Could Virginia assess 2012 tax more than three years after the return due date when taxpayers had not reported an IRS increase in federal income?

Plain-English summary

Virginia could assess additional 2012 income tax after the ordinary three-year limitations period because the taxpayers had not reported the IRS's federal changes on an amended Virginia return.

Va. Code § 58.1-311 required an amended return within one year of the final federal change. When that did not happen, § 58.1-312 A 3 allowed the Department to assess the appropriate Virginia tax at any time.

Virginia matched the taxpayers' federal adjusted gross income and itemized deductions to the IRS record and did not look behind the IRS's final audit determination. The taxpayers had already paid, so no immediate action remained. A later IRS revision could support an amended Virginia return and refund claim.

Common questions

Why did the ordinary three-year limit not protect the taxpayers? An unreported federal change triggered a statutory exception.

Could Virginia decide that the IRS figures were wrong? No. The ruling directed disputes over the federal figures to the IRS.

Could the taxpayers recover money after a later IRS correction? Yes. They could amend Virginia under the cited provisions.

Citations and references

• Va. Code §§ 58.1-104, 58.1-301, 58.1-311, 58.1-312 A 3, and 58.1-1823 A (ii)
• P.D. 11-107 (June 14, 2011)
• P.D. 15-204 (October 20, 2015)

Subject

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-66

Original ruling text

May 10, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of individual income tax paid by * (the “Taxpayers”) for the taxable year ended December 31, 2012.

FACTS

The Taxpayers, a husband and a wife, filed a 2012 Virginia resident individual income tax return. The Department received information from the Internal Revenue Service (IRS) indicating the federal adjusted gross income (FAGI) reported to the IRS did not match the FAGI reported to the Department. The Department adjusted its records to match the IRS records and issued an assessment for additional tax. The Taxpayers filed an appeal, contending they did not know why they received an assessment and the assessment was issued outside of the statute of limitations period.

DETERMINATION

Virginia Code § 58.1-301 provides 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 the 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 Taxpayers contend that pursuant to Va. Code § 58.1-104, the Department was required to issue an assessment within three years of the due date of their 2012 return. Because the assessment was issued on November 6, 2016, which is more than three years from the May 1, 2013 due date of their return, the Taxpayers assert that the assessment was issued outside of the limitations period. Virginia law, however, provides an exception to the three-year statute of limitations for assessing tax when an individual fails to report a change or correction in federal taxable income. See Va. Code § 58.1-312, Public Document (P.D.) 88-307 (11/7/1988) and P.D. 11-105 (6/10/2011).

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. Because the Taxpayers did not file an amended 2012 Virginia income tax return reporting an increase in FAGI, the Department could issue the assessment after the three-year limitations period.

The information received from the IRS indicates it adjusted the Taxpayers FAGI and itemized deductions. Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination. See P.D. 11-107 (6/14/2011). The Department merely adjusted the Taxpayers' FAGI and deductions to match the amount of the federal changes. Accordingly, the Department increased the Taxpayers' 2012 income tax liability as permitted by Virginia statute. Because the Department's assessment was based on the information received from the IRS, the Taxpayers must contact the IRS to dispute any discrepancies in their FAGI. See P.D. 15-204 (10/20/2015).

The Taxpayers assert that the Department did not provide an explanation for the assessment. By letter dated September 22, 2016, the Department informed the Taxpayers that the IRS had made changes to their 2012 federal income tax return and included a schedule showing proposed corrections to their Virginia return. The letter requested that the Taxpayers provide official documentation from the IRS to support the FAGI reported on their return. When no response has been received, the assessment was issued in November 2016.

The Department's records indicate that the Taxpayers have paid the assessment. Therefore, no further action is required. If the IRS adjusts its audit findings for the 2012 taxable year, the Taxpayers will be permitted to file amended returns to correct the liability pursuant to Va. Code § 58.1-311 and Va. Code § 58.1-1823 A(ii).

The Code of Virginia sections and public documents 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/1118.B