My business is being audited for the third time in a row, and this time I couldn't produce records during the audit -- can I still fix the estimated assessment by providing the paperwork now?

Plain-English summary

This ruling is a close companion to the corpus's established audit-records "second chance" family (see P.D. 24-126 and P.D. 25-122) -- a business failed to substantiate its sales and use tax position during an audit, drawing an estimated assessment, but gets one final documentation window before the estimate becomes final. Two features distinguish this ruling: it was the taxpayer's third consecutive audit ("3rd generation"), and the auditor's estimation method specifically drew on the taxpayer's own federal income tax return data.

The recordkeeping baseline. Virginia law imposes overlapping recordkeeping duties: every taxpayer must retain records substantiating a return for three years (Va. Code § 58.1-102), make them available for inspection during business hours (§ 58.1-103), and — specifically for dealers — keep suitable sales, lease, and purchase records plus any other books the Tax Commissioner requires (§ 58.1-633 A; 23 VAC 10-210-470).

What happened during this (third) audit. The taxpayer failed to provide sufficient documentation to complete the audit. The auditor turned to the taxpayer's federal income tax return information to estimate untaxed purchases, compiling an exceptions report that was shared with the taxpayer for review, with a further request for information. When the taxpayer didn't respond even to that follow-up, the audit was completed and the estimated assessment issued under Va. Code § 58.1-618, which authorizes the Department to reconstruct a dealer's sales or purchases using the best information available whenever adequate records aren't provided.

Why "I can get the documents" wasn't enough on its own. On appeal, the taxpayer argued many purchases were actually exempt and that supporting documentation could be supplied on request. But a Department assessment is presumed correct (§ 58.1-205), putting the burden on the taxpayer to prove otherwise — and § 58.1-1826 bars a court from granting relief where the assessment stems from the taxpayer's own willful failure to provide the required information. A promise to produce documents later doesn't satisfy that burden by itself.

One more chance, despite the taxpayer already having missed one. Even though the taxpayer had already failed to respond once during the audit itself, the Department is giving it a genuine final opportunity: the assigned auditor will contact the taxpayer within 30 days to arrange a mutually convenient time to review the documentation, and will adjust the assessment and issue a revised audit report if the records support it. If the taxpayer doesn't come through this time, the outstanding liability becomes immediately due and payable — no further extensions implied.

Procedural close-out. The current application is being closed with this determination. If issues remain after the auditor's review, the taxpayer may file a new application for correction within 90 days of the revised audit report, under Va. Code § 58.1-1821 and 23 VAC 10-20-165.

What this means for you

Businesses facing repeat audits

A history of prior audits doesn't by itself change the legal standard, but it's worth knowing the Department will still extend a final documentation opportunity even to a taxpayer on its third consecutive audit — don't assume repeat-audit status forecloses a second chance.

Anyone whose auditor used tax-return data (rather than sales records) to estimate a liability

This is a recognized "best information available" technique under § 58.1-618 when your own dealer records are inadequate. If you believe the resulting estimate overstates your liability, the fix is producing your own transaction-level records for the specific items in dispute — not merely disputing the method used.

Anyone who already missed one auditor request for documentation

Don't assume a missed deadline is fatal. As here, the Department may still offer one final window — but treat it as truly final, since the ruling explicitly says the liability becomes immediately due and payable if you miss it again.

Common questions

Q: My auditor used my federal tax return to estimate my sales tax liability because I couldn't produce records — is that allowed?
A: Yes. Virginia Code § 58.1-618 authorizes the Department to reconstruct a dealer's sales or purchases using the best information available, which can include federal return data, when adequate records aren't provided.

Q: I already missed my auditor's request for documents once — can I still get another chance?
A: Possibly, as this taxpayer did — but expect it to be explicitly framed as final, with the assessment becoming immediately due and payable if you miss it again.

Q: What happens to my current appeal while I gather the documentation?
A: It's closed. If issues remain after the auditor reviews your records and issues a revised report, you must file a new application for correction within 90 days of that revision.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-102 -- general duty to retain records substantiating a return, preserved for three years
• Va. Code § 58.1-103 -- required records must be available for inspection by the Tax Commissioner during regular business hours
• Va. Code § 58.1-633 A -- dealer recordkeeping requirement for sales/use tax
• 23 VAC 10-210-470 -- dealers must keep and preserve adequate records for three years
• Va. Code § 58.1-618 -- authorizes the Department to use the best information available to reconstruct a dealer's sales/purchases and determine tax liability
• Va. Code § 58.1-205 -- a Department assessment is prima facie correct; burden of proof is on the taxpayer
• Va. Code § 58.1-1826 -- a court cannot grant relief where the assessment is attributable to the taxpayer's willful failure to provide required information
• Va. Code § 58.1-1821 and 23 VAC 10-20-165 -- a taxpayer may file a new application for correction within 90 days of a revised audit report

Authorities the Department relied on (described here, not linked): P.D. 98-4 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), P.D. 20-28 (2/7/2020), and P.D. 22-108 (6/9/2022) (estimated assessments based on best available information when a taxpayer fails to provide records) -- part of the same audit-records "second chance" family as the already-enriched P.D. 24-126 and P.D. 25-122.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-117

Original ruling text

November 14, 2024

RE: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the periods May 2018 through April 2021.

FACTS

As a result of a 3rd generation audit, the Taxpayer was issued an estimated assessment on its assets and purchases after it failed to provide adequate records during the audit. The Taxpayer filed an application for correction contending that many of the purchases were exempt and that required documentation can be provided upon request.

DETERMINATION

Virginia Code § 58.1-102 provides:

It shall be the duty of every taxpayer to retain suitable records and documents substantiating all information contained on any return required by this subtitle and any such other pertinent records or documents as the Tax Commissioner may require by regulation. The records and documents shall be preserved for a period of three years from the required date for filing a return to which such records or documents pertain.

Virginia Code § 58.1-103 further provides that “All records and documents required by this subtitle or by rule or regulation shall be available during regular business hours for inspection by the Tax Commissioner or his duly authorized agents.”

More specifically, Virginia Code § 58.1-633 A requires that dealers “keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.” Title 23 of the Virginia Administrative Code (VAC) 10-210-470 also provides for sales and use tax purposes that the taxpayer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

The Department has previously addressed instances in which taxpayers failed to provide records for review by the Department and assessments were estimated based on the best available information. See Public Document (P.D.) 98-4 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), P.D. 20-28 (2/7/2020), and P.D. 22-108 (6/9/2022).

In this instance, the Taxpayer failed to provide sufficient documentation in order to perform the audit. As a result, the auditor reviewed federal income tax return information to estimate untaxed purchases for an exceptions report. The proposed report was submitted to the Taxpayer for review and additional information was requested at that time. When the Taxpayer failed to respond, the audit was completed and an assessment was issued.

The estimated assessment was issued to the Taxpayer in accordance with Virginia Code § 58.1-618, which authorizes the Department to use the best information available to reconstruct a dealer’s sales or purchases to determine whether a tax liability exists. In its appeal, the Taxpayer now contends that documentation can be made available upon request.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the dealer to prove the assessment is erroneous. In addition, 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 assessment was attributable to a taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

Despite its failure to respond to the auditor’s request for records, the Taxpayer will be given one final opportunity to provide documentation for review. The Taxpayer will be contacted by the auditor within 30 days of the date of this letter to discuss the documentation that must be provided. The Taxpayer must make all of the requested documentation available to the auditor at a mutually agreed-upon time. The auditor will review the documentation and make adjustments, as appropriate, and issue a revised audit report. If the documentation is not provided within the allotted time frame stated above, the outstanding liability will become immediately due and payable.

In accordance with this decision, this application is being closed. At the conclusion of the auditor’s review, should issues remain, the Taxpayer may submit an application for correction within 90 days of the audit revision pursuant to Virginia Code § 58.1-1821 and Title 23 VAC 10-20-165.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at 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 (804) or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Related Documents

98-4

16-75

16-67

18-83

20-28

22-108