The IRS adjusted our itemized deductions years ago, and Virginia only just assessed us for it -- shouldn't there be a time limit on how long Virginia can wait before catching a mismatch like this?

Plain-English summary

The IRS notified the Department that it had adjusted a married couple's itemized deductions for the 2012 taxable year. Because the Department had no record of ever receiving an amended Virginia return reporting that change, it issued an assessment years later for the resulting additional tax. The taxpayers appealed with two arguments: first, that they HAD actually filed an amended 2012 Virginia return; and second, that even if they hadn't, the Department should have caught and notified them of the discrepancy within one year of the original return's due date.

No record of the amended return. The Department had simply never received an amended 2012 Virginia return or any additional tax payment from the taxpayers, despite their claim to have filed one. Without any record on file, the Department had nothing to work with except the IRS-reported adjustment itself.

There's no one-year clock running against the Department here -- it runs the other way. Virginia law requires an individual to report a federal taxable income change to the Department within ONE YEAR of its final determination, by filing an amended return. That's the taxpayer's obligation, not the Department's. If the taxpayer fails to file that required amended return, Virginia law separately allows the Department to assess the correct tax AT ANY TIME -- there's no limitations period protecting the taxpayer in that scenario. The couple's argument flipped this framework backward: they wanted a one-year window to apply against the DEPARTMENT for catching a discrepancy, when the actual one-year window under the statute runs against the TAXPAYER for reporting the change.

Result. Because the Department had already followed its usual practice of deferring to the IRS's own final determination (rather than re-litigating the federal adjustment itself), and because the taxpayers couldn't produce proof they'd actually filed the required amended return or paid the resulting tax, the Tax Commissioner found no basis to revise the assessment.

What this means for you

Taxpayers whose federal income or deductions are adjusted by the IRS

File the required Virginia amended return within ONE YEAR of the federal change's final determination -- and keep proof that you actually filed it (certified mail receipt, confirmation, copy of the filed return) since the Department's own records are what will control if a dispute arises years later.

Taxpayers hoping a long delay before a Department assessment might work in their favor

Don't count on it -- if the underlying issue is an unreported federal change and no amended Virginia return was ever filed, there is NO statute of limitations protecting you. The Department can assess the resulting tax at any time, no matter how many years have passed.

Anyone who believes they filed an amended return the Department has no record of

Be prepared to produce independent proof of filing (not just your recollection) -- a Department with "no record" of your amended return will generally proceed as though it was never filed, and the burden falls on you to establish otherwise.

Common questions

Q: The IRS adjusted my return years ago, and Virginia is only now assessing me for it -- isn't there a deadline for Virginia to catch this?
A: Not if you never filed the required amended Virginia return reporting the change. Virginia law imposes no limitations period on the Department's ability to assess tax in that situation -- the one-year deadline runs against YOU (to report the change), not against the Department (to catch it).

Q: I believe I filed an amended Virginia return reporting a federal change, but the Department says it has no record -- what happens?
A: The Department will generally proceed based on its own records. If you don't have independent proof of filing (a confirmation, mailing receipt, or copy), you may have difficulty overcoming an assessment based on the assumption that no amended return was ever received.

Q: Does the Department independently verify or dispute an IRS adjustment before assessing Virginia tax based on it?
A: Generally no -- once the IRS has made its own final determination of a federal change, the Department typically applies that determination directly rather than re-litigating it.

Citations and references

• Public Document 11-107 (6/14/2011) -- where the IRS has audited a taxpayer's federal taxable income, the Department does not look behind the IRS's final determination

Subject

Administration : Statute of Limitations - Report Federal Changes

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-88

Original ruling text

July 13, 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 assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2012.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating the IRS adjusted the Taxpayers’ itemized deductions for the 2012 taxable year. Because the Department had no record of having received an amended Virginia income tax return to report the federal change, an assessment was issued for additional tax due. The Taxpayers filed an appeal, contending that they filed an amended return and the Department should have notified them of any discrepancy within one year of the return’s due date.

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 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 IRS adjusted the Taxpayers’ itemized deductions. 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 Taxpayers contend that they filed an amended 2012 Virginia return reporting the additional income. The Department, however, has no record of receiving an amended return or of any additional payment of tax for the 2012 taxable year.

The Taxpayers assert that the Department should have notified them about the discrepancy involving the 2012 taxable year within one year of the due date of the return. As stated above, however, there is no limitations period for assessing additional individual income tax when there is an increase in liability due to a change in federal taxable income and a taxpayer fails to amend their Virginia return accordingly.

Regardless, the Department issued a letter dated October 14, 2020, notifying the Taxpayers of the change and providing further instructions to the Taxpayers. Because the Taxpayers were unable to provide proof that they filed an amended 2012 Virginia return and paid the additional liability due, the Department adjusted the Taxpayers’ return based on the federal information available from the IRS.

Accordingly, I find no basis to revise the assessment. The Taxpayers will receive an updated bill with accrued interest to date. 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 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/3689.B

Related Documents

11-107