Could a Virginia resident defeat a 2005 assessment by claiming he had no 'Federal 26 CFR Income' without evidence contradicting IRS records?

Subject

Unsupported claim of no federal income did not defeat the Virginia assessment

Plain-English summary

Virginia upheld the 2005 individual-income-tax assessment because the resident provided no objective evidence contradicting income information obtained from the IRS. The taxpayer did not deny receiving income, but argued that he had no "Federal 26 CFR Income" and that neither the federal nor state assessment was lawful.

Virginia begins its individual-tax calculation with federal adjusted gross income. Income included there is subject to Virginia tax for a resident unless a specific Virginia modification applies; the ruling found none applicable.

A resident required to file federally generally must file in Virginia, and a resident exceeding Virginia's adjusted-gross-income threshold can have a state filing duty even without a federal filing requirement. The Department was authorized to use IRS information when no proper Virginia return was filed.

Because the taxpayer had used the same unsupported position in prior appeals and supplied no contrary evidence, the assessment remained correct. The ruling said that if payment was not received within its 30-day deadline, the fraud penalty would be assessed, interest would continue, and collection would resume.

What this means for you

• Virginia generally starts with federal adjusted gross income rather than a self-created income definition.
• To challenge IRS-derived information, provide objective records showing what is incorrect.
• Identify a specific Virginia subtraction or modification if claiming federally reported income is not taxable by Virginia.
• Repeated nonfiling based on unsupported claims can expose a taxpayer to the fraud penalty described in the ruling.

Common questions

Did the taxpayer deny receiving income?

No. The ruling says he challenged whether it counted as federal income.

Could Virginia obtain IRS information?

Yes. The ruling cites IRC § 6103(d) for that authority.

Was the assessment abated?

No. Virginia upheld it.

Citations and references

• Va. Code §§ 58.1-301, 58.1-308, 58.1-321, 58.1-322, and 58.1-341.
• IRC § 6103(d).
• Virginia Public Documents 08-5 and 08-104.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-164

Original ruling text

October 16, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter concerning the Virginia individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2005.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer, a Virginia resident, had income for the taxable year at issue. A letter was sent requesting that the Taxpayer file the proper Virginia individual income tax return or provide an explanation concerning why the income was not taxable. When an adequate response was not received, the Department issued an assessment.

The Taxpayer states he had no "Federal 26 CFR Income" for 2005 and, thus, had no federal income tax liability for 2005 and no Virginia income tax liability. Further, he asserts that the Department's assessment is not supported by any lawful document or debt instrument. As such, the Taxpayer requests that the assessment for the 2005 taxable year be abated.

DETERMINATION

Virginia Code § 58.1-301 provides that 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), with certain exceptions. None of the exceptions apply to the Taxpayer. Therefore, income 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 Va. Code § 58.1-322.

Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Va. Code § 58.1-321. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine the resident's tax liability.

The Taxpayer does not deny having income, but contends he had no income for federal income tax purposes for the 2005 taxable year. Further, he claims the IRS failed to make a lawful assessment and, therefore, is prohibited from assessing tax. Because Virginia conforms to the IRC, the Taxpayer believes the Department is also prohibited from assessing tax.

The Taxpayer has appealed previous assessments on the same basis. See Public Document (P.D.) 08-5 (1/7/2008) and P.D. 08-104 (6/18/2008). Like the prior cases, the Taxpayer has provided no objective evidence to show that the information properly obtained by the Department from the IRS is incorrect. A person who fails to file income tax returns repeatedly based on unsubstantiated claims has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308.

Based on the applicable law cited above and the information presented, there is no basis to invalidate the Department's assessment. Accordingly, the assessment for the 2005 taxable year is correct. Payment of the outstanding assessment, as shown on the enclosed schedule, should be made within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. If payment is not received within the allotted time, the fraud penalty will be assessed, additional interest will accrue and collection action will resume on the outstanding balance.

The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have any questions about this determination, please contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3551278080.E