Could Virginia assess a nonfiler from IRS information when the taxpayer claimed some reported income was nontaxable but filed no state return?

Subject

Taxpayer did not file a Virginia income tax return, the Department made an assessment based on the information it had available pursuant to Va. Code § 58.1-111.

Plain-English summary

Virginia was authorized to assess the taxpayer from the information available because he filed no 2012 state return. The IRS indicated a possible Virginia filing obligation, and the taxpayer did not answer the Department's information request before assessment.

Virginia generally begins a resident's taxable-income computation with federal adjusted gross income, subject to specific Virginia modifications. A resident with a federal filing duty, or Virginia adjusted gross income above the state threshold, must file a Virginia return.

The taxpayer said some reported income should have been nontaxable and that amended information documents were coming, but he still had not filed a return. The Commissioner gave him one final 30-day opportunity in that case to file; the Department would review the return and adjust the assessment if appropriate.

What this means for you

• An estimated assessment does not substitute for filing the required return.
• If an information return is wrong, pursue the correction and still respond to state deadlines with documentation.
• A filed return gives the Department the facts needed to calculate any adjustment.

Citations and references

• Va. Code §§ 58.1-111, 58.1-301, 58.1-321, 58.1-322, 58.1-341, and 58.1-1812.
• IRC § 6103(d).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-185

Original ruling text

September 24, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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, 2012.

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 2012 taxable year. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When a response was not received, the Department issued an assessment based on the available information. The Taxpayer appealed, contending that a large portion of his income was not taxable.

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 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.

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. Because the Taxpayer did not file a Virginia income tax return, the Department made an assessment based on the information it had available pursuant to Va. Code § 58.1-111.

The Taxpayer asserts that some of his income should have been reported as nontaxable on the respective information return. The Taxpayer stated that he would file a return when he received the amended documents. As of the date of this determination, however, no return has been filed.

Virginia's taxing system is based largely on the theory of self-assessment. The taxpayer is given the responsibility to compute, file and pay their own income tax. Virginia has implemented a self-assessment system based on the federal system because it is less intrusive upon the taxpayer, and less costly to the administration of the tax. The Department has the authority to assess the additional tax plus any penalty and interest, as required by law, when it finds that any taxpayer "has failed to make a proper return or to pay in full any proper tax." See Va. Code § 58.1-1812. Thus, the Department was well within its authority to issue an assessment based on the information it had in its possession.

I will, however, grant the Taxpayer one final opportunity to file his Virginia income tax return for the 2012 taxable year. The return must be submitted within 30 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203: Attn: *. Upon receipt, the return will be reviewed and processed, and the assessment will be adjusted accordingly. If the return is not filed within the allotted time, the assessment will be considered correct and collections action may resume.

The Code of Virginia sections 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/1-6044911578.M