Did a Treasury Offset Program notice restart Virginia's 90-day appeal period, and was a citizen's domestic income exempt from Virginia tax?

Subject

TOP notice did not restart the income-tax appeal deadline

Plain-English summary

Virginia dismissed the appeal because it was filed more than 90 days after the assessment. The Department issued the 2011 assessment on June 25, 2014. A March 2, 2015 notice that the debt would be submitted to the Treasury Offset Program did not restart the appeal period, so the April 14, 2015 appeal was untimely.

The assessment remained due and would be submitted for offset against eligible federal refunds or federal vendor payments. The Department also rejected the taxpayer's argument that an American citizen's domestic income was not subject to federal or Virginia income tax. Virginia begins with federal adjusted gross income and requires qualifying residents to file.

The ruling warned that intentionally failing to file solely on that rejected claim can support the 100% fraud penalty in Va. Code § 58.1-308. It did not state that the penalty was actually imposed in this determination.

Result: the Department lacked authority to grant the late appeal, the assessment remained payable with interest, and Treasury Offset Program collection would proceed.

What this means for you

• Count the 90-day administrative appeal period from the assessment date.
• Do not use a later collection or offset notice as the appeal starting date.
• Virginia residents generally start with federal adjusted gross income and then apply Virginia modifications.
• A tax-protester filing position can create separate fraud-penalty exposure.

Common questions

Q: Did the TOP notice create a new right to appeal the assessment?

A: No. The statutory deadline ran from the original assessment.

Q: Did the ruling impose the 100% fraud penalty?

A: No. It warned that intentionally failing to file solely on the rejected claim is subject to that penalty.

Citations and references

• Va. Code §§ 58.1-1821, 58.1-301, 58.1-321, 58.1-341, 58.1-322, and 58.1-308.
• 23 VAC 10-20-165.
• IRC §§ 6402(e) and 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-169

Original ruling text

August 18, 2015

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, 2011.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia individual income tax return for the 2011 taxable year. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When an adequate response was not received, the Department issued an assessment in June 2014. In March 2015, the Taxpayer was notified that the assessment would be submitted to the Treasury Offset Program (TOP). The Taxpayer filed an appeal, asserting that he was exempt from filing federal and Virginia income tax returns because the Internal Revenue Code (IRC) does not impose a direct non-apportioned tax on the domestic income of individuals who are American citizens.

DETERMINATION

Treasury Offset Program

TOP allows the Department to satisfy a taxpayer's state debts, including state income tax debts, by offsetting the debt against the taxpayer's federal refund. Under TOP, the Department submits eligible state income and business tax debts to offset federal income tax refunds and federal vendor payments. Once a debt is submitted, the United States Department of Treasury will withhold or reduce eligible federal tax refund or federal vendor payments by the amount of the Virginia debt. See Internal Revenue Code (IRC) § 6402(e).

As required by the TOP program, the Department issued a notice to inform the Taxpayer that it would be submitting the 2011 assessment for offset unless the liability was satisfied by the appropriate date. The Taxpayer has failed to satisfy the 2011 assessment.

Time for Filing an Appeal

Virginia Code § 58.1-1821 provides that "any person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner." [Emphasis added.] 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.

The Taxpayer filed an appeal for the taxable year at issue with the Department by letter dated April 14, 2015. The TOPS notification was issued on March 2, 2015. As such, the Taxpayer's appeal was filed within 90 days of the TOP letter. However, an appeal must be filed within 90 days of the date of the assessment. The assessment for the taxable year 2011 was issued on June 25, 2014. The Taxpayer's appeal letter was filed well outside the 90-day period provided in Va. Code § 58.1-1821.

Taxation of Residents

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). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322. A resident of Virginia includes any natural person domiciled in Virginia at any time during a taxable year or who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.

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 individual income tax return. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine the resident's tax liability.

In addition, the Virginia Supreme Court has held "the power of the State of Virginia to levy taxes is not derived from the Constitution of the United States as interpreted by the Supreme Court. On the contrary, the State has the inherent and unlimited power of taxation unless restrained by its Constitution or the Constitution of the United States." See Colonial Pipeline Company v. Commonwealth of Virginia , 206 Va. 517, 145 S.E.2d 227 (1965). Thus, the fact that Virginia starts with the IRC to determine Virginia taxable income does not in any way inhibit the Commonwealth's authority to impose an income tax on its citizens.

Although the Taxpayer does not deny that he was a Virginia resident or that he had income during the taxable year at issue, he states that he was exempt from filing federal and Virginia income tax returns. Regardless of the fact that the Taxpayer did not timely file his 2011 resident Virginia return, the information available shows that the Taxpayer received Virginia taxable income during the 2011 taxable year. Because the amount of such income exceeded the applicable filing threshold under Va. Code § 58.1-321, the Taxpayer was required to file a Virginia return. See also Public Document (P.D.) 14-33 (3/7/2014).

CONCLUSION

The Taxpayer's application for correction was filed beyond the statutory period under which the Department is authorized to act on such appeal. Accordingly, the assessment for the taxable year ended December 31, 2011 is correct and remains due and payable. An updated bill will be issued shortly, which will include accrued interest. Payment of the assessment should be made within 30 days of the bill date in order to avoid the accrual of additional interest. In addition, the Department will submit the assessment to TOP.

Notwithstanding the jurisdictional issues, the Taxpayer's claim that his income is not subject to Virginia taxation has no basis in fact or Virginia law. An individual 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.

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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6031720159.B