Could Virginia disallow a resident's 2022 and 2024 Schedule C deductions when the taxpayer failed to provide the requested audit records?

Plain-English summary

Virginia upheld individual income tax assessments for 2022 and 2024 after the taxpayer failed to provide records supporting federal Schedule C deductions.

The taxpayer argued that the Department could not adjust Schedule C amounts. The Commissioner explained that Virginia begins with federal adjusted gross income and normally relies on the federal return, but it may examine and adjust FAGI and deductions when reported figures appear inconsistent with the Internal Revenue Code. It may make those adjustments independently of the IRS.

The assessments were presumed correct, and the taxpayer supplied no information proving otherwise. The Commissioner nevertheless allowed one final 30-day period to submit adequate records for review and possible adjustment.

What this means for you

Sole proprietors should preserve documentation for every claimed business deduction and respond to Virginia audit requests. A federal filing does not prevent the Department from examining the underlying support.

Common questions

Which years were assessed? 2022 and 2024.

Could Virginia review Schedule C independently of the IRS? Yes.

Why did the assessments remain in place? The taxpayer did not provide the requested records.

Could documentation still change the result? Potentially. The ruling allowed a final 30-day submission period.

Citations and references

• Va. Code §§ 58.1-301, 58.1-219, and 58.1-310 — conformity, audit authority, and supporting records.
• Va. Code §§ 58.1-205, 58.1-1821, and 58.1-1826 — presumed correctness, administrative appeals, and failure to provide information.
• Treas. Reg. § 1.6001-1(a) — federal recordkeeping requirement cited in the ruling.
• P.D. 10-126, 12-141, 14-155, 16-53, 19-104, 21-67, and 22-11, cited as prior Department authority.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-56

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 and 2024.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2022 and 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. 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, the Department must uphold the assessments for the 2022 and 2024 taxable years. 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 Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR 5364.J

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67

22-11