The IRS adjusted my income and I'm actively challenging that adjustment in federal Tax Court, with no decision yet -- does Virginia have to wait for the Tax Court before it can assess tax based on the IRS's number?

Plain-English summary

A taxpayer filed an amended 2019 Virginia individual income tax return. The IRS subsequently adjusted her federal adjusted gross income (FAGI) for that year, and the Department issued an assessment for additional Virginia tax based on that adjustment. She appealed, explaining that she was actively challenging the IRS's adjustment in the United States Tax Court and no decision had been reached yet.

An active, undecided court challenge doesn't pause Virginia's assessment. A taxpayer must report a federal change within one year of the final determination by filing an amended Virginia return (Va. Code § 58.1-311), and the Department's settled practice is not to look behind a completed IRS determination (P.D. 11-107) -- the same doctrine applied throughout this corpus's IRS-conformity rulings (see, for example, P.D. 24-52 and P.D. 24-113). Here, the Department had independently confirmed the adjustment amount through an IRS account transcript, so it applied the adjusted FAGI and found the assessment correct -- regardless of the taxpayer's pending, unresolved Tax Court case.

A door left open if she wins in Tax Court. If the Tax Court eventually determines her 2019 FAGI was different from what the IRS reported to Virginia, she can then file an amended Virginia return to correct her liability, under Va. Code §§ 58.1-311 and 58.1-1823.

Outcome. The assessment was upheld, with an updated bill (including accrued interest) due within 30 days.

What this means for you

Anyone actively litigating an IRS adjustment in Tax Court (or otherwise) while Virginia assesses tax on it

Filing or pursuing a federal court challenge doesn't pause a Virginia assessment based on the IRS's current adjustment -- Virginia applies the IRS's numbers as they stand today, not as you hope a pending case will resolve them.

Anyone who eventually wins a federal challenge to an IRS adjustment already reflected in a Virginia assessment

You can file an amended Virginia return once the IRS (or a court reviewing it) actually changes the federal determination -- keep that option available rather than assuming the Virginia assessment is the final word if your federal case is still pending.

Citations and references

Statutes:

• Va. Code § 58.1-311 -- a taxpayer must report a federal change/correction within one year by filing an amended Virginia return
• Va. Code § 58.1-1823 -- deadline for filing an amended return to claim a correction

Prior rulings 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 applied in this corpus's P.D. 24-52 and P.D. 24-113 (where, unlike here, the taxpayer had no pending court challenge, only an informal disagreement with the IRS).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-45

Original ruling text

March 29, 2024

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, 2019.

FACTS

The Taxpayer filed an amended 2019 Virginia individual income tax return. The Internal Revenue Service (IRS) subsequently adjusted the Taxpayer’s federal adjusted gross income (FAGI) for that year. Based on this adjustment, the Department issued an assessment for additional tax due. The Taxpayer filed an appeal, contending that the IRS’s adjustment of her income is being challenged in the federal tax court and a decision has not yet been issued.

DETERMINATION

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. 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).

The Department adjusted the Taxpayer’s return based on the federal information available from the IRS as permitted by Virginia statute. The amount of the adjustment was confirmed by means of an IRS account transcript. As such, the assessment is correct. If the federal tax court determines that the Taxpayer’s FAGI for the 2019 taxable year was different than what was reported to the Department by the IRS, she 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 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.

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 (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4540.B

Related Documents

11-107