How did Virginia resolve seven years of delinquent returns after comparing the taxpayers' filings with IRS records?

Subject

IRS records supported five years of returns but required two years of adjustments

Plain-English summary

Virginia accepted the taxpayers' 1999 through 2003 returns because they matched federal information, but adjusted 2004 and 2005 to the IRS records. The couple had not timely filed federal or Virginia returns, and the Department initially could not verify the late Virginia filings because supporting documentation was missing.

During the appeal, Virginia confirmed that federal returns had been filed or that the IRS had generated return information for each year. The 1999 through 2003 federal data agreed with the Virginia returns, so those returns were accepted as filed and the related assessments were revised.

The 2004 and 2005 Virginia returns did not agree with IRS records. Virginia therefore adjusted those years to the federal information and returned the case to the auditor.

The ruling explained that Virginia generally relies on reasonable federal-return computations because state taxable income begins with federal adjusted gross income. The Department can still adjust that starting amount when clear evidence shows that the reported federal or state figures are inconsistent with the Internal Revenue Code.

What this means for you

• Virginia individual income tax generally starts with federal adjusted gross income.
• Late state returns need records that can be reconciled to federal filings or IRS-generated information.
• Matching federal data can support acceptance; inconsistent years can be adjusted separately.
• A later federal change affecting taxable income had to be reported to Virginia within one year under the cited rule.

Common questions

Which years were accepted as filed?

1999 through 2003.

Which years were adjusted to IRS information?

2004 and 2005.

Does Virginia always accept the federal return without review?

No. It may adjust federal adjusted gross income when clear evidence shows inconsistency with federal law.

Citations and references

• Va. Code §§ 58.1-219, 58.1-301, 58.1-311, 58.1-321, and 58.1-341.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-77

Original ruling text

May 18, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the Virginia individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 1999 through 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers are Virginia residents. The Department obtained information from the Internal Revenue Service (IRS) indicating the Taxpayers received taxable income for the 1999 through 2005 taxable years and further, that the Taxpayers had failed to file federal individual income tax returns. The Department requested that the Taxpayers file the appropriate Virginia individual income tax returns or provide an explanation concerning the taxable status of that income.

In response, the Taxpayers filed Virginia returns but the Department was unable to verify their accuracy. Because sufficient documentation to support the income and deductions reported was not provided, assessments were issued. The Taxpayers appeal the assessments, contending the Virginia returns they filed accurately reported their Virginia income.

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).

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 income tax return.

As a general rule, 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 looks reasonable, there is generally no reason to look behind those computations. The Department, however, retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Va. Code § 58.1-219.

In the instant case, the Taxpayers were contacted concerning delinquent Virginia income tax returns. When the delinquent Virginia returns were ultimately filed, the Department requested documentation from the Taxpayers to verify the information reported on the returns. Assessments were issued based on the information at hand when sufficient documentation was not provided.

During the course of this appeal, the Department has been able to verify that the Taxpayers filed federal income tax returns or the IRS generated return information for the taxable years at issue. The return information provided by the IRS is consistent with the Virginia returns provided to the Department by the Taxpayers for the 1999 through 2003 taxable years.

Based on the Department's analysis of the federal returns and the facts of this case, the Taxpayers' Virginia returns for the 1999 through 2003 taxable years will be accepted as filed. The assessments for these taxable years will be adjusted accordingly.

The Taxpayers' 2004 and 2005 Virginia returns, however, do not match the IRS records. The assessments for these taxable years will be adjusted to reflect the IRS information. Accordingly, this case will be returned to the auditor to make the above adjustments.

The Taxpayers should be aware that should the IRS make any changes to their federal income tax return affecting federal taxable income reported on that return, Va. Code § 58.1-311 requires that they report the change to the Department within one year after the final determination of such change or correction.

The Code of Virginia sections cited, along with other reference documents, 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 about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2342935409.B