The IRS audited me and found unreported income, and Virginia assessed me for the same change plus interest -- can I get the interest waived since I didn't know about the federal adjustment right away?

Plain-English summary

The IRS audited a taxpayer's 2017 federal return and determined she hadn't included all her income in federal adjusted gross income. Virginia law requires a taxpayer to report any change or correction in federal taxable income within one year of the change becoming final, by filing an amended Virginia return -- but here, she hadn't filed one. Because she didn't self-report the federal change, the Department was authorized to assess the resulting Virginia tax at any time, which it did, confirming the adjustment amount against an actual IRS account transcript. The taxpayer appealed, asking the Department to confirm her adjusted return matched the IRS audit and to waive the interest that had accrued.

On the first point, the Department explained that when the IRS has already audited and finalized a taxpayer's federal taxable income, Virginia doesn't look behind that federal determination or re-litigate it -- it simply adopts the federal result. Having independently verified the adjustment against the IRS's own account transcript, the Department confirmed the 2017 assessment was correct.

On interest, the answer was firmly no. Virginia law makes interest on tax underpayments mandatory, and it can't be waived unless the underlying tax amount itself is adjusted -- interest isn't a penalty imposed for wrongdoing, but simply a charge for having had the use of money that was properly owed to Virginia the whole time. Because the underlying tax itself was correct (matching the IRS's own findings), there was no basis to abate any of the accrued interest. The Department did note one path forward: if the IRS later changes its own audit findings for the 2017 year, the taxpayer could file an amended Virginia return to correct her liability at that point.

What this means for you

Anyone whose federal return is audited and adjusted by the IRS

Virginia requires you to self-report that change within one year by filing an amended Virginia return. If you don't, the Department can assess the resulting Virginia tax at any time (no ordinary statute-of-limitations protection), and it can independently verify the adjustment against your IRS account transcript rather than relying solely on your own reporting.

Taxpayers hoping to get interest waived on an assessment tied to a federal audit adjustment

Don't expect it. Interest on an underpayment is mandatory under Virginia law and functions as compensation for the use of money owed, not a punitive penalty -- it can only be reduced if the underlying tax amount itself turns out to be wrong, not based on delay, hardship, or a taxpayer's timeline in learning about the change.

Taxpayers who think the IRS might still revise its audit findings

If the IRS later changes its determination for the same tax year, you can file an amended Virginia return at that point to correct your Virginia liability accordingly -- but until and unless that happens, the current assessment (including interest) stands.

Common questions

Q: The IRS audited my return and found more income -- does Virginia independently re-check the IRS's findings?
A: No. Once the IRS has issued a final determination on your federal taxable income, Virginia adopts that determination rather than re-examining it itself.

Q: Can I get interest waived on a Virginia assessment tied to an IRS audit adjustment?
A: Generally no. Interest on a tax underpayment is mandatory and can only be abated if the underlying tax amount itself is adjusted -- it isn't waived based on taxpayer circumstances or the reason for the delay in reporting.

Q: What if the IRS changes its mind and revises its audit findings later?
A: You can then file an amended Virginia return to correct your liability to match the IRS's revised determination.

Citations and references

• Va. Code § 58.1-311 (report a federal taxable income change/correction within 1 year of the final determination, by filing an amended Virginia return)
• Va. Code § 58.1-312(A)(3) (the Department may assess the appropriate tax at any time if a taxpayer fails to report a federal change)
• P.D. 11-107 (6/14/2001) (Virginia does not look behind an IRS final determination of federal taxable income)
• Va. Code § 58.1-1812 (interest on tax underpayments is mandatory and cannot be waived unless the associated tax is adjusted)
• Va. Code § 58.1-1823 (amended return procedure, including for later IRS adjustments)

Subject

Administration: Audits - Reporting Federal Changes; Interest - Interest Not Waived

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-96

Original ruling text

May 26, 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 Taxpayer was audited by the Internal Revenue Service (IRS) for the 2017 taxable year. The Department subsequently received information from IRS indicating that the Taxpayer failed to include all her income in federal adjusted gross income (FAGI) on her federal return. Because the Taxpayer had not filed an amended Virginia income tax return to report the federal changes, an assessment was issued for the additional tax due. The Taxpayer filed an appeal, requesting confirmation that her adjusted Virginia income tax return accurately reflected the IRS audit and a waiver of accrued interest.

DETERMINATION

Federal Changes

Virginia Code § 58.1-311 requires any 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 the taxpayer fails to file an amended return reflecting the federal adjustment, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

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 (6/14/2001). The Department adjusted the Taxpayer’s 2017 return based on the federal information available from the IRS as permitted by Virginia statute. In addition, the amount of the adjustment was confirmed by means of an IRS account transcript. As such, the 2017 assessment is correct.

Interest on Assessments

The application of interest to tax underpayments is mandatory under Virginia Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.

The Taxpayer will receive an updated bill that will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.

If the IRS adjusts its audit findings for the 2017 taxable year, the Taxpayer will be permitted to file an amended return to correct her liability pursuant to Virginia Code § 58.1-311 and Virginia Code § 58.1-1823.

The Code of Virginia sections 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/4097.X

Related Documents

11-107