The IRS accepted our Schedule C and Form 2106 deductions across three tax years with no questions -- can Virginia still audit and disallow them for all three years if we can't produce documentation when asked?

Plain-English summary

This ruling covers the exact same legal ground as another ruling issued the same week in this corpus (P.D. 22-13), but for a taxpayer who was audited across three consecutive tax years rather than two. These taxpayers claimed deductions on federal Schedule C for 2018, 2019, and 2020, plus federal Form 2106 for 2019 only, and carried those amounts onto their Virginia returns. When the Department's auditor requested documentation supporting the deductions for all three years and received no response, it disallowed the deductions and assessed additional tax across the board. On appeal, the taxpayers again argued the Department had no authority to adjust figures that came straight from federal tax forms.

The Department's answer tracked the same reasoning as its companion ruling: while Virginia generally accepts federal return figures at face value, Va. Code § 58.1-219 specifically preserves the Department's authority to adjust FAGI and itemized deductions whenever there's clear evidence the reported amounts don't line up with the Internal Revenue Code -- and this ruling adds an explicit point that such adjustments have been made "independently from any actions taken by the IRS." Because a Virginia assessment is presumed correct once issued, and because the taxpayers provided nothing to rebut that presumption for any of the three years, all three years' assessments were upheld -- with the same final 30-day documentation window offered before the assessments become truly final.

What this means for you

Anyone audited for multiple consecutive tax years over the same type of deduction

A documentation problem doesn't reset year to year -- if the same unsupported deduction pattern repeats, expect the Department to disallow it (and assess) for every year it appears, not just the first.

Anyone assuming IRS silence protects a deduction from Virginia scrutiny

This ruling makes the point explicitly: the Department's authority to adjust a federal-form deduction is exercised independently of whatever the IRS did or didn't do. IRS acceptance across multiple years doesn't insulate you from a Virginia audit reaching a different conclusion.

Anyone facing an audit spanning several tax years

If an auditor requests documentation covering multiple years at once, treat every year's request with equal seriousness -- non-response across the board, as happened here, leads to disallowance and assessment for the entire span, not just isolated years.

Common questions

Q: If the IRS has never questioned a deduction across several years, does that protect it from a Virginia audit?
A: No. This ruling explicitly notes that Virginia's adjustment authority under Va. Code § 58.1-219 is exercised independently of any IRS action -- years of IRS silence doesn't bind Virginia's own audit conclusions.

Q: Can Virginia audit and assess me for more than one tax year at the same time over the same type of unsupported deduction?
A: Yes, as shown here -- the Department disallowed the same category of deduction and issued assessments across three consecutive tax years in a single audit and ruling.

Q: What's my last chance to fix an assessment like this before it becomes final?
A: This ruling (like its companion case) gives taxpayers a final 30-day window to submit the requested documentation directly to the audit unit before the assessments are treated as final.

Citations and references

• Va. Code § 58.1-301 (Virginia conforms to IRC terminology and starts VTI computation with FAGI)
• Va. Code § 58.1-219 (Department may adjust FAGI/itemized deductions inconsistent with the IRC, independent of any IRS action)
• Va. Code § 58.1-310 (Department may require a taxpayer to produce federal returns and supporting schedules)
• Va. Code § 58.1-205 (an assessment is prima facie correct; burden of proof on the taxpayer)
• Va. Code § 58.1-1826 (no court relief where an erroneous assessment stems from the taxpayer's willful failure to provide required information)
• Treas. Reg. § 1.6001-1(a) (taxpayers must maintain records sufficient to determine correct tax liability)

Subject

Administration : Audits - Taxpayer Records

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-11

Original ruling text

January 18, 2022

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, 2018, 2019 and 2020.

FACTS

The Taxpayers filed Virginia resident income tax returns for the 2018, 2019 and 2020 taxable years claiming deductions on federal Schedule C and on federal Form 2106 (2019 only). Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessments. The Taxpayers appeal the assessments, contending the Department lacks authority to adjust amounts reported on federal tax forms.

DETERMINATION

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. The Department, however, 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. The Department has consistently exercised this authority in conducting its audit programs. See Public Document (P.D.) 10-126 (07/07/2010), P.D. 12-141 (08/29/2012), P.D. 14-155 (08/28/2014), P.D. 16-53 (04/11/2016), P.D. 19-104 (09/18/2019), and P.D. 21-67 (05/25/2021). In addition, such adjustments have been made independently from any actions taken by the IRS.

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 of any individual, estate, trust, partnership or corporation in order properly to 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.

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 failed to furnish information required by law, I must uphold the Department’s assessments for the 2018, 2019 and 2020 taxable years. I will, however, give the Taxpayers one last opportunity to provide adequate documentation. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Compliance, Desk Audit, RAP, P.O. Box 5610, Richmond, Virginia 23220-0610, Attention: *, Tax Auditor. Upon receipt, the documentation will be reviewed and the assessments may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessments will be considered correct.

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/3862.X

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67