Could a taxpayer avoid Virginia income-tax assessments by arguing that federal and state income-tax payment is voluntary?

Subject

The Taxpayer's claim that she is not required to pay income tax has no basis in fact or Virginia law.

Plain-English summary

Virginia rejected the taxpayer's argument that federal and Virginia income-tax payment was voluntary. Voluntary compliance means taxpayers generally calculate and pay the proper amount themselves; it does not prevent the Department from assessing tax when they do not comply with the law.

The taxpayer may have been a Maryland resident earning Virginia wages, which could matter because Virginia and Maryland have a reciprocal wage-tax agreement. But she did not provide the residency evidence Virginia requested, so the Department could not verify that she qualified for the exemption.

Because Virginia may estimate tax from available information and its assessments are presumed correct, the taxpayer carried the burden of showing that she was not taxable. She did not meet that burden, and the 2013 and 2014 assessments were upheld.

Virginia allowed one final 30-day period for residency documentation. It also warned that a person who fails to file solely because of the baseless voluntary-tax claim intentionally understates liability with intent to evade tax and is subject to the 100% fraud penalty in Va. Code § 58.1-308.

Common questions

Does a voluntary-compliance system make income-tax payment optional? No. Virginia can assess tax when a taxpayer does not properly comply.

Could Maryland reciprocity have changed the result? Potentially, if the taxpayer proved Maryland residency and had only qualifying Virginia wages, but she supplied no objective residency evidence.

Were the assessments immediately final? They were upheld, but Virginia allowed 30 days for sufficient residency evidence before they became immediately due and payable.

Citations and references

• Va. Code §§ 58.1-111, 58.1-205, 58.1-301, 58.1-308, 58.1-322, and 58.1-342 B.
• P.D. 10-58.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-29

Original ruling text

March 17, 2016

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 "Taxpayer") for the taxable years ended December 31, 2013 and 2014.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have had Virginia income tax liabilities for the 2013 and 2014 taxable years. A review of the Department's records showed that the Taxpayer's employer withheld Virginia income tax, and the Taxpayer had filed Virginia nonresident individual income tax returns reporting no tax due. The Department requested additional information from the Taxpayer in order to determine if her income was taxable in Virginia. When a response was not received, the Department issued assessments. The Taxpayer appeals, contending she was not subject to Virginia income tax because the payment of both the United States and Virginia income taxes is voluntary.

DETERMINATION

Voluntary Taxation

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 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.

The Taxpayer contends that the payment of federal and Virginia individual income tax is voluntary and she has chosen not to pay. While the federal and Virginia income tax systems rely on voluntary compliance by taxpayers for payment of the proper amount of taxes, this does not preclude the Department from issuing assessments when a taxpayer does not properly comply with the law. See Public Document (P.D.) 10-58 (5/7/2010).

Reciprocity

Virginia Code § 58.1-342 B grants the Department the authority to enter into reciprocal agreements with other states to exempt nonresidents from the Virginia income tax when they earn salaries and wages from working in Virginia if such other states similarly exempt Virginia residents. In addition, employers are not required to withhold Virginia income tax from residents of these states. Virginia currently has this type of agreement with Maryland, West Virginia and Pennsylvania.

It appears the Taxpayer may be a resident of Maryland who earned wages in Virginia during the 2013 and 2014 taxable years. In addition, it looks as if the Taxpayer may not have had other Virginia source income subject to Virginia income tax. However, the Department needed to verify her residency status. By letter dated November 15, 2015, the Department requested the Taxpayer validate her residency. To date, the Taxpayer has failed to provide any objective evidence that she was not a Virginia resident during the 2013 and 2014 taxable years.

When a taxpayer fails or refuses to provide documentation sufficient to calculate an accurate liability, Va. Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to such taxpayer. To date, the Taxpayer has failed to provide sufficient documentation on which the Department could make an informed decision concerning her domiciliary residence or her tax liability.

Further, under the provisions of Va. Code § 58.1-205 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 she was not subject to income tax in Virginia.

CONCLUSION

Based on the applicable law cited above and the information presented, there is no basis to abate the Department's assessment for the 2013 and 2014 taxable years. Accordingly, the assessments are upheld and remain due and payable.

Further, the Taxpayer's claim that she is not required to pay income tax 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.

I will, however, grant the Taxpayer one final opportunity to provide sufficient evidence regarding her residency for the 2013 and 2014 taxable years. Such evidence should be provided within 30 days from the date of this letter to: Virginia Department of Taxation, Appeals and Rulings, Attention: *, Post Office Box 27203, Richmond, Virginia 23261-7203. If the requested information is not provided within the allotted time, the assessment will become immediately due and payable.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6121367953.B