The IRS increased my income on audit, but I disagree -- can Virginia just accept the return I want to file instead of the IRS's adjusted numbers, and can I still claim my overpayment credits and age deduction?

Plain-English summary

The IRS notified the Department that it had adjusted a taxpayer's 2018 and 2019 federal income tax returns (increasing her federal adjusted gross income and self-employment income after a 2022 examination). Because the Department had no record that she'd filed amended Virginia returns reporting that change, it assessed additional Virginia tax for 2018 through 2020 -- also removing several credits and a deduction along the way. The taxpayer sought correction, asking the Department to instead accept the different returns she included with her application.

Virginia doesn't look behind a completed IRS audit. Virginia's individual income tax starts from federal adjusted gross income (FAGI) and generally conforms to federal terminology and determinations (Va. Code § 58.1-301). A taxpayer must report any federal change or correction within one year by filing an amended Virginia return (§ 58.1-311); if she doesn't, the Department can assess the additional tax at any time (§ 58.1-312 A 3). The Department is also authorized under IRC § 6103(d) to get taxpayer information directly from the IRS -- which is how it learned of the adjustment here. Because the IRS itself hadn't changed its own adjustments, and because the Department's settled policy is not to look behind a completed IRS determination (P.D. 11-107), the Department applied the IRS's increased figures rather than the taxpayer's preferred numbers.

Other adjustments, unsupported by evidence. The Department also removed overpayment credits the taxpayer had claimed on her 2018, 2019, and 2020 returns, because in each case there was no actual credit available carried forward from the prior taxable year -- and removed 2020 estimated tax payments because the Department had no record of ever receiving them. The taxpayer didn't provide any evidence showing these removals were wrong, so they stood.

Age deduction denied for not meeting the age threshold. Virginia allows a deduction for certain qualifying individuals age 66 and over (Va. Code § 58.1-322.03 14). The taxpayer claimed it on her 2018 and 2020 returns, but she wasn't yet 66 in either year, so the deduction was properly disallowed both times.

Outcome, and a door left open. All of the assessments were upheld, with updated bills (plus accrued interest) to follow and 30 days to pay. But the Department noted that if the IRS later revises its own 2018 or 2019 audit findings, the taxpayer can still file an amended Virginia return at that point to correct her liability (§§ 58.1-311, 58.1-1823).

What this means for you

Anyone who disagrees with an IRS audit adjustment that Virginia later assesses on

Fighting the number has to happen with the IRS, not the Department. Virginia will apply whatever the IRS's final determination says; it won't accept a different return simply because you believe the IRS got it wrong. If you later succeed in getting the IRS to revise its own findings, that's your path to correcting the Virginia assessment too.

Anyone who receives an IRS adjustment notice

File the required amended Virginia return within one year of the IRS's final determination (§ 58.1-311). If you don't, the Department can assess the additional tax based on the IRS's numbers at any time, with no limitations-period protection.

Anyone claiming an overpayment credit carried forward from a prior year, or estimated payments

Keep your own records proving the credit or payment actually exists -- the Department will remove a claimed credit or payment it has no record of, and the taxpayer bears the burden of proving otherwise.

Anyone claiming Virginia's age-66 income tax deduction

Double-check your actual age in the specific taxable year claimed -- this deduction has a hard age threshold with no partial-year or approaching-the-threshold accommodation shown here.

Common questions

Q: I disagree with the IRS's audit adjustment -- can I ask Virginia to use my own numbers instead?
A: No. The Department doesn't look behind a completed IRS determination; it will assess Virginia tax based on the IRS's adjusted figures unless the IRS itself later changes them.

Q: What if the IRS later revises its own findings?
A: You can then file an amended Virginia return to correct your Virginia liability, per Va. Code §§ 58.1-311 and 58.1-1823.

Q: The Department removed my overpayment credit and estimated payments -- can I get them back?
A: Only with evidence. The Department will restore them if you can show they actually existed; here, the taxpayer provided none.

Citations and references

Statutes:

• Va. Code § 58.1-301 -- Virginia income tax terminology conforms to the Internal Revenue Code unless a different meaning is clearly required
• Va. Code § 58.1-311 -- a taxpayer must report a federal change/correction within one year by filing an amended Virginia return
• Va. Code § 58.1-312 A 3 -- the Department may assess tax at any time if the taxpayer fails to file the required amended return
• IRC § 6103(d) -- authorizes the Department to obtain taxpayer information from the IRS
• Va. Code § 58.1-322.03 14 -- deduction for certain qualifying individuals age 66 and over
• Va. Code §§ 58.1-311 and 58.1-1823 -- a taxpayer may file an amended return if the IRS later changes its own audit findings

Authorities the Department relied on (described here, not linked): P.D. 11-107 (6/14/2011) (the Department does not look behind a completed IRS audit determination) -- the same doctrine addressed at greater length in P.D. 25-16.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-113

Original ruling text

November 14, 2024

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, through 2020.

FACTS

The Internal Revenue Service (IRS) notified the Department that it adjusted the Taxpayer’s 2018 and 2019 federal income tax returns. Because the Department had no record of having received amended Virginia income tax returns to report the federal changes, assessments were issued for additional tax due. The Department also disallowed the age deduction and overpayment credit claimed from the 2017 taxable year on the 2018 Virginia income tax return. In addition, the Department adjusted the Taxpayer’s 2019 Virginia income tax return to remove the overpayment credit claimed from the 2018 taxable year. Further, the Department disallowed the age deduction, estimated payments, and overpayment credit claimed from the 2019 taxable year on the Taxpayer’s 2020 Virginia income tax return. The Taxpayer filed an application for correction, requesting that the Department correct the assessments to reflect the returns she included with her application.

DETERMINATION

Internal Revenue Service Adjustments

Virginia Code § 58.1-301 provides, with certain exceptions, that the 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. 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 .

Virginia Code § 58.1-311 requires taxpayers to report a change or correction made to their federal taxable income within one year of the final determination of any such change or correction by filing an amended return with the Department. If a taxpayer fails to file an amended return, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

In addition, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will assist in determining any additional tax liability. In this case, the information obtained by the Department indicated that the Taxpayer’s FAGI and self-employment income were increased as a result of an IRS examination performed in 2022.

The Taxpayer requests that the Department disregard the IRS adjustments and accept the returns included with her application for correction. The IRS, however, has not made any changes to its adjustments. 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 (6/14/2011).

Other Adjustments

Under review, the Department removed the overpayment credits claimed on the Taxpayer’s 2018, 2019, and 2020 Virginia income tax returns because there were no available overpayment credits from the 2017, 2018, or 2019 taxable years, respectively. The Department also removed the estimated payments reported on the Taxpayer’s 2020 Virginia income tax return because the Department had no record of receiving any estimated payments in 2020. The Taxpayer has not provided any evidence to prove that these adjustments were incorrect.

In addition, the Department adjusted the Taxpayer’s 2018 and 2020 returns to disallow the claimed age deduction. Virginia Code § 58.1-322.03 14 provides a deduction for certain qualifying individuals age 66 and over. The Taxpayer was not age 66 or over in 2018 or 2020. Accordingly, the adjustments were correct.

CONCLUSION

For the reason discussed above, the assessments are upheld. The Taxpayer will receive updated bills that will include accrued interest to date. The Taxpayer should remit the balances due within 30 days of the bill dates to avoid the accrual of additional interest and possible collection actions. If the IRS adjusts its audit findings for the 2018 or 2019 taxable years, the Taxpayer will be permitted to file an amended Virginia return to correct the liability pursuant to Virginia Code § 58.1-311 and Virginia Code § 58.1-1823.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public document cited is available at 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 (804) or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Related Documents

11-107