Could a taxpayer relitigate business deductions in Virginia after the IRS made a final 2005 itemized-deduction adjustment?

Plain-English summary

Virginia upheld the assessment based on the IRS's final reduction of the taxpayer's 2005 itemized deductions. The taxpayer did not amend his Virginia return to report the federal change and instead argued that the deductions were legitimate business expenses.

Virginia began its individual-income-tax calculation with federal adjusted gross income and generally relied on federal return figures. Although the Department retained authority to adjust federal figures when clear evidence showed inconsistency with the Internal Revenue Code, it would not look behind a final IRS determination after the IRS had examined the taxpayer.

The taxpayer had one year after the final federal determination to report the change on an amended Virginia return. Because he did not, Virginia could assess the corresponding tax at any time. The assessment remained due, with updated interest.

What this means for you

• Track every final IRS change that affects Virginia taxable income.
• File the required Virginia amended return within one year.
• Do not assume a state appeal will reopen deductions already finalized by the IRS.
• Reconcile federal audit figures to the resulting Virginia assessment.

Common questions

Q: Could Virginia adjust federal income or deductions itself?
A: Yes, when clear evidence shows reported amounts conflict with federal law.

Q: Did Virginia revisit the IRS's final deduction decision here?
A: No. It used the final federal figures.

Q: Why could Virginia assess after the taxpayer failed to amend?
A: Va. Code § 58.1-312(A)(3) allowed an assessment at any time in that circumstance.

Citations and references

• Va. Code §§ 58.1-219, 58.1-301, 58.1-311, and 58.1-312(A)(3).
• Virginia Public Document 11-107 (June 14, 2011).

Subject

Department does retain the authority to adjust federal adjusted gross income and itemized deductions

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-169

Original ruling text

September 29, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

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

FACTS

The Taxpayer was audited by the Internal Revenue Service (IRS) for the 2005 taxable year. The IRS adjusted the Taxpayer's 2005 federal itemized deductions. The Taxpayer did not amend his 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 deductions were legitimate business expenses.

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 treat it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI).

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.

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 and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the Internal Revenue Code. However, where the IRS has examined the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination. See Public Document (P.D.) 11-107 (6/14/2011).

In this case, the Taxpayer failed to file an amended Virginia individual income tax return as required by Va. Code § 58.1-311. As authorized under 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 and public document 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 website. If you have any questions concerning this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings Division, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4760008240.E