If I claim I was a victim of identity theft, does that excuse me from having to document deductions the Department questions in an audit?

Plain-English summary

A taxpayer filed Virginia returns for 2018 and 2019 claiming itemized deductions on Schedule A and rental property expenses on Schedule E. During an audit, the Department asked for documentation supporting those deductions; when nothing came in, it disallowed the deductions and issued assessments. The taxpayer then contacted the Department repeatedly, saying she had been a victim of fraud, and claimed she had sent multiple faxes about the identity theft that the Department never received. She appealed both years' assessments on that basis.

The Department explained that an assessment is presumed correct, and the burden is on the taxpayer to prove it wrong, and a bare assertion of identity theft doesn't meet that burden on its own. Critically, the taxpayer never explained how the alleged identity theft actually affected her 2018 or 2019 Virginia returns: she didn't deny that she herself filed the returns at issue, and she never offered to file amended returns correcting information she said was fraudulent or inaccurate. The Department also noted that, even while the appeal was pending, it separately asked the taxpayer three times, by email in July 2022 and by letters in August and October 2022, for documentation about the fraud allegations she said she'd reported to the IRS. She never responded to any of those requests either.

Because the taxpayer failed to substantiate either her original deductions or her identity-theft claim despite multiple opportunities, the Department upheld both years' assessments. Consistent with its usual practice in documentation cases, it gave her one final chance: 30 days from the determination letter to submit adequate documentation, with the assessments becoming final if nothing further arrived.

What this means for you

Anyone claiming identity theft as a reason for missing tax documentation or nonresponse

Simply telling the Department you were a victim of fraud isn't enough. You need to explain specifically how the identity theft affected the return or deduction being questioned, and, where relevant, actually file a corrected or amended return, or provide the same kind of documentation the IRS or Department would need to verify the fraud claim itself.

Anyone whose mailing address changed during an active Department audit or appeal

Confirm the Department has your correct current address, and follow up in writing, with proof of delivery such as certified mail or a fax confirmation you retain, if you believe correspondence isn't reaching you. This taxpayer said she sent faxes the Department never received; without proof of delivery, an assertion that something was sent doesn't establish that it was.

Anyone claiming itemized or rental-property expense deductions under audit

The underlying documentation requirement doesn't go away because of a separate, unrelated dispute like an identity theft claim. Keep receipts, records, and other support for your deductions regardless of what else may be happening with your identity or tax filings.

Common questions

Q: Does claiming to be a victim of identity theft excuse me from documenting my tax deductions?
A: No -- the Department requires you to show specifically how the identity theft affected the return or deduction in question, and you still bear the burden of providing supporting documentation for the underlying deductions.

Q: What should I do if I believe fraudulent information was included on my tax return?
A: File an amended return correcting the inaccurate information, and be prepared to document the fraud itself if the Department asks; silence or an unsubstantiated claim, without more, won't change an assessment.

Q: What happens if the Department repeatedly asks for documentation and I don't respond?
A: The assessment is presumed correct and stands; Virginia law also bars a court from granting relief where an erroneous assessment results from the taxpayer's own willful failure to provide required information.

Citations and references

• Va. Code § 58.1-301 (Virginia income tax terminology conforms to the Internal Revenue Code)
• Va. Code § 58.1-219 (Department's authority to adjust FAGI and itemized deductions)
• Va. Code § 58.1-310 (Department may require a taxpayer to produce federal returns and supporting schedules)
• Va. Code § 58.1-205 (assessment presumed correct; burden of proof)
• Va. Code § 58.1-1826 (no judicial relief where an erroneous assessment traces to the taxpayer's willful failure to provide information)
• Treas. Reg. § 1.6001-1(a) (recordkeeping requirement)

Subject

Administration: Audit - Identity Theft Deduction: Rental Expense - Inadequate documentation; Itemized - Inadequate documentation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-4

Original ruling text

January 6, 2023

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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 December 31, 2019.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2018 and 2019 taxable years claiming itemized deductions reportable on federal Schedule A and deductions for expenses attributable to a rental property on federal Schedule E. Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessments.

Subsequently, the Taxpayer contacted the Department multiple times to state that she had been a victim of fraud. The Department resent the original audit letters to the Taxpayer at her new address. The Taxpayer stated that she sent multiple faxes regarding her identity theft to the Department, but none were ever received. The Taxpayer appeals the assessments, contending she has been a victim of identity theft, fraud, and misrepresentation.

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.

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.

Although Taxpayer has asserted she was a victim of identity theft, she has not demonstrated how identity theft affected her 2018 and 2019 Virginia individual income tax returns. The Taxpayer has not denied filing the returns at issue, nor has she offered to file amended returns on the basis that what was filed contained erroneous information. In addition, while the appeal was pending, the Department asked for documentation concerning fraud allegations the Taxpayer claims to have made through the Internal Revenue Service (IRS). Such documentation was requested in an electronic mail dated July 21, 2022, then in follow-up letters dated August 30, 2022, and October 24, 2022, respectively. To date, the Department still has not received a response to these requests. The Department cannot accept an unsubstantiated assertion of fraud as a basis for adjusting an assessment.

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 Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *. 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 cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. 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/4251.X