 30-day window to send documentation before treating the assessments as permanently correct. That's a courtesy extended in the determination letter, not a guaranteed right you can count on.

Q: Does it matter that I never responded during the audit itself, only appealed afterward?
A: It matters a great deal -- an appeal isn't a substitute for actually providing the requested documentation. If nothing is submitted either during the audit or with the appeal, there's simply no evidence in the record to disturb the assessment.

Citations and references

• Va. Code § 58.1-301 (Virginia's income tax terminology generally follows the IRC unless the Code of Virginia says otherwise)
• Va. Code § 58.1-219 (Department's authority to adjust FAGI/deductions on clear evidence of an IRC inconsistency, independent of any IRS action)
• P.D. 10-126 (7/7/2010); P.D. 12-141 (8/29/2012); P.D. 14-155 (8/28/2014); P.D. 16-53 (4/11/2016); P.D. 19-104 (9/18/2019); P.D. 21-67 (5/25/2021) (prior rulings applying that independent-adjustment authority)
• Treas. Reg. § 1.6001-1(a) (recordkeeping sufficient to establish correct tax liability)
• Va. Code § 58.1-310 (Department may require production of federal returns and supporting schedules)
• Va. Code § 58.1-205 (assessments presumed correct; burden on the taxpayer to disprove)
• Va. Code § 58.1-1826 (no court relief where an erroneous assessment stems from the taxpayer's willful failure to provide required information)

Subject

Administration: Audits - Taxpayer Records, Failure to Provide Documentation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-82

Original ruling text

April 28, 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 “Taxpayer”) for the taxable years ended December 31, 2018 and 2019.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2018 and 2019 taxable years. For both years, the Taxpayer claimed certain itemized deductions reportable on federal Schedule A and employee business expenses reportable on federal Form 2106. For 2018, the Taxpayer also claimed business expense deductions on federal Schedule C, and for 2019, claimed a deduction for student loan interest paid. Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessments. The Taxpayer appeals 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. 19-104 (09/18/2019), and P.D. 21-67 (05/25/2021). In addition, such adjustments have been made independently from any actions taken by the IRS.

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 Taxpayer has 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 Taxpayer 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 . If you have any questions regarding the documentation you must submit, you may contact at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4039.X

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67