Would Virginia reconsider an IRS audit adjustment or waive interest while the taxpayer disputed the federal result?

Subject

Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination.

Plain-English summary

An individual did not file an amended Virginia return after the IRS adjusted his 2013 federal income. Virginia assessed tax from the federal information, and the taxpayer appealed while disputing the IRS audit.

Virginia upheld the assessment. Its rule was that the Department does not look behind the IRS's final determination; a taxpayer must report the federal change within one year, and Virginia may assess at any time if the taxpayer fails to do so.

The Department also refused to waive interest. Interest on an underpayment was mandatory and could not be removed unless the underlying tax changed. No penalty had actually been included. If the IRS later revised its findings, the taxpayer could file an amended Virginia return to correct the liability.

What this means for you

• Disputing an IRS audit does not itself erase the related Virginia assessment.
• Report a final federal change to Virginia within one year.
• Virginia interest on unpaid tax is mandatory while the tax remains due.
• If the IRS later changes the federal result, use the amended-return process to seek a corresponding Virginia correction.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312 A 3, 58.1-1812, and 58.1-1823 A(ii).
• P.D. 11-107.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-146

Original ruling text

August 23, 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 year ended December 31, 2013.

FACTS

The Taxpayer was audited by the Internal Revenue Service (IRS) for the 2013 taxable year. The Taxpayer 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 Taxpayer filed an appeal, contending he is appealing the IRS audit. The Taxpayer also requests an abatement of any penalties and interest applied to the assessment.

DETERMINATION

IRS Adjustments

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 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 (6/14/2001). The Department adjusted the Taxpayer's 2013 return based on the federal information available from the IRS as permitted by Virginia statute. As such, the 2013 assessment remains due and payable.

Interest and Penalty Waiver Request

The application of interest to tax underpayments is mandatory under Va. Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest. No penalties were included with the assessment.

CONCLUSION

The amount of tax assessed was based on adjustments by the IRS, and the Department does not look behind such adjustments. In addition, the law requires the assessment of interest to underpayments of tax, and Department does not have discretion to abate interest. The assessment, therefore, is upheld. The Taxpayer indicates that he has established a payment plan, so no further action from the Taxpayer is required at this time other than to abide by the terms of the payment plan. If the IRS adjusts its audit findings for the 2013 taxable year, the Taxpayer will be permitted to file an amended return to correct his liability pursuant to Va. Code § 58.1­311 and Va. Code § 58.1-1823 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/1243.M