Is Virginia bound by my federal Schedule C, and who has the burden when the Department disallows my deductions on audit?

Plain-English summary

A Virginia resident claimed business deductions on federal Schedule C. The Department audited, requested documentation to support the deductions, received no response, disallowed the deductions, and issued assessments. The taxpayer appealed, arguing that the Department "lacks the authority to adjust amounts reported on Schedule C." The Tax Commissioner disagreed and upheld the assessments.

The core points:

• Virginia individual income tax begins with federal adjusted gross income (FAGI) (§ 58.1-301). The Department normally accepts the federal figures, but it may examine and adjust FAGI and deductions when there is clear evidence they are inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310) — independently of the IRS.
• The Department may require the federal return and its supporting schedules (§ 58.1-310), and taxpayers must keep records adequate to determine their correct tax (Treas. Reg. § 1.6001-1(a)).
• A Virginia assessment is "prima facie correct," so the burden is on the taxpayer to disprove it (§ 58.1-205). Under § 58.1-1826, a court cannot grant relief when an erroneous assessment results from the taxpayer's willful failure to provide required information.

Because the taxpayer did not furnish the requested records, the assessments stood — but the Department offered a final 30-day window to submit documentation that could still reduce the bill.

What this means for you

Schedule C filers (sole proprietors, independent contractors)

Substantiation is everything. Virginia can review and disallow your Schedule C deductions on its own, and having reported them on an accepted federal return does not protect you. Keep contemporaneous records for your income and every expense you deduct.

Taxpayers responding to a Virginia audit

Meet the documentation deadline. After an assessment the burden shifts to you, and simply asserting that the Department "can't touch" your federal Schedule C will not work. Ignoring the request can also forfeit later court relief under § 58.1-1826.

Tax preparers

Advise clients that Virginia's conformity to the Internal Revenue Code is a starting point, not a limit on the Department's audit authority — the Department can and does adjust FAGI and deductions on Virginia returns.

Common questions

Q: Is Virginia bound by what's on my federal Schedule C?
A: No. Virginia starts from your federal numbers but can examine and adjust deductions that are inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310).

Q: Who has the burden of proof after an assessment?
A: The taxpayer. Virginia assessments are prima facie correct (§ 58.1-205), so you must prove the assessment is wrong.

Q: What happens if I don't send documentation?
A: The deductions stay disallowed, the assessments stand, and § 58.1-1826 can bar court relief for a willful failure to provide required information.

Q: Do I still have a chance to fix it?
A: Yes — the ruling gave a final 30 days to submit records. After that the assessments become final.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-301 — Virginia conforms to IRC terminology; computation starts from FAGI
• Va. Code § 58.1-219 and § 58.1-310 — Department may examine/adjust amounts inconsistent with the IRC and require the federal return and schedules
• Va. Code § 58.1-205 — an assessment is prima facie correct; burden of proof on the taxpayer
• Va. Code § 58.1-1826 — no court relief where the assessment is attributable to a willful failure to provide required information
• Treas. Reg. § 1.6001-1(a) — taxpayers must keep records sufficient to determine the correct tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-42

Original ruling text

May 25, 2026

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 you (the “Taxpayer”) for the taxable year ended December 31, 2024.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2024 taxable years claiming deductions on federal Schedule C. Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessment. The Taxpayer applied for correction, contending the Department lacks the authority to adjust amounts reported on Schedule C.

DETERMINATION

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 .

Generally, 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 appears reasonable, then, typically, the Department does not look behind those computations. The Department, however, may examine and adjust the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are inconsistent with the IRC. See Virginia Code § 58.1-219 and § 58.1-310. The Department has consistently exercised this authority in conducting its audit programs. See Public Document (P.D.) 10-126 (07/07/2010), P.D. 12-141 (08/29/2012), P.D. 14-155 (08/28/2014), P.D. 16-53 (04/11/2016), P.D. 19-104 (09/18/2019), and P.D. 21-67 (05/25/2021). In addition, such adjustments have been made independently from any actions taken by the IRS. See P.D. 22-11 (1/18/2022).

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 assessments are 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.

Because the Taxpayer failed to furnish information required by law, the Department must uphold the assessment for the 2024 taxable year. The Department 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 Compliance, Desk Audit, RAP, P.O. Box 5610, Richmond, Virginia 23220-0610, Attention: *, Tax Auditor. 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. In either case, the Taxpayer will receive updated bills that will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill dates to avoid the accrual of additional interest and possible collection actions.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are 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 and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR 5515.H

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67

22-11