Could Virginia disregard a final IRS income adjustment because the taxpayer said the return preparer made the underlying error?

Plain-English summary

Virginia upheld the assessment based on the IRS's final income figures. The taxpayer said a preparer had incorrectly handled an education-expense deduction, but the taxpayer did not contest the IRS assessment and did not file an amended Virginia return reporting the federal change.

Va. Code § 58.1-311 required the individual to report the final federal correction within one year through an amended Virginia return. When that return was not filed, § 58.1-312 allowed the Department to assess the appropriate Virginia tax at any time.

The Department ordinarily relies on federal-return computations. Although Va. Code § 58.1-219 allows it to adjust federal adjusted gross income when clear evidence shows inconsistency with the Internal Revenue Code, the Department said it does not look behind the IRS's final determination after the IRS has examined the taxpayer's federal income. A claimed preparer error therefore did not support relief from this assessment.

What this means for you

• A final IRS adjustment can flow directly into Virginia taxable income.
• File the required amended Virginia return within one year of the final federal change.
• Contest an alleged federal deduction or preparer error through the federal process before the result becomes final.
• Virginia generally will not relitigate the IRS's completed examination in a state appeal.

Citations and references

• Va. Code §§ 58.1-219, 58.1-311, and 58.1-312.

Subject

Taxpayer failed to file an amended Virginia individual income tax return

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-107

Original ruling text

June 14, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2006.

FACTS

The Taxpayer was audited by the Internal Revenue Service (IRS) for the 2006 taxable year. The IRS adjusted the Taxpayer's 2006 federal adjusted gross income (FAGI). The Taxpayer did not amend her Virginia income tax return to report the IRS adjustment. As a result, the Department issued an assessment for the taxable year in question. The Taxpayer appeals the assessment, contending the preparer made an error when filing the income tax return.

DETERMINATION

Virginia Code § 58.1-311 requires any individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the taxpayer fails to file an amended return, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

In this case, the Taxpayer contends that her accountant failed to properly report a deduction for education expenses, resulting in the adjustment to her federal taxable income. Due to personal issues at the time, the Taxpayer indicates that she did not contest the IRS assessment.

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. The Department does retain the authority under Va. Code § 58.1-219 to adjust federal adjusted gross income (FAGI) where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. However, where the IRS has examined the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination.

The Taxpayer failed to file an amended Virginia individual income tax return as required by Va. Code § 58.1-311. As authorized by Va. Code § 58.1-312, the Department issued an assessment based on the final figures computed by the IRS. As such, the assessment is correct as issued, and there is no basis for relief.

The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest.

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 about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4666956965.D