Could a late Virginia appeal defeat assessments by arguing that wages were not taxable and no federal return meant no federal adjusted gross income?

Subject

Failure to file income tax returns.

Plain-English summary

Virginia left the 2002-2006 assessments in place. The taxpayer did not file federal or Virginia returns, and federal information showed income. After the taxpayer failed to provide returns or an adequate explanation, Virginia assessed tax.

The appeal arrived after the 90-day period measured from the most recent July 1, 2009 assessment, so it was procedurally barred. Virginia also addressed the merits: the claims that wages could not be taxed and that no federal return meant no federal adjusted gross income had no basis in fact or Virginia law.

The ruling warned that intentionally failing to file solely on that theory can constitute evasion and trigger the 100% fraud penalty under Va. Code § 58.1-308.

What this means for you

• Not filing a federal return does not make income disappear for Virginia tax purposes.
• File a complete administrative appeal within 90 days of the assessment.
• Unsupported constitutional wage-tax arguments can create penalty exposure rather than eliminate liability.

Citations and references

• Va. Code §§ 58.1-1821 and 58.1-308.
• 23 VAC 10-20-165.
• P.D. 05-68.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-30

Original ruling text

February 28, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter concerning the Virginia individual income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2002 through 2006.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayer had income for the taxable years at issue. The Taxpayer did not file a federal or Virginia individual income tax return for those taxable years. The Department requested that the Taxpayer file the proper Virginia income tax returns or provide an explanation concerning why her income was not taxable. When an adequate response was not received, the Department issued the assessments.

On behalf of the Taxpayer, you contend that there is no federal statute that requires payment of a direct un-apportioned tax on the Taxpayer's wages and that the United States Constitution strictly forbids a capitation tax. Further, because the Taxpayer did not file a federal income tax return, you maintain that the Taxpayer had no federal adjusted gross income. As such, you assert that the assessments for the 2002 through 2007 taxable years are illegal and should be abated.

DETERMINATION

Virginia Code § 58.1-1821 provides that "[a]ny person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of assessment, apply for relief to the Tax Commissioner." Title 23 of the Virginia Administrative Code (VAC) 10-20-165 provides additional requirements regarding the timely filing of administrative appeals. This regulation provides information to taxpayers about the process for appealing tax assessments, including how to file a complete and timely administrative appeal.

You filed an appeal on behalf of the Taxpayer with the Department by letter dated February 23, 2010. The most recent assessment for the taxable years at issue is dated July 1, 2009. The statutory period for filing an appeal under Va. Code § 58.1-1821 for the taxable years at issue expired well before the appeal was filed. As such, the Taxpayer's administrative appeal is barred by the statute of limitations.

Regardless of the timeliness of the appeal, the claim that the Taxpayer's income is not subject to Virginia taxation has no basis in fact or Virginia law. A person who fails to file income tax returns based solely on such a claim has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308. See Public Document (P.D.) 05-68 (4/26/2005).

Accordingly, the Virginia individual income tax assessments for the 2002 through 2006 taxable years are correct and remain due and payable. Payment of the outstanding assessments, as shown on the enclosed schedule, should be made within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. If payment is not received within the allotted time, penalty will be assessed, additional interest will accrue, and collection action will resume on the outstanding balance.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4262537370.E