If I concede that the business I reported on Schedule C did not exist, can Virginia still uphold the assessment disallowing those deductions?

Plain-English summary

This is one of a series of Virginia "Schedule C desk-audit" determinations the Tax Commissioner issued in 2026, but with a decisive twist. An individual taxpayer claimed business deductions on federal Schedule C for the 2022 through 2024 taxable years. Under audit the Department asked for documentation, got no response, disallowed the deductions, and issued assessments. The taxpayer then appealed, arguing the Department "lacks the authority to adjust amounts reported on Schedule C" — but also told the Department that he did not own a business as reported and had not incurred the expenses.

That concession settled the case against him. The Commissioner explained the same framework as the rest of this series:

• Virginia individual income tax starts from federal adjusted gross income (FAGI) (§ 58.1-301), and the Department may examine and adjust FAGI and deductions inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310) — independently of the IRS.
• A Virginia assessment is "prima facie correct," so the taxpayer bears the burden of disproving it (§ 58.1-205); § 58.1-1826 can also bar court relief where the error stems from a willful failure to provide required information.

Because the taxpayer both failed to furnish records and conceded he did not incur the claimed business expenses, the Commissioner upheld the assessments for all three years. Notably — and unlike the companion rulings in this series (see P.D. 26-42) — the determination gave no final 30-day window to submit documentation: once the taxpayer admitted the deductions were not real, there was nothing left to substantiate.

What this means for you

If you report a business on Schedule C, be sure it is genuine and that you can document its income and expenses. Conceding — even informally, in a letter to the Department — that the business did not exist or that the expenses were not incurred hands the Department its case: the deductions are gone, the assessment stands, and interest keeps accruing. This ruling is a reminder that the "prima facie correct" rule (§ 58.1-205) is hardest of all to overcome when the taxpayer's own statements support the disallowance.

Common questions

Q: The taxpayer admitted he had no business. Why did he still owe the tax?
A: Disallowing the phantom Schedule C deductions raised his Virginia taxable income, producing the assessment. His admission confirmed the deductions were improper, so the assessment was correct and was upheld.

Q: Why was there no 30-day chance to submit records here?
A: The other rulings in this series left the door open because documentation might still support the deductions. Here the taxpayer conceded the expenses were never incurred, so there was nothing to document.

Q: Could arguing that Virginia "can't adjust" a federal Schedule C have helped?
A: No. Virginia starts from federal figures but can examine and adjust deductions inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310), and the assessment is prima facie correct (§ 58.1-205).

Citations and references

• 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 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. 26-48

Original ruling text

May 26, 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 years ended December 31, 2022 through 2024.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2022 through 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 assessments. Subsequently, the Taxpayer informed the Department that he did not own a business as reported on the returns for the taxable years at issue. 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 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.

Because the Taxpayer failed to furnish information required by law, and because the taxpayer conceded that he did not incur the business expenses claimed on the return, the Department must uphold the assessments for the 2022 through 2024 taxable years. 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 Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR 5441.T

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67

22-11