What records did Virginia require to substantiate medical, home, charity, mileage, work-clothing, and cell-phone itemized deductions?

Plain-English summary

A taxpayer claimed itemized deductions for medical expenses, real-estate taxes, mortgage interest, charitable gifts, mileage, work clothing, and cell-phone use for 2014 through 2016. Virginia asked for support, found it insufficient, replaced the itemized amounts with the standard deduction, and assessed tax.

The Department upheld the adjustments: records must prove what the expense was, who paid it, its business or deductible purpose, and the amount. General bank statements, cash withdrawals, lists, and incomplete logs did not do that.

Medical expenses

Medical deductions required a provider statement or itemized invoice identifying the service or item, patient, amount, and payment date (Treas. Reg. § 1.213-1(h)). Bank and credit-card entries showed purchases but did not establish that they were deductible medical expenses. Receipts were needed.

Real-estate taxes and mortgage interest

The home was jointly owned, but the federal information return for property tax and mortgage interest named only the other owner. The taxpayer's bank statements merely showed cash withdrawals said to represent half the mortgage payment; they did not show who received the money or establish the payment.

Mortgage interest generally must involve the taxpayer's own debt or qualifying legal/equitable ownership. The submitted records did not prove the taxpayer was the mortgage obligor or made the claimed payments.

Charitable gifts

Cash contributions require a canceled check, receipt, or other reliable written record. A contribution of $250 or more also requires a contemporaneous written acknowledgment from the charity. The taxpayer supplied a general property list but no qualifying acknowledgment, so the deduction failed.

Mileage and other employee business expenses

• Mileage: The log listed dates and miles but no starting or ending locations or trip purpose. Because the taxpayer claimed actual costs rather than the standard mileage rate, maintenance and operating records were also required. The Department said the existing log could support the standard mileage method if the federal return were amended accordingly.
• Work clothing: Deductible clothing must be required as a condition of employment and unsuitable for everyday wear. No such evidence was supplied.
• Cell phone: Only the business-use portion is deductible. Bills or bank payments alone did not identify business calls or provide a reasonable allocation from personal use.

Burden of proof and final opportunity

Virginia may look behind federal figures when clear evidence shows they do not comply with federal rules (Va. Code § 58.1-219). Assessments are presumed correct under Va. Code § 58.1-205, and taxpayers must provide records supporting returns.

After repeated requests, the submitted documents still did not prove the deductions. Virginia nevertheless gave the taxpayer one final 30-day period to provide adequate records. Hardship options such as an offer in compromise or payment plan were separate from whether the deductions were legally valid.

What this means for you

• A payment record is not always an expense record. Keep invoices and receipts showing what was purchased and why it qualifies.
• Cash is especially hard to trace. Withdrawals do not prove mortgage, tax, or charitable payment recipients.
• Business logs need purpose and endpoints. Dates and mileage totals alone may not distinguish deductible travel from commuting.
• Mixed-use expenses require allocation. Document business phone use separately from personal use.
• Large donations need the charity's acknowledgment. Your own list is not enough for contributions of $250 or more.

Common questions

Q: Are bank and credit-card statements enough for medical deductions?

A: Not here. Virginia required provider receipts or itemized invoices identifying the medical service, patient, amount, and payment date.

Q: Can I deduct mortgage interest if I co-own the home but am not named on Form 1098?

A: Possibly only with proof of your debt or legal/equitable ownership and actual payment. The cash withdrawals here did not establish those facts.

Q: What was wrong with the mileage log?

A: It omitted trip origins, destinations, and purposes. Actual-cost treatment also required records for vehicle expenses.

Q: Did Virginia permanently close the record?

A: No. The taxpayer received one final 30-day opportunity to submit adequate substantiation.

Citations and references

• Va. Code §§ 58.1-301, 58.1-219, 58.1-322.03(1) — federal conformity and itemized deductions
• IRC §§ 162, 163, 164, 170, 213, 280A — deduction categories
• Va. Code §§ 58.1-205, 58.1-310, 58.1-1826 — burden and records
• Treas. Reg. §§ 1.162-1, 1.162-17(d)(2), 1.163-1(b), 1.170A-13, 1.213-1(h), 1.6001-1(a) — substantiation
• Smith v. Commissioner, 84 T.C. 889 (1985)
• United States v. National Bank of Commerce, 472 U.S. 713 (1985)
• Vivian L. Tiller v. Ralph D. Owen, 243 Va. 176, 413 S.E.2d 51 (1992)
• Related Virginia ruling cited: P.D. 16-53

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-78

Original ruling text

July 29, 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 assessment issued to * (the “Taxpayer”) for the taxable years ended December 31, 2014 through 2016.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2014 through 2016 taxable years claiming itemized deductions for medical expenses, real estate taxes and home mortgage interest, gifts to charity and unreimbursed business expenses for mileage driven, work clothing and cell phone. Under audit, the Department requested documentation to support the deductions. When insufficient proof was provided, the Department disallowed the itemized deductions, applied the standard deduction, and issued assessment for the taxable years. The Taxpayer appeals, contending the adjustments were unreasonable and the itemized deductions should be allowed as claimed on her filed returns.

DETERMINATION

Conformity

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 the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219.

Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. These deductions include those for medical expenses, charitable contributions and business expenses provided they are claimed in accordance with the IRC and its related regulations.

Medical Expenses

For the 2014 through 2016 taxable years, IRC § 213 allowed as a deduction the expenses paid for medical care of a taxpayer, their spouse, or a dependent to the extent that such expenses exceed 10% of FAGI. The auditor disallowed the Taxpayers medical expenses because the Taxpayer had not submitted sufficient documentation of payment or expense.

Treas. Reg. § 1.213-1(h) requires taxpayers to substantiate medical expenses, by providing a statement or itemized invoice from the individual or entity providing the service showing the type of service performed or item purchased, the patient the service was performed on, and the amount and date of payment. The Taxpayer provided bank and credit card statements reflecting purchases but the records did not clearly show evidence of deductible medical expenses. To provide such evidence, receipts must be provided in order to verify the medical purchase.

Real Estate Taxes and Home Mortgage Interest

IRC § 164 provides a deduction for certain state and local real estate taxes paid for business and non-business purposes. Before a taxpayer may claim a deduction for taxes paid, the taxpayer must show that they actually paid the tax. Additionally, IRC § 163(a) allows taxpayers to deduct mortgage interest paid on a principal residence.

Generally, an individual may deduct interest on a mortgage if the indebtedness is an obligation of the individual and not an obligation of another. See Smith v. Commissioner , 84 T.C. 889 (1985). However, Treas. Reg. § 1.163-1(b) provides:

Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deductible as interest on his indebtedness.

The United States Supreme Court considers state law to determine the nature of a taxpayer’s property rights. See United States v. Natl. Bank of Commerce , 472 U.S. 713 (1985). In Virginia, an individual cannot claim equitable ownership of property when he is not obligated to pay off the debt secured by the property. See Vivian L. Tiller v. Ralph D. Owen , 243 Va. 176, 413 S.E.2d 51 (1992). Accordingly, the Taxpayer must be the obligor of the mortgages on the house at issue in order to claim that she had an equitable ownership of the residence.

In this case, the Taxpayer and another individual shared ownership of the residence, as supported by a deed of gift provided by the Taxpayer. However, the federal information return reporting the property taxes and mortgage interest bears only the other individual’s name and Social Security Number. The Taxpayer provided bank statements to attempt to document payments made to the other individual for 50% of the mortgage payment; however, the documentation fails to show the source to which those funds were paid as the statements merely show withdrawals of cash. No further evidence regarding the payment of the mortgage was supplied.

Gifts to Charity

Under IRC § 170(a), taxpayer may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year. Treas. Reg. § 1.170A-13(a) generally requires contributions of money to be substantiated by cancelled check, receipt, or other reliable written records; however, for any charitable contribution of $250 or more, the taxpayer must have a contemporaneous written acknowledgement described in Treas. Reg. § 1.170A-13(f) from the donee organization. Because of Virginia’s conformity to the IRC, taxpayers must meet the substantiation requirement established by federal regulations.

The auditor disallowed the charitable gifts because the Taxpayer was unable to provide the substantiation required. The Taxpayer has provided a general list of property donated and claimed a deduction exceeding $250, but is unable to produce a contemporaneous written acknowledgement from the donee organization.

Unreimbursed Business Expenses

Under IRC § 162, taxpayers are permitted to deduct all of the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Such expenses must be directly connected with or pertaining to the taxpayer’s trade or business. See Treas. Reg. § 1.162-1.

Travel Expenses

The expenses of operating and maintaining a car used for business purposes are deductible. Taxpayers may use the actual operating costs or the business standard mileage rate in computing the deductible costs. See Rev. Proc. 2010-51 (12/3/2010). In PLR 8023052 (3/12/1980), the Internal Revenue Service (IRS) determined an individual working several jobs in the same locality may deduct the transportation expenses incurred in traveling between jobs. However, travel costs incurred from home to the first job and from the last job to home are generally nondeductible commuting expenses.

Expenses may be substantiated through the preparation of a daily diary or record of expenditures, maintained in sufficient detail to enable a taxpayer to readily identify the amount and nature of any expenditure, and the preservation of supporting documents, especially in connection with large or exceptional expenditures. See Treas. Reg. § 1.162-17(d)(2). The methodology for business expense record keeping is more fully described in IRS Publication 463, Travel, Entertainment, Gift and Car Expense.

The Taxpayer has provided a mileage log with dates and mileage calculated per trip. However, the log does not identify a starting or ending location or the purpose of the trip. Additionally, because the Taxpayer claimed actual expenses instead of the standard mileage rate, documentation supporting expenses related to vehicle maintenance and other expenses is necessary. If the Taxpayer amended the federal return to claim the standard mileage rate, the provided documentation would be sufficient to also do so on her Virginia return.

Work Clothing

IRC § 162 permits employees to deduct the cost of their work clothing or uniform so long as such clothing must be worn as a condition of the taxpayer’s employment and such clothing is not suitable for everyday wear. See also IRS Publication 529 (2014). Merely distinctive clothing does not meet the standard under this section. Examples include, but are not limited to, firefighter, health care and law enforcement uniforms. No evidence has been submitted that sufficiently demonstrates that the Taxpayer was required to wear such clothing as a condition of her employment.

Cell Phone Expense

Under IRC § 280A, expenses can be deducted for the business use of personal utilities, such as a cell phone line. Expenses that benefit both the personal and business use of the taxpayer are required to be allocated and only the portion attributable to the business may be deducted. See Public Document (P.D.) 16-53 (4/11/2016). In this case, the auditor disallowed the expense for a cell phone because it was also used for the Taxpayers personal use. Bank statements showing payments to a cell phone company were provided; however, there was no indication as to the business or personal nature of the usage. Cell phone usage would be deductible only for business-related calls. Documentation would need to be provided to show specifically when the cell phone was used for business purposes.

CONCLUSION

Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax 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 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.

By letter dated July 25, 2017, the audit staff requested documentation to substantiate the Taxpayer’s itemized deductions for each of the 2014 through 2016 taxable years. Information to support the deductions was also requested by the appeals analyst. The documentation is reflected in the analysis above. The documentation, however, failed to substantiate the itemized deductions claimed on the original returns or change the auditor’s adjustments.

Under the provisions of Virginia Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayer to show that the assessments were erroneous. In addition, 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 assessment was attributable to a taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law. Despite several requests by the Department, the Taxpayer has not provided objective evidence to show the auditor’s adjustments are incorrect.

Based on the applicable law cited above and the information presented, there is no basis to abate the Department’s assessments for the 2014 through 2016 taxable years. However, I will give the Taxpayer one last opportunity to provide adequate documentation with regard to the itemized deductions described above. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *. Upon receipt, the documentation will be reviewed and assessments may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessments will be considered to be correct as issued.

If the assessments create a financial hardship, the Taxpayer may pursue an offer in compromise based on doubtful collectability. To begin that process, the Taxpayer should complete the enclosed Offer in Compromise Form and Financial Information Statement. The completed form and statement will allow the Department to review and analyze the Taxpayer’s financial situation. Upon completion of that review, a response will be issued to the Taxpayer. The Taxpayer also has the option to request a payment agreement with the Departments Collection Unit. The Collection Unit may be contacted at (804) 367-8045.

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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1592.A

Related Documents

16-53