Could taxpayers keep Virginia itemized deductions for 2014-2016 after repeatedly failing to provide records substantiating the claimed expenses?

Plain-English summary

Taxpayers claimed Virginia itemized deductions for 2014-2016 but did not answer repeated requests for substantiation.

Virginia upheld the assessments. Conformity with federal deductions does not eliminate the duty to keep and provide supporting records.

Why the deductions were denied

Virginia may adjust federal-based deductions when clear evidence shows reported amounts may not comply with the Internal Revenue Code. State law authorizes the Department to require federal returns and supporting statements, inventories, and schedules.

The taxpayers supplied none of the requested proof. Because an assessment is presumed correct, their failure to substantiate the deductions left the audit adjustments in place.

Final opportunity

Although the ruling upheld tax and interest, it granted one more 30-day period to provide the required documentation.

What this means for you

• Keep source records for every material itemized deduction.
• A federal return entry alone may not satisfy a Virginia audit.
• Respond to both audit and appeal information requests.
• Missing records can foreclose later court relief as well as administrative relief.

Common questions

Q: Does Virginia normally accept federal return computations?

A: Generally yes, when they appear reasonable, but Virginia retains audit authority.

Q: Were the taxpayers given another chance?

A: Yes, one final 30-day opportunity to substantiate the deductions.

Citations and references

• Va. Code §§ 58.1-219, 58.1-322(D)(1) — deduction authority
• Va. Code §§ 58.1-310, 58.1-205, 58.1-1826 — records and burden
• Treas. Reg. § 1.6001-1(a) — federal recordkeeping

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-27

Original ruling text

April 8, 2019

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 “Taxpayers”) for the taxable years ended December 31, 2014 through 2016.

FACTS

For the taxable years at issue, the Taxpayers claimed itemized deductions on their Virginia individual income tax returns. Under audit, the Department requested supporting documentation to substantiate the deductions claimed. When the information was not received, the Department disallowed the deductions and issued assessments for additional tax and interest for each taxable year. All of the assessment for the 2015 taxable year and part of the assessment for the 2016 taxable year have been satisfied through collection actions by the Department. The Taxpayers appeal the assessments, and contend the itemized deductions should be allowed.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. 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 properly 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 Virginia Code § 58.1-322.

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust income and deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the Internal Revenue Code (IRC). See Virginia Code § 58.1-219.

Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes. IRC § 211 allows additional itemized deductions for individuals, such as expenses for the production of income (nonbusiness expenses, medical and dental expenses, alimony, moving expenses and contributions to IRAs. Taxpayers must maintain records sufficient to allow the IRS to determine their correct liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:

Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof of any individual, estate, trust, partnership or corporation in order to properly audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.

In the Taxpayers’ case, the Department requested information sufficient to confirm the basis of the deductions claimed. Multiple requests were made by the auditor and appeals analyst. The Taxpayers have failed to provide the requested information.

Pursuant to Virginia Cod e § 58.1-205 any assessment of tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect. Further, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

Because the Taxpayer has failed to furnish information required by law, I must uphold the Department’s assessments of tax and interest issued to the Taxpayers for the 2014 through 2016 taxable years. I will, however, grant the Taxpayers one more opportunity to provide the information required to substantiate their claim. The documentation must be provided within 30 days from the date of this letter. Please send the additional information to the Department’s Office of Tax Policy, Appeals and Rulings, P.O. Box Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections cited, along with other reference documents, are available on-line in the Laws, Rules and Decisions section of the Department’s web site, located at www.tax.virginia.gov . 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

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