The IRS increased my taxable income based on money a payment app reported as business income, but it was really just reimbursements from friends and family -- can I get Virginia to ignore the IRS's number?

Plain-English summary

The IRS notified the Department that it had increased a taxpayer's 2020 federal adjusted gross income (FAGI). Because the Department had no record that she'd filed the amended Virginia return required to report that change, it assessed additional Virginia tax. The taxpayer sought correction, arguing the IRS's adjustment itself was wrong.

Where the extra income came from. The IRS's adjustment traced to additional income reported by "a company that operates a business technology platform for processing payments" -- in plain terms, a payment app that issued the IRS a report attributing income to the taxpayer. The taxpayer argued this money was actually nontaxable payments from friends and family sent through the app, not business income at all.

Why that argument didn't work here. This ruling is another application of the corpus's established "do not look behind the IRS" doctrine (see also P.D. 25-16 and P.D. 24-113): Virginia's individual income tax starts from FAGI and generally conforms to federal determinations (Va. Code § 58.1-301). A taxpayer must report a federal change within one year by filing an amended return (§ 58.1-311); if she doesn't, the Department may assess the tax at any time (§ 58.1-312 A 3). The Department obtained the adjustment information directly from the IRS under IRC § 6103(d). Critically, the taxpayer provided no objective evidence that the payment-app amounts were actually nontaxable gifts or reimbursements, and no legal argument for why they wouldn't be taxable even if so characterized -- she simply asserted it. And just as important: the IRS itself had not changed its own adjustment, and there was no indication she had even appealed the matter to the IRS. With nothing to contradict the IRS's completed determination, the Department applied the IRS's higher FAGI figure and found no basis to abate the assessment.

What's still possible. If the IRS ever does revise its own 2020 findings, the taxpayer can file an amended Virginia return at that point to correct her state liability (§§ 58.1-311, 58.1-1823).

What this means for you

Anyone whose payment app (Venmo, PayPal, Cash App, or similar) reported income to the IRS that you believe was really personal transfers

Fighting a mischaracterized 1099-style report has to happen with the IRS, not the Virginia Department of Taxation. Gather objective evidence -- transaction descriptions, correspondence with the sender, memo lines showing "reimbursement" or "gift," and similar proof -- and pursue the correction with the IRS (or in a federal proceeding) before or alongside any Virginia appeal. A bare assertion, without evidence, won't move the Department.

Gig workers, freelancers, and casual sellers who receive money through payment apps

Distinguishing personal transfers (gifts, reimbursements, splitting a bill) from taxable business income is increasingly the IRS's focus given expanded third-party payment reporting. Keep records contemporaneously -- don't wait until an IRS notice arrives to try to reconstruct the story.

Anyone who successfully gets the IRS to correct a FAGI adjustment after a Virginia assessment already issued

You're not stuck with the old number -- Virginia law lets you file an amended return to reflect the IRS's own later correction.

Common questions

Q: A payment app reported my income to the IRS, but it was really money from friends and family -- how do I fix my Virginia tax bill?
A: You generally need to first get the IRS itself to correct its determination (or successfully appeal it), with objective evidence supporting your position. Virginia will not independently second-guess a completed IRS determination.

Q: What kind of evidence would have helped here?
A: Something objective -- transaction records, communications with the senders, documentation showing the payments were personal in nature -- rather than an unsupported assertion. The taxpayer here provided none.

Q: If the IRS later agrees with me and lowers my income, is my Virginia assessment locked in forever?
A: No. You can file an amended Virginia return under Va. Code §§ 58.1-311 and 58.1-1823 to reflect the IRS's later correction.

Citations and references

Statutes:

• Va. Code § 58.1-301 -- Virginia income tax terminology conforms to the Internal Revenue Code unless a different meaning is clearly required
• Va. Code § 58.1-311 -- a taxpayer must report a federal change/correction within one year by filing an amended Virginia return
• Va. Code § 58.1-312 A 3 -- the Department may assess tax at any time if the taxpayer fails to file the required amended return
• IRC § 6103(d) -- authorizes the Department to obtain taxpayer information from the IRS
• Va. Code §§ 58.1-311 and 58.1-1823 -- a taxpayer may file an amended return if the IRS later changes its own audit findings

Authorities the Department relied on (described here, not linked): P.D. 11-107 (6/14/2011) (the Department does not look behind a completed IRS audit determination) -- the same doctrine addressed in the already-enriched P.D. 25-16 and P.D. 24-113.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-106

Original ruling text

October 23, 2024

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 “Taxpayer”) for the taxable year ended December 31, 2020.

FACTS

The Internal Revenue Service (IRS) notified the Department that it adjusted the Taxpayer’s 2020 federal adjusted gross income (FAGI). 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 Taxpayer filed an application for correction, contending the IRS adjustment was incorrect.

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. For individual income tax purposes, Virginia conforms to federal law, in that it starts the computation of Virginia taxable income 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 taxpayers to report a change or correction in their federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the 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, Internal Revenue Code (IRC) § 6103(d) authorizes the Department to obtain information from the IRS that will assist in determining any additional tax liability. Information obtained by the Department indicated that the IRS adjusted the Taxpayer’s FAGI to be greater than the FAGI the Taxpayer reported on her 2020 Virginia income tax return.

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). In this case, the Department adjusted the Taxpayer’s 2020 Virginia return based on the federal information available from the IRS. It appears that the IRS’s adjustment was attributable to additional income reported by a company that operates a business technology platform for processing payments.

The Taxpayer asserts that the IRS’s adjustment is incorrect because the income was attributable to non-taxable payments made by friends and family through a payment app. The Taxpayer, however, has not provided any objective evidence of these assertions or legal arguments as to why such payments would not be taxable. Regardless, the IRS has not re-adjusted the Taxpayer’s FAGI, nor is there any indication the Taxpayer has appealed the matter to the IRS.

Under these circumstances, the Department finds no basis to abate the assessment. The Taxpayer will receive an updated bill that will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions. If the IRS adjusts its audit findings for the 2020 taxable year, the Taxpayer will be permitted to file an amended Virginia return to correct the liability pursuant to Virginia Code § 58.1-311 and Virginia Code § 58.1-1823.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public document cited is available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this decision, you may contact * in the Office of Tax Policy, Appeals and Rulings, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4948.Q

Related Documents

11-107

24-52