Could a taxpayer defeat a Virginia assessment by arguing that only federal-connected work and money are taxable?

Subject

Federal-connection theory did not disprove the IRS-information assessment

Plain-English summary

Virginia upheld the taxpayer's 2004 assessment because he did not provide an accurate return or evidence showing the federal information was wrong. He argued that his income came from Social Security payments and services for a non-federal entity and that only federal-connected money for federal-connected services could be taxed.

Virginia rejected that theory. Resident Virginia income tax began with federal adjusted gross income and applied unless a specific Virginia modification excluded an item. A resident with a federal filing duty—or Virginia adjusted gross income above the state threshold—also had a Virginia filing duty.

The ruling did not resolve the taxability of each claimed Social Security payment. Instead, it relied on the presumption that the assessment was correct and the taxpayer's failure to provide objective evidence of the proper liability. He was given 30 days to file an accurate return and pay, with a warning that repeating the stated claims could justify a 100% fraud penalty and other collection action.

What this means for you

• Virginia taxability was not limited to federal employment or federally connected money.
• IRS information could support an assessment when a proper Virginia return was missing.
• The taxpayer bore the burden to show the assessment was wrong.
• A specific income exclusion still had to be established with an accurate return and evidence.

Common questions

Did Virginia rule that all Social Security benefits were taxable?

No. It upheld the assessment because the taxpayer did not document the correct income or liability.

What did Virginia require next?

An accurate 2004 Virginia return and payment within 30 days.

Citations and references

• Va. Code §§ 58.1-205, 58.1-301, 58.1-321, 58.1-322, and 58.1-341.
• IRC § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-90

Original ruling text

May 29, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter concerning denial of a refund reported on the individual income tax return filed by * (the "Taxpayer") for the taxable year ended December 31, 2004.

FACTS

The Department received information from the Internal Revenue Service ("IRS") indicating the Taxpayer had income from Virginia sources. The Department requested 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 based on the information provided by the IRS.

The Taxpayer contends that all his income resulted from Social Security payments and services performed for a non-federal entity. The Taxpayer believes he is not subject to income tax because he is a non-federal worker who did not earn any federal-connected money for federal-connected services.

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 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 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.

Virginia Code § 58.1-205 provides that any assessment of a tax by the Department shall be deemed prima facie correct. The Taxpayer has not shown that the assessment issued by the Department or the information provided by the IRS is incorrect. He has only confirmed that income was not reported on the federal return filed for the 2004 taxable year. Further, he has failed to provide objective evidence as to the correct liability for the taxable year at issue. Consequently, I find no basis to abate the Virginia individual income tax assessment for the 2004 taxable year.

The Taxpayer is requested to file an accurate Virginia individual income tax return for the 2004 taxable year, along with payment of the balance due, within 30 days from the date of this letter. Refusal to file the requested return or any subsequent returns in accordance with Virginia law by continuing to make the claims you have stated in your letter would justify the 100% fraud penalty and other legal actions to collect the proper tax.

Returns and payments should be sent at this time to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. Collection action will be held for 30 days, pending filing of correct returns and payment of the balance due.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2615225368.E