Would sending documents to the IRS overturn Virginia assessments based on the IRS's current audit adjustments?

Subject

Change or correction in federal taxable income

Plain-English summary

The IRS adjusted an individual's federal returns for 2012 through 2014. She did not file amended Virginia returns, so Virginia assessed tax from the IRS information. She appealed, saying she had sent documents to the IRS to dispute the changes.

Virginia upheld the assessments because it did not look behind the IRS's current final determination and the taxpayer had not shown the state figures were incorrect. Her pending bankruptcy could affect collection or discharge, but did not establish that the assessments were wrong.

If the IRS later changed its findings, that later event could be another federal final determination. The taxpayer could then file corresponding amended Virginia returns within one year.

What this means for you

• Report final IRS changes to Virginia within one year.
• A pending federal dispute does not automatically suspend the Virginia assessment.
• Preserve the later IRS document that changes the federal liability.
• Bankruptcy treatment affects collection separately from the merits of the tax assessment.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312 A 3, and 58.1-1823 A(ii).
• 23 VAC 10-20-180 B.
• P.D. 11-107.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-125

Original ruling text

June 29, 2017

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 years ended December 31, 2012 through 2014.

FACTS

The Taxpayer was audited by the Internal Revenue Service (IRS) for the taxable years at issue. The IRS notified the Department of adjustments it made to the Taxpayer's federal income tax returns. The Taxpayer 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 Taxpayer filed an appeal, contending she submitted documents to the IRS to refute the adjustments.

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

Where the Internal Revenue Service (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 2012 through 2014 income tax liability based on federal information available from the IRS as permitted by statute. The Taxpayer has failed to show the Department's assessments are incorrect.

Accordingly, the Department's assessments are upheld. The Taxpayer will receive an updated bill with accrued interest to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest.

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. Therefore, if the IRS adjusts its audit findings for the taxable years at issue, the Taxpayer will be permitted to file amended returns to correct her liability pursuant to Va. Code § 58.1-311 and Va. Code § 58.1­1823 A (ii).

The Taxpayer states that she has begun bankruptcy proceedings and that the IRS assessments may be included in the bankruptcy. Some or all of the Taxpayer's Virginia income tax assessments may be dischargeable in bankruptcy. Please contact of the Department's bankruptcy collections unit at (804) 367-8045 if you have any questions regarding payment.

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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1191.B