My audit was closed using estimates from my tax returns because I couldn't produce records in time — now that I actually have the records, can I get a fresh look?

Plain-English summary

A dual-role contractor that sells and installs kitchens and bathrooms was audited for August 2018 through July 2021. The auditor requested general ledger detail reports and invoices to verify the Taxpayer's compliance with Virginia's sales and use tax statutes. When the Taxpayer didn't provide adequate documentation, the auditor instead reconstructed financial statements for sales and purchase bases from the Taxpayer's federal Form 1120 corporate tax returns and closed the audit on that basis. The Taxpayer then filed a correction request, claiming it has additional documentation — not considered during the audit — that would significantly change the assessment amount.

Why the auditor could use tax returns instead of the Taxpayer's own records. Virginia Code § 58.1-633 requires every dealer to keep suitable sales, purchase, and other records necessary to determine tax due, with 23 VAC 10-210-470 spelling out specifically what must be maintained. When a dealer doesn't maintain adequate records, Virginia Code § 58.1-618 authorizes the Department to use the best information available — here, the Taxpayer's own Form 1120 filings — to reconstruct sales and purchases and determine whether tax is owed. Under Va. Code § 58.1-205, that resulting assessment is presumed correct, and the burden falls on the taxpayer to prove it wrong.

A genuine second chance, not a final word. Because the Taxpayer represents that the previously missing records are now available for review, the Department isn't treating the best-information-available assessment as the end of the story. Instead, the case is being returned to field audit staff, who will contact the Taxpayer to review the newly available records (and any further documentation the auditor requests). Once that review is complete, the Department will issue a revised audit report and adjust the assessment as necessary.

But the door isn't open indefinitely. The Department was explicit that if the Taxpayer fails to timely provide the documentation this time around, the original best-information-available assessment will simply be upheld — and interest on the unpaid balance continues to accrue regardless of how the documentation review turns out.

What this means for you

Contractors and dealers who missed an audit's documentation deadline

Missing the initial deadline to provide records doesn't necessarily end your chances — if you can show the Department you now have the documentation, a correction request can get your case sent back for a genuine review of that evidence. But don't expect unlimited patience: provide it promptly and completely, or the original assessment stands.

Keeping records the auditor can actually use

The Department's fallback — reconstructing your sales and purchases from your own federal tax filings — is a blunt instrument compared to your actual general ledger and invoices, and it's unlikely to work in your favor. Complete, organized records under § 58.1-633 and 23 VAC 10-210-470 are what let you avoid that fallback in the first place.

Accountants and tax professionals

If a client's audit closed on a best-information-available basis due to a documentation gap, a correction request offering the now-available records is a real path back to a substantive review — but move quickly once the case is remanded, since a second failure to provide documentation will be treated as final.

Common questions

Q: My audit closed because I didn't have my records ready in time — is that assessment final?
A: Not necessarily. If you can now produce the missing documentation, a correction request can get the Department to send the case back to field audit staff for a fresh review.

Q: What happens if I still can't produce the records after the case is sent back?
A: The original assessment — based on the best information available, such as your federal tax return filings — will simply be upheld, and interest keeps accruing.

Q: Why did the auditor use my Form 1120 tax returns instead of my actual sales records?
A: Because Virginia Code § 58.1-618 lets the Department use the best information available when a dealer's own records are inadequate — your federal filings were the best substitute available at the time.

Q: Who has the burden of proving the assessment wrong?
A: You do. Under Va. Code § 58.1-205, a Department assessment is presumed correct, so it's on you to provide the records and documentation that show it's in error.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-633 — dealer recordkeeping requirement
• 23 VAC 10-210-470 — specific records a dealer must maintain for sales and use tax purposes
• Va. Code § 58.1-618 — best-information-available assessment authority when records are inadequate
• Va. Code § 58.1-205 — assessment presumed correct; burden on the taxpayer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-142

Original ruling text

December 16, 2024

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period August 2018 through July 2021.

FACTS

The Taxpayer, a dual role contractor that sells and installs kitchen and bathrooms, was audited for the period at issue. The auditor requested documentation in order to verify the Taxpayer’s compliance with Virginia sales and use tax statutes. When sufficient documentation was not provided, the audit was finalized, and an assessment was issued based on the limited records available. The Taxpayer filed an application for correction contending it has additional documentation that was not considered during the audit that would significantly impact the assessment amount.

DETERMINATION

Virginia Code § 58.1-633 sets out statutory recordkeeping requirements of dealers and provides that:

Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.

The statute is interpreted by Title 23 of the Virginia Administrative Code (VAC) 10-210-470, which specifically indicates the type of records that must be maintained for sales and use tax purposes. The auditor requested general ledger detail reports and invoices and when the Taxpayer failed to provide adequate documentation, the auditor used Form 1120 tax returns to create financial statements for sales and purchase bases. After no additional records were provided, the audit was subsequently closed.

When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, placing the burden of proof upon a taxpayer to show that the assessment is in error. Because the Taxpayer failed to present documentation to support its claim, the auditor used the best information available to estimate the audit liability.

The Taxpayer claims that the requested records are now in order and available for review. Accordingly, the audit will be returned to the appropriate field audit staff who will contact the Taxpayer to review the records that were not available and other documentation as may be requested by the auditor. After the review is completed, the Department will issue a revised audit report and adjust the assessment, as necessary.

If the Taxpayer fails to timely provide the requested documentation, the assessment will be upheld. Further, interest on the unpaid balance will continue to accrue until the balance is paid.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4702.F

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