Could Virginia assess a resident from IRS information before the taxpayer's federal dispute was finally resolved?

Plain-English summary

Virginia upheld assessments for 2009 through 2013 that were based on information received from the IRS. A Virginia resident generally must file a Virginia return when required to file federally, and Virginia may assess at any time when a taxpayer fails to file a proper return.

The Department did not have to wait for the taxpayer's federal appeal to end before using IRS information to determine Virginia liability. If the IRS later made a final change or correction, however, the taxpayer could report it and file returns to correct the Virginia liability under the cited federal-change provisions.

Citations and references

• Va. Code §§ 58.1-341, 58.1-321, 58.1-312 A, 58.1-311, and 58.1-1823 A(ii)
• IRC § 6103(d)
• 23 VAC 10-20-180 B

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-51

Original ruling text

April 16, 2018

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, 2009 through 2013.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file Virginia individual income tax returns and pay Virginia income tax for the taxable years at issue. The Taxpayer indicated that he would file Virginia returns once his federal tax liability was resolved with the IRS. When the Taxpayer was unable to provide documentation of a resolution, the Department issued assessments based on the IRS information. The Taxpayer filed an appeal, contending he is in the process of appealing his federal tax liability with the IRS and the Department of Treasury (Treasury).

DETERMINATION

Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Virginia Code § 58.1-321. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return.

When a resident does not file a proper Virginia return, Virginia Code § 58.1-312 A allows the Department to assess underreported tax at any time when a taxpayer fails to file a return or files a false or fraudulent return with the intent to evade tax. The Taxpayer only filed returns after the Department contacted him about his failure to comply with Virginia law. In reviewing returns filed by the Taxpayer, Internal Revenue Code (IRC) § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine a resident's tax liability. Accordingly, the Department does not need to wait for a final determination by the IRS to use the Taxpayer's federal information to assess Virginia income tax.

Virginia Code § 58.1-311 does require 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. 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, a taxpayer will be permitted to file returns to correct his liability pursuant to Virginia Code § 58.1-311 and Virginia Code § 58.1-1823 A (ii).

Accordingly, the Department's assessments for the taxable years ended December 31, 2009 through 2013 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.

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/1393.B