Could taxpayers overturn a Virginia assessment based on an IRS audit while their later federal amendment was still pending, and would a payment plan admit liability?

Plain-English summary

Virginia upheld a 2010 assessment based on the IRS's final audit adjustments. The taxpayers had not filed a Virginia amended return reflecting the federal changes, so Va. Code § 58.1-312 A 3 allowed the Department to assess the resulting state tax.

The couple said a later federal amended return remained under IRS review. Virginia explained that it would not look behind the IRS's existing final determination, but a later IRS revision could support a Virginia amended return and possible refund. The federal transcript showed that the IRS had written off its balance, not reversed the income adjustments that flowed into Virginia taxable income.

The ruling also clarified that entering a Virginia installment-payment agreement does not admit that the assessment is legally correct. The taxpayers could pay, seek a payment plan, or pursue an offer in compromise based on doubtful collectability while awaiting any federal change.

Common questions

Does Virginia independently redo an IRS audit? Not in the circumstances described. It used the IRS's final federal-income determination.

What if the IRS later changes the audit result? The taxpayers could file a Virginia amended return and seek a refund if their payments exceeded the corrected liability.

Does accepting a payment plan concede the tax? No. The ruling expressly said an installment agreement is not an admission that the tax is owed.

Citations and references

• Va. Code §§ 58.1-301, 58.1-311, 58.1-312 A 3, 58.1-1817, and 58.1-1823 A (ii)
• IRC § 6103(d)

Subject

Under circumstances where the IRS has audited the FAGI of an individual, the Department does not look behind the IRS's final determination.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-78

Original ruling text

May 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 “Taxpayers”) for the taxable year ended December 31, 2010.

FACTS

The Taxpayers, a husband and wife, were audited by the Internal Revenue Service (IRS) for the 2010 taxable year. The IRS reduced the itemized deductions the Taxpayers claimed on their federal income tax return and notified the Department of the adjustments it made. The Taxpayers 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 Taxpayers filed an appeal, contending they filed an amended federal income tax return subsequent to the audit that is still under review by the IRS. The Taxpayers also believe the establishment of a payment plan would be an admission that they owed the tax. In addition, the Taxpayers request to see the documentation indicating that the IRS wrote-off the balance due on their federal account.

DETERMINATION

IRS Audits

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.

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.

Under circumstances where the IRS has audited the FAGI of an individual, 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 Taxpayers' 2010 return based on the federal information available from the IRS as permitted by Virginia statute.

Payment Plans

Virginia Code § 58.1-1817 authorizes the Department to enter into an agreement allowing taxpayers to satisfy a tax liability by making installment payments. While the statute permits the Department to alter or terminate the agreement, the establishment of a payment plan does not constitute an admission by the taxpayer that they owe the tax.

IRS Information

Under IRC § 6103(d), the Department and the IRS have entered into a coordination agreement under which the Department can obtain information from the IRS that will enable the Department to determine that resident's tax liability. See P.D. 14-­33 (3/7/2014). The enclosed is a copy of the Taxpayers' federal income tax transcript for the 2010 taxable year that was obtained through the coordination agreement. The federal transcript shows that the IRS wrote off the balance due on its assessment but made no change to its adjustments to the Taxpayers' federal taxable income.

CONCLUSION

As stated above, the Department's assessment was based on corrections the IRS made to the Taxpayers' federal taxable income. If the IRS adjusts its audit findings for the 2010 taxable year, the Taxpayers will be permitted to file an amended return to correct their liability pursuant to Va. Code § 58.1-311 and Va. Code § 58.1-1823 A (ii). At that time, the amount of the Taxpayers' total payments for the 2010 taxable year would be compared to the tax liability as amended, and a refund would be issued if the payments exceed the liability.

The Taxpayers 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. Alternatively, the Taxpayers may contact a member of the Collections Team at (804) 367-8045 to arrange a payment plan.

If the assessment creates a financial hardship for the Taxpayers, they also have the option of pursuing an offer in compromise based on doubtful collectability. If the Taxpayers decide to request an offer in compromise, they should complete an Offer in Compromise Individual Request for Settlement, and Financial Information Statement (enclosed). The completed forms should be mailed to Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, Virginia 23218-2475.

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 ou 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