The IRS adjusted my old federal return years ago and I never amended my Virginia return -- can Virginia still assess me now, and can I settle the bill for less?

Plain-English summary

A husband and wife's 2013 federal income tax return was adjusted by the IRS. The IRS informed Virginia's Department of Taxation of the change, as it routinely does. Virginia law requires a taxpayer to report any federal change or correction to the Department within ONE YEAR of the IRS's final determination, by filing an amended Virginia return -- but the couple never did. When the Department got no response after sending several notice letters, it used the IRS's own information to adjust the couple's 2013 Virginia return and issue an assessment.

No statute of limitations when the required amended return is never filed. The couple's main argument was that the assessment came too late. But Virginia law creates a specific, harsh consequence for exactly this situation: if a taxpayer fails to file the required amended return reporting a federal change, the Department may assess the correct tax at ANY time -- there is no statute-of-limitations deadline that applies. The normal limitations clock that protects taxpayers in most situations simply doesn't run here, because the couple never started it by filing the amended return the law required.

The Department doesn't re-litigate the IRS's findings. Separately, the ruling reaffirms a settled principle: once the IRS has made a final determination adjusting a taxpayer's federal income, the Department does not look behind that determination or re-examine whether the IRS was right -- it simply applies the federal change to the Virginia return.

Why the settlement offer failed too. The couple also offered money to settle their liability outright. Virginia's "offer in compromise" authority lets the Department settle a tax claim, but only when the liability is genuinely doubtful or disputed -- meaning there's real uncertainty about whether or how much is actually owed. Here, there was no doubt: the IRS had made a final adjustment, the couple simply never reported it, and the Department properly calculated the assessment from that adjustment. With no genuine dispute about the underlying liability, there was nothing to "compromise," so the offer was rejected.

What's still available. The Department noted two different paths still open to the couple: (1) a payment agreement with its Collections Unit if paying the full balance is a hardship, or (2) a SEPARATE kind of offer in compromise based on "doubtful collectability" -- meaning even though the amount owed isn't in dispute, the taxpayer genuinely can't pay it in full, which is a distinct legal theory from disputing the amount itself.

What this means for you

Anyone who learns the IRS adjusted a past year's return

File the required Virginia amended return within ONE YEAR of the IRS's final determination -- missing that filing doesn't just risk penalties, it removes Virginia's normal statute-of-limitations protection entirely, exposing you to an assessment at any point in the future based on the federal change.

Taxpayers considering an "offer in compromise" to reduce a bill

Understand which kind you're making: a "doubtful liability" offer only works if there's real uncertainty about whether the tax is actually owed (it won't work once the IRS has made a final, unchallenged adjustment); a "doubtful collectability" offer is different -- it's based on genuine inability to pay, not on disputing the amount.

Taxpayers who can't pay an assessment in full

Ask about a payment agreement with the Collections Unit or file a doubtful-collectability offer in compromise with supporting financial information -- both remain available even after a liability dispute has been resolved against you.

Common questions

Q: Is there a time limit for Virginia to assess me based on an IRS adjustment?
A: Only if you file the required Virginia amended return within one year of the IRS's final determination. If you don't, Virginia can assess you at any time -- there's no statute-of-limitations deadline in that situation.

Q: Can I argue the assessment is wrong because the IRS shouldn't have made its adjustment?
A: No. The Department does not look behind the IRS's own final determination of your federal income -- it simply applies that determination to your Virginia return.

Q: Can I settle my tax bill for less if I think it's unfair?
A: Only through an "offer in compromise," and only if the liability is genuinely doubtful or disputed. If the IRS already made a final, unchallenged adjustment and you just never reported it, there's no doubt to compromise.

Q: What if I genuinely can't afford to pay the full assessment?
A: You can request a payment agreement with the Department's Collections Unit, or file a separate "doubtful collectability" offer in compromise based on your actual ability to pay.

Subject

Administration : Assessment - IRS Audit; Statute of Limitations - Federal Change; Offer in Compromise - Doubtful Liability / Doubtful Collectability

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-46

Original ruling text

March 23, 2021

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will respond to your letter in which you contest the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2013, and offer to settle any potential liability.

FACTS

The Internal Revenue Service (IRS) informed the Department that it adjusted the Taxpayers’ 2013 federal income tax return. The Department did not receive an amended 2013 Virginia income tax return reflecting the changes made by the IRS, and an assessment was issued. The Taxpayers appeal the assessment, contending that the assessment was not issued in a timely manner, and suggesting that the Department settle or cancel any potential liability.

DETERMINATION

Statute of Limitations

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. 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 taxpayers to report a change or correction made to their federal taxable income within one year of the final determination of any 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 that 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 several letters notifying the Taxpayers of the change and providing further instructions to the Taxpayers. When no response was received, the Department adjusted the Taxpayers’ 2013 return based on the federal information available from the IRS.

In their appeal, the Taxpayers assert that the timing of the assessment is improper. However, the Taxpayers have provided no factual or legal support for their position. Therefore, I find no basis to revise the assessment.

Offer in Compromise

Virginia Code § 58.1-105 grants the Department the authority to settle doubtful or disputed claims of tax liability where reasonable cause is demonstrated. The Taxpayers have offered to settle any liability in exchange for *. In this case, the IRS corrected the Taxpayers’ income, the Taxpayers failed to report the change as required by Virginia law, and the Department issued an assessment in accordance with Virginia Code § 58.1-312. Because the assessment is not in doubt, the Department finds no basis for settling the Taxpayers’ liability.

An updated bill with accrued interest to date will be mailed to the Taxpayers shortly. The Taxpayers should remit the balance due within 30 days of the date on the bill to avoid the accrual of additional interest.

If the assessment creates a financial hardship, the Taxpayers may (1) request a payment agreement with the Department’s Collections Unit, which can be reached at *, or (2) request an offer in compromise based on doubtful collectability by completing the enclosed Offer in Compromise Form and Financial Information Statement and following the corresponding instructions.

The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. 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/3662-C

Related Documents

11-107