Could taxpayers avoid Virginia assessments while contesting IRS adjustments if they filed no amended Virginia returns or proof of a revised federal result?

Subject

Taxpayers failed to file amended Virginia income tax returns reflecting the IRS adjustments

Plain-English summary

Virginia upheld assessments based on IRS adjustments because the taxpayers had not filed amended Virginia returns or documented a different final federal result. Virginia law requires an individual to report a federal taxable-income change within one year after the final federal determination.

When no amended return is filed, Virginia may assess the resulting tax at any time. The taxpayers said they were still contesting the IRS findings, but they did not provide enough information about the audits for Virginia to change the current assessments. Virginia also explained that it does not look behind the IRS's final determination.

The assessments remained due with accrued interest. If the IRS later issued a new final determination for 2009, 2010, or 2013, the taxpayers could file amended Virginia returns to correct their state liabilities.

What this means for you

• Track the date a federal change becomes final and report it to Virginia within the required period.
• Do not assume that an ongoing IRS dispute automatically suspends a Virginia assessment.
• Give Virginia the federal notices and other documentation showing the current audit status or a revised final result.
• If the IRS later changes the result, file the permitted amended Virginia return promptly.

Common questions

Q: Why did Virginia uphold the assessments?

A: The taxpayers filed no amended Virginia returns reflecting the IRS changes and provided insufficient proof that the federal result had changed.

Q: Would Virginia independently redo the IRS audit?

A: No. The ruling says the Department does not look behind the IRS's final determination.

Q: Could the state liabilities be corrected later?

A: Yes. A later IRS final determination could support amended Virginia returns under the cited statutes.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312(A)(3), and 58.1-1823(A)(ii).
• P.D. 11-107.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-60

Original ruling text

April 14, 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 assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2009, 2010 and 2013.

FACTS

The Taxpayers were audited by the Internal Revenue Service (IRS) for the 2009 through 2013 taxable years. The IRS notified the Department of adjustments it made to the Taxpayers' federal income tax return. The Taxpayers failed to file amended Virginia income tax returns reflecting the IRS adjustments. As a result, the Department issued assessments based on the IRS information. The Taxpayers appeal the assessments, contending they are in the process of contesting the adjustments with the IRS.

DETERMINATION

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

The Taxpayers indicate that they are working with the IRS to correct the audit findings. 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 Taxpayer's 2009, 2010 and 2 013 Virginia income tax returns based on federal information available from the IRS as permitted by statute.

The Department requested information regarding the progress of the IRS audits, but the Taxpayers have failed to provide sufficient documentation that would allow the Department to adjust the current assessments. Accordingly, the assessments are upheld and remain due and payable. The Taxpayers will receive updated bills with accrued interest to date. The bills should be paid within 30 days of the bill date to avoid the accrual of additional interest.

If the IRS later adjusts its audit findings for the 2009, 2010 and 2013 taxable years and issues a new final determination, the Taxpayers may file amended returns to correct their liabilities as permitted under Va. Code § 58.1-311 and Va. Code § 58.1­1823 A(ii).

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5811363737.B