Could taxpayers defeat a Virginia assessment by saying their 2006 return was e-filed when they had no confirmation number or proof of payment?

Subject

No proof that electronic return or payment was received

Plain-English summary

Virginia upheld the 2006 assessment because the taxpayers could not prove that the Department received their electronic return or the tax payment shown on it. A timely federal filing did not establish that the Virginia return was also successfully transmitted.

The Department issues a confirmation number for an accepted electronic return. The taxpayers had not retained that number or proof of payment, and the two sets of software instructions they later produced conflicted over whether and when the Virginia filing had to be mailed. With no Department record of receipt, the evidence did not establish a filed return.

That finding also defeated the three-year limitations argument. Va. Code § 58.1-312 A 1 allowed the Department to assess at any time when a required return was not filed. Although the recordkeeping regulation generally required preservation for three years, the assessment was presumed correct and the taxpayers still bore the burden of proving it wrong.

The assessment remained due, but the taxpayers received one final 45-day period to provide evidence that the tax reported on the 2006 Virginia return had actually been paid.

What this means for you

• Keep the state e-file acceptance confirmation; a federal acceptance does not prove state receipt.
• Preserve bank or payment records separately from the return copy.
• If Virginia has no filed return, the normal three-year assessment limit may not apply.
• A record-retention minimum does not shift the burden of disproving an assessment to the Department.

Citations and references

• Va. Code §§ 58.1-104, 58.1-312 A 1, 58.1-205, and 58.1-102.
• 23 VAC 10-20-90.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-118

Original ruling text

July 24, 2014

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 "Taxpayers") for the taxable year ended December 31, 2006. I apologize for the delay in responding to your appeal.

FACTS

The Department received information that the Internal Revenue Service (IRS) adjusted the Taxpayers' federal adjusted gross income (FAGI) for the 2006 taxable year. Because it had no return on file, the Department requested additional information from the Taxpayers. The Taxpayers provided copies of federal and state returns, but the FAGI did not match the information received from the IRS. As a result, the Department issued an assessment for additional tax, penalties and interest based on the information provided by the IRS.

The Taxpayers concede their income was adjusted by the IRS and have remitted payment for that portion of the assessment. They appeal the remaining balance of the assessment, contending they timely filed a 2006 return electronically and paid the balance of the tax due. The Taxpayers also assert the assessment was issued beyond the statute of limitations and beyond the period under which taxpayers are required to keep records.

DETERMINATION

Electronically Filed Returns

The Taxpayers claim they electronically transmitted their Virginia income tax return when they filed their federal return. The Taxpayers state that because the federal return was timely filed, the Virginia return should also be considered timely filed. The Department, however, does not have any record of receiving the Taxpayers' return before they responded to the request for information.

The Department has established procedures for accepting electronically filed returns. When a return is filed electronically, the Department will issue a confirmation number. The Taxpayers did not retain the confirmation number confirming the receipt of the return or proof of payment.

Further, in responding to the Department's inquiries, the Taxpayers have provided conflicting information. The software instructions provided with the federal and state returns indicate the 2006 Virginia income tax return was filed electronically but that the payment must be mailed by May 1, 2007. After the assessment was issued, the Taxpayers provided another set of software instructions indicating the return must be mailed by November 1, 2007. This evidence and the fact that the Department has no record of receiving a return raise considerable doubt as to whether the Taxpayers' 2006 return was filed.

Statute of Limitations

Virginia Code § 58.1-104 generally requires the Department to make an assessment of underpaid tax within three years from the last day prescribed by law for the timely filing of the return. When a taxpayer fails to file a required Virginia return, however, Va. Code § 58.1-312 A 1 permits the Department to assess the appropriate tax at any time. Because the evidence indicates the Taxpayers did not file a Virginia return, the Department acted within its authority to issue the assessments for the 2006 taxable year.

Taxpayer Records

The Taxpayers assert the Department lacks the authority to require taxpayers to maintain tax records beyond three years when a return is timely filed. They cite Title 23 of the Virginia Administrative Code (VAC) 10-20-90, which states "records and documents shall be preserved for a period of three years from the required date for filing a return to which such records or documents pertain." Based on this regulation, the Taxpayers believe they were only required to maintain records for a maximum of three years from the filing date of their 2006 return.

As indicated above, no clear evidence has been provided to show that the Taxpayers filed a Virginia income tax return. Therefore, the Department is not limited to issuing assessments within three years from the due date of a return when a taxpayer has failed to file a return. Further, Va. Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the taxpayer to show an assessment issued by the Department is erroneous.

While Virginia regulations do not require a taxpayer to maintain records for more than three years, nothing in Virginia statute precludes them from retaining records for longer periods of time. Like the federal tax regimen, Virginia's taxing system is based largely on the concept of self-assessment. A taxpayer computes his own income tax, fills-out his own return, files the return and pays the tax indicated. Virginia has implemented a self-assessment system based on the federal system because it is less intrusive upon taxpayers, simpler, and less costly to administer. As such, it is incumbent upon the taxpayer to retain and review suitable records and documents to determine his proper Virginia income tax liability. See Va. Code § 58.1-102.

CONCLUSION

Based on the information provided, there is not conclusive evidence to prove that the Taxpayers' Virginia income tax return was transmitted to the Department at the time the federal return was transmitted. Furthermore, there is no documentation to prove payment of the tax due as reported on the 2006 Virginia return. Without such proof, there is no basis to adjust or abate the assessment. Accordingly, the assessment for the 2006 taxable year remains due and payable.

I will allow the Taxpayers one final opportunity to provide evidence showing the tax due as shown on the 2006 Virginia income tax return was paid. Such evidence must be provided within 45 days of the date of this letter. If the documentation requested is not received within the allotted time, an updated bill with accrued interest will be issued to the Taxpayers.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5488078843.D