The Department disallowed my itemized medical and charitable deductions because I couldn't produce enough documentation -- and one of my charitable receipts was for a donation to a church I personally run. Does that matter?

Plain-English summary

A husband and wife claimed itemized deductions for medical expenses and charitable contributions on Schedule A of their federal returns for the 2017-2019 taxable years, and carried those deductions onto their Virginia returns (since Virginia's individual income tax starts from federal adjusted gross income and generally follows federal itemized-deduction rules). Under audit, the Department asked for documentation to support these deductions. When the couple's response didn't provide sufficient support, the Department disallowed the itemized deductions entirely, applied the standard deduction instead, and issued assessments for all three years.

Medical expenses: Federal law (which Virginia follows here) requires medical expense deductions to be substantiated with a statement or itemized invoice from the provider showing the service or item, the patient, and the amount and date of payment. The Department had no record of ever receiving this kind of documentation for any of the three years at issue.

Charitable gifts -- the self-dealing receipt problem: For 2017, the couple submitted a receipt for donations to a church -- but the receipt was signed by the husband himself, who was also the church's founder and pastor. As the Tax Commissioner put it, "the husband wrote a receipt to himself." Where the donor and the person certifying the donation are this closely related, the Department requires ADDITIONAL objective documentation beyond the self-issued receipt to substantiate the deduction. No documentation at all was provided for the 2018 or 2019 charitable claims. A second receipt, from a different, unrelated church and signed by that church's financial director, WAS accepted as sufficient -- but the amount involved wasn't large enough by itself to push the couple's total itemized deductions above the standard deduction.

Bottom line: Because the couple hadn't provided adequate documentation despite two separate Department requests (in October 2020 and March 2021), and a taxpayer bears the burden of proving an assessment wrong, the Tax Commissioner upheld the assessments for all three years. The couple was given one final 30-day window to submit real substantiation, with any adjustment to follow if the new documentation holds up -- and a further right to appeal within 90 days of any subsequent Department response.

What this means for you

Anyone claiming itemized medical expense deductions

Keep contemporaneous statements or itemized invoices from each medical provider showing the service performed, the patient, and the amount/date paid -- a general claim of medical spending without this kind of documentation will be disallowed on audit.

Anyone donating to a charity they personally control or lead (e.g., a church they founded, a nonprofit they run)

A receipt you sign yourself, as both donor and the person certifying the gift on the recipient's behalf, is NOT sufficient on its own -- get additional objective, independent documentation (e.g., board minutes acknowledging the gift, an independent bookkeeper's or treasurer's confirmation) whenever there's a close relationship between you and the donee organization.

Taxpayers responding to a Department documentation request during an audit

Respond fully and promptly -- the Department may (as here) give you a further, final opportunity to substantiate a disallowed deduction, but that's discretionary, and Virginia law bars a court from granting relief where an erroneous assessment traces back to your own willful failure to provide required information.

Common questions

Q: What documentation do I need to support a medical expense deduction?
A: A statement or itemized invoice from the provider showing the type of service or item, who the patient was, and the amount and date of payment.

Q: Can I use my own signed receipt to substantiate a donation to a charity that I personally run?
A: Generally not by itself -- where there's a close relationship between the donor and the donee (such as when you founded and lead the recipient organization), the Department requires additional objective documentation beyond a receipt you signed yourself.

Q: What happens if I don't provide documentation the Department requests during a deduction audit?
A: The Department may disallow the deduction and apply the standard deduction instead, and the resulting assessment is presumed correct -- with the burden on you to prove it wrong, and courts barred from granting relief if the error traces to your own willful failure to provide required information.

Citations and references

• IRC § 213 and Treas. Reg. § 1.213-1(h) -- federal medical expense deduction and its substantiation requirement (statement or itemized invoice showing service, patient, amount, and date)
• IRC § 170(a) and Treas. Reg. § 1.170A-13(a)(1)(ii) -- federal charitable contribution deduction and its substantiation requirement (a receipt or acknowledgment letter showing donee name, date, and amount)
• Treas. Reg. § 1.6001-1(a) -- general federal requirement that taxpayers maintain records sufficient to determine correct tax liability

Subject

Deduction : Itemized - Medical, Charitable

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-105

Original ruling text

August 10, 2021

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, 2017, through 2019.

FACTS

The Taxpayers, a husband and wife, filed Virginia resident income tax returns for the 2017 through 2019 taxable years. Under audit, the Department requested documentation to support itemized deductions for medical expenses and charitable deductions reported on Schedule A of their federal tax returns. After reviewing the response, the Department disallowed the itemized deductions, applied the standard deduction, and issued assessments for each taxable year. The Taxpayers appeal, contending they submitted information to substantiate their expenses.

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 Chapter 3 of Title 58.1 of the Code of Virginia .

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.

Itemized Deductions

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. When the Taxpayers did not produce documentation to substantiate itemized deductions claimed for medical expenses and charitable gifts, the Department denied the deductions and applied the standard deduction.

Medical Expenses

For the taxable years at issue, 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 7.5% of FAGI. 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 Department has no record of receiving documentation regarding their medical expenses for any of the taxable years at issue.

Gifts to Charity

Under IRC § 170(a), 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)(1)(ii) provides that a contribution of money may be substantiated by a receipt from the donee charitable organization showing the name of the donee, the date of the contribution, and the amount of the contribution. A letter or other communication from the donee charitable organization acknowledging receipt of a contribution and showing the date and amount of the contribution constitutes a receipt. Id.

To support the deduction, the Taxpayers submitted information from two donee churches. The first was signed by the husband, detailing the Taxpayers’ contributions to in 2017. The husband was the founder and pastor of the church. In effect, the husband wrote a receipt to himself. Where there is such a close relationship between the donor and the donee, additional objective documentation must be provided in order to substantiate the donations. The Department has not received any of the requested documentation with regards to charitable gifts made for the 2018 and 2019 taxable years.

The Taxpayers also submitted a receipt from another church for a donation made in 2017, signed by its financial director. It does not appear that the same close relationship existed between the Taxpayers and this church, and the receipt was signed by a third party. Although the Department finds that this receipt is sufficient proof of the contribution, it is not a large enough amount to make the Taxpayers’ allowable itemized deductions greater than the standard deduction.

CONCLUSION

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 for medical expenses and charitable gifts. The Department has requested this documentation by letters dated October 21, 2020 and March 12, 2021. The Taxpayers have not provided the requested information.

Pursuant to Virginia Code § 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 Taxpayers have not furnished the information required by law, I must uphold the Department’s assessments of tax and interest issued for the 2017 through 2019 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: *.

Any new documentation submitted will be referred to the audit staff to review and the assessments will be adjusted if warranted. Upon the completion of any further review, the audit staff must issue a written response to the Taxpayers detailing the audit findings. If the Taxpayers disagree with the findings, they may file an appeal within 90 days of the Department’s written response.

The Code of Virginia sections 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/3638.B