Were taxpayers entitled to a Virginia refund merely because they filed an amended federal return contesting an IRS audit?

Subject

Refund claim based on a contested IRS audit

Plain-English summary

Virginia denied the taxpayers' refund claim even though they had filed an amended federal return contesting the IRS audit. The taxpayers did not file an amended Virginia return reporting the original federal adjustment, so the Department assessed 2011 tax using information received from the IRS. They paid and sought a refund.

The Department treated the protective claim as an appeal on the merits. It said it would not look behind the IRS's determination and found that the assessment was properly issued from the available federal information.

If the IRS later changed its audit findings, the taxpayers could file an amended Virginia return. The ruling explained that a tax year can have more than one federal final determination, including an IRS refund, revenue-agent report, Form 870, 90-day letter, closing agreement, or court decision in the circumstances described by the regulation.

Result: the refund of paid Virginia tax and interest was denied on the existing record.

What this means for you

• Report final federal changes to Virginia even while tracking later federal proceedings.
• An amended federal filing alone does not prove that the IRS result has changed.
• Preserve each federal final-determination document because a later one may reopen the state correction route.
• A protective claim may be decided immediately on its merits rather than held indefinitely.

Common questions

Q: Why did Virginia issue the assessment?

A: The taxpayers did not file an amended state return reflecting IRS adjustments, so Virginia assessed from the federal information.

Q: Could they amend Virginia later?

A: Yes, if the IRS later adjusted its findings for 2011.

Q: Was the protective claim held pending the IRS dispute?

A: No. The Department exercised its authority to decide the claim on the merits.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312(A)(3), 58.1-1821, 58.1-1823(A)(ii), and 58.1-1824.
• 23 VAC 10-20-180(B).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-228

Original ruling text

December 9, 2015

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you submit a protective claim requesting a refund of Virginia individual income tax for * (the "Taxpayers") for the taxable year ended December 31, 2011.

FACTS

The Taxpayers were audited by the Internal Revenue Service (IRS) for the 2011 taxable year. The IRS notified the Department of adjustments it made to the Taxpayers' federal income tax return. The Taxpayers failed to file an amended Virginia income tax return reflecting the IRS adjustments. As a result, the Department issued an assessment based on the IRS information. The Taxpayers paid the assessment and filed a claim for refund, contending they have filed an amended federal return contesting the adjustments with the IRS.

DETERMINATION

Pursuant to the authority granted the Department under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1­1821. As permitted by statute, the Taxpayers' request has been treated as an appeal under Va. Code § 58.1-1821.

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 reflecting the federal adjustment, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

The Taxpayers assert that they had filed an amended federal return and are pursuing reconsideration of the IRS audit. Where the IRS has audited 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). The Department adjusted the Taxpayers' 2011 return based on federal information available from the IRS as permitted by Virginia statute. As such, the Department's assessment was properly issued, and the Taxpayers' request for a refund of the tax and interest paid is denied.

If the IRS adjusts its audit findings for the 2011 taxable year, the Taxpayers will be permitted to file an amended return to correct their liability pursuant to Va. Code § 58.1-311 and Va. Code § 58.1-1823 A(ii). Under Title 23 of the Virginia Administrative Code (VAC) 10-20-180 B, a final determination of a change in liability for the federal tax includes, with certain exceptions, the refund by the IRS of any federal income or estate tax. A final determination may also include a copy of an RAR, Form 870, 90-day letter, closing agreement, or court decision. Thus, under Title 23 VAC 10-20-180 B, a taxpayer may have more than one final determination for a given taxable year.

The Code of Virginia sections, regulation and public document 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6055544764.B