If the IRS audits me and increases my federal income, what must I do in Virginia, and what happens if I don't report the change?

Plain-English summary

The IRS audited these taxpayers' 2016 federal return and adjusted it, increasing their federal taxable income. The taxpayers did not file an amended 2016 Virginia return to report that change, so the Department issued a Virginia assessment based on the federal information. The taxpayers appealed, saying the matter was "still under investigation." The Tax Commissioner upheld the assessment.

The determination lays out how Virginia handles federal changes:

• Virginia individual income tax starts from federal adjusted gross income and conforms to the Internal Revenue Code (§ 58.1-301). Income properly included in a Virginia resident's federal income is subject to Virginia tax unless specifically exempt.
• Va. Code § 58.1-311 requires a taxpayer to report any change or correction in federal taxable income within one year of the final federal determination by filing an amended Virginia return. If the taxpayer fails to do so, Va. Code § 58.1-312 A 3 lets the Department assess the tax at any time — there is no limitations period protecting an unreported federal change.
• The Department may obtain the underlying federal information directly from the IRS under IRC § 6103(d), and it does not look behind the IRS's final determination (citing P.D. 11-107).

The Department had notified the taxpayers of the change by letter and, getting no response, adjusted the return using the IRS information. On appeal the taxpayers claimed the IRS matter was ongoing but, despite Department requests, provided nothing to support that. The Commissioner found no basis to revise the assessment but gave a final 60 days to submit documentation about the IRS investigation.

What this means for you

If the IRS changes your income — whether by audit, adjustment, or your own amended federal return — Virginia expects you to file an amended Virginia return within one year of the final federal determination. Skipping that step is costly: the Department can pull your federal data directly from the IRS and assess the Virginia tax at any time, with no statute of limitations to fall back on. If you believe the federal change isn't final (for example, an IRS matter genuinely still in dispute), be ready to document that; a bare assertion that something is "still under investigation" will not stop the assessment.

Common questions

Q: The IRS changed my federal income. Do I have to do anything in Virginia?
A: Yes. Va. Code § 58.1-311 requires you to file an amended Virginia return reporting the change within one year of the final federal determination.

Q: What if I don't report the federal change?
A: Va. Code § 58.1-312 A 3 allows the Department to assess the resulting Virginia tax at any time — the normal limitations period does not apply.

Q: Will Virginia re-examine the IRS's findings?
A: No. The Department does not look behind the IRS's final determination (P.D. 11-107) and can obtain the federal information directly under IRC § 6103(d).

Q: I say the IRS matter is still open. Is that enough?
A: Not by itself. The taxpayers here asserted the matter was under investigation but provided no support, so the assessment stood — subject to a final 60-day chance to document it.

Citations and references

• Va. Code § 58.1-301 — Virginia conforms to the Internal Revenue Code; computation starts from federal adjusted gross income
• Va. Code § 58.1-311 — a taxpayer must report a federal change or correction within one year by filing an amended Virginia return
• Va. Code § 58.1-312 A 3 — if no amended return is filed, the Department may assess the appropriate tax at any time
• IRC § 6103(d) — authorizes the Department to obtain federal return information from the IRS
• P.D. 11-107 (6/14/2011) — the Department does not look behind the IRS's final determination of federal taxable income

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-138

Original ruling text

August 11, 2020

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will reply to your letter concerning the Virginia individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayers were audited by the Internal Revenue Service (IRS) for the 2016 taxable year. The IRS adjusted the Taxpayers’ 2016 federal income tax return, resulting in a change to federal taxable income. The Taxpayers did not file an amended 2016 Virginia income tax return reflecting the IRS adjustment. As a result, the Department issued an assessment. The Taxpayers appeal the assessment.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, that the 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 (VTI) 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 Chapter 3 of Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-311 requires an 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 a taxpayer fails to file an amended return, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

In addition, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will assist in determining any additional tax liability. In this case, information obtained by the Department indicates the Taxpayers’ FAGI was increased.

Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS’s final determination. See Public Document (P.D.) 11-107 (6/14/2011). The Department issued a letter dated September 5, 2019, notifying the Taxpayers of the change and providing further instructions to the Taxpayers. When no response was received, the Department adjusted the Taxpayers’ 2016 return based on the federal information available from the IRS.

In their appeal, the Taxpayers assert the matter was still under investigation. However, the Taxpayers have provided no support regarding that contention after the Department requested it by letter dated February 25, 2020, and email dated April 16, 2020. Therefore, I find no basis to revise the assessment.

I will, however, give the Taxpayers one last opportunity to provide adequate documentation with regard to the IRS investigation. The documentation should be submitted within 60 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: *, Tax Analyst. 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 assessment will be considered to be correct and an updated bill with accrued interest will be issued. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest.

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 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/3270.A

Related Documents

11-107