Did an amended S-corporation return and explanatory note adequately report an IRS increase to a shareholder's federal adjusted gross income?

Subject

Taxpayer provided insufficient information to adjust his Virginia taxable income.

Plain-English summary

The taxpayer did not adequately report the federal adjustment to his individual income. Amending the S-corporation return and saying income had been “moved” did not tell Virginia how the IRS change affected his federal adjusted gross income.

Virginia begins with federal adjusted gross income and taxes included income unless a Virginia modification applies. Because the Department later received the federal change from the IRS, it could assess the additional 2005 tax. The assessment remained due.

What this means for you

• An IRS adjustment generally requires a Virginia amended return within the stated one-year period.
• A business-entity amendment does not necessarily report the owner's individual federal change.
• The Department needs enough detail to compute the corrected Virginia liability.
• If a federal change is not properly reported, Virginia may assess based on IRS information.

Common questions

Was the taxpayer excused because he believed Virginia taxable income would not change?

No. The federal adjusted gross income had changed, and the submission did not establish an offsetting Virginia modification.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312(A)(3), 58.1-1823, 58.1-301, and 58.1-322.
• IRC § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-260

Original ruling text

December 2, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

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

FACTS

The Taxpayer, a resident of Virginia, was audited by the Internal Revenue Service (IRS) for the 2005 taxable year. As a result of the audit, the Taxpayer's federal adjusted gross income (FAGI) was increased. The Taxpayer amended his 2005 Virginia S Corporation return and included a letter stating he was advised by the IRS to report the income earned from the S Corporation on his individual income tax return. The Taxpayer also stated in the letter that he did not believe the adjustment would affect his Virginia taxable income.

The IRS notified the Department of the change in the Taxpayer's FAGI. The Department issued an assessment to the Taxpayer for additional tax and interest. The Taxpayer appeals the assessment, contending he reported the results of the audit to the Department and provided the Department with sufficient information to make adjustments to his Virginia income tax return, as required per Va. Code § 58.1-211.

DETERMINATION

Under Va. Code § 58.1-311, a taxpayer audited by the IRS is required to file an amended return and report the changes to the Department within one year of the final determination of the change. Further, under Va. Code § 58.1-1823, a taxpayer has three years from the last day prescribed by law for the timely filing of the return, or one year from the final determination of a federal change or correction to file an amended return to request a refund. If such amended returns are not filed, the Department may make an assessment of additional tax based on the federal adjustments at any time pursuant to Va. Code § 58.1-312.

The Taxpayer believed the adjustments to his FAGI would not have an affect on his Virginia taxable income and, therefore, he was not required to file an amended return. Virginia Code § 58.1-301 provides that for individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with the 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. In this case, the information received from the IRS clearly indicates a change to the Taxpayer's FAGI.

The Taxpayer also contends he provided the Department sufficient information to adjust his Virginia taxable income. Generally, if the Department has sufficient information to compute the proper additional tax and the Taxpayer has paid such tax, then the Taxpayer is not required to file a return to report the change in FAGI. In this instance, the Taxpayer filed an amended the return for the S-Corporation but failed to notify the Department that the IRS had also adjusted his FAGI. The Taxpayer included a note indicating the income had been "moved" but gave no information as to how the income affected his FAGI. The Department does not consider the Taxpayer's submission to be of sufficient detail to accurately recompute his Virginia income tax liability for the 2005 taxable year.

Subsequently, the Department obtained information from the IRS pursuant to an agreement under Internal Revenue Code (IRC) § 6103(d). The Department assessed the appropriate tax as permitted under Va. Code § 58.1-312 A 3.

Based on the foregoing, the 2005 assessment is correct and remains due and payable. An updated bill will be mailed to you shortly.

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 website. If you have any questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4492689112.D