The IRS says it adjusted my federal return and increased my income, but I think the IRS made a mistake — can Virginia's assessment based on that IRS change be corrected?

Plain-English summary

The IRS notified the Virginia Department of Taxation that it had adjusted a taxpayer's 2018 federal income tax account. Because the Department had no record of the taxpayer ever filing an amended Virginia return reporting that federal change, it issued its own assessment for the additional Virginia tax due. The taxpayer appealed, arguing the underlying IRS adjustment itself was wrong.

Virginia's system runs on federal conformity. Virginia starts its own income tax computation from federal adjusted gross income (Va. Code § 58.1-301), and taxpayers are required to report any federal change or correction within one year by filing an amended Virginia return (§ 58.1-311). If a taxpayer doesn't do that, the Department may assess the resulting Virginia tax at any time (§ 58.1-312 A 3) — and federal law (IRC § 6103(d)) specifically lets the Department pull that information straight from the IRS.

The Department generally will not relitigate the IRS's own audit. As settled Department policy, once the IRS has examined a taxpayer's federal income and reached a final determination, the Department does not look behind that determination to second-guess it (P.D. 11-107).

But the facts here were unusually sympathetic — and unresolved. It appears the taxpayer actually did mail a paper return to the IRS for the year at issue, but the IRS never received it — so the IRS assessed him based on a "substitute return" that omitted his business expenses, inflating his reported income. The taxpayer said he was working with the IRS to fix the error, but despite the Department's request for supporting evidence, none had been provided, and an IRS account transcript checked as recently as December 2024 showed no pending adjustment to his account.

A conditional outcome, not a flat denial. Rather than simply closing the case, the Department gave the taxpayer one final 60-day window from the date of its letter to submit documentation proving he's actively working with the IRS to resolve the underlying dispute. If he doesn't, the assessment becomes final — an updated bill with accrued interest will follow, and collection action may result.

What this means for you

Anyone disputing an IRS adjustment that also triggered a Virginia assessment

Arguing the IRS itself got it wrong is not, by itself, enough to overturn a Virginia assessment based on that IRS change — Virginia generally defers entirely to a final IRS determination. Your real fight has to happen with the IRS directly, and you need actual documentation of that ongoing dispute (correspondence, a case number, an amended federal return) to show the Department, not just an assertion that you're "working on it."

If your paper return got lost and the IRS used a substitute return

A substitute return the IRS prepares for you typically doesn't include your deductions or business expenses, which can significantly inflate your reported income and any downstream state assessment. Move quickly to correct the federal record (refile, dispute the substitute return, or otherwise engage IRS collections/exam) and keep dated proof of every step.

Accountants and tax professionals

If a client's Virginia assessment traces back to an IRS adjustment the client disputes, don't expect the Department to independently evaluate the merits of that federal dispute. Instead, get the client's IRS matter actively documented and moving, and provide that documentation to Virginia promptly — as this ruling shows, the Department may extend a courtesy window, but it isn't obligated to.

Common questions

Q: If I think the IRS made a mistake, will Virginia investigate that for me?
A: No — as a matter of settled policy, once the IRS has audited a taxpayer's federal income and reached a final determination, the Department does not look behind it.

Q: What is a "substitute return," and why does it matter here?
A: It's a return the IRS prepares on a taxpayer's behalf when it doesn't receive the taxpayer's own filing — typically without deductions or business expenses the taxpayer would otherwise have claimed, which can overstate income.

Q: Did the Department deny this taxpayer's appeal outright?
A: Not yet — it gave him a final 60-day window from the date of its letter to submit documentation showing he's actively working with the IRS to resolve the underlying dispute, before treating the assessment as final.

Q: What happens if he doesn't provide that documentation in time?
A: The assessment will be considered correct, he'll receive an updated bill with accrued interest, and collection actions may follow.

Citations and references

Statutes:

• Va. Code § 58.1-301 — Virginia's conformity to the Internal Revenue Code
• Va. Code § 58.1-311 — one-year requirement to amend a Virginia return after a federal change
• Va. Code § 58.1-312 A 3 — Department may assess at any time if no amended return is filed
• IRC § 6103(d) — authorizes the Department to obtain information from the IRS

Prior ruling relied on (described here, not linked): P.D. 11-107 (6/14/2011) (the Department does not look behind a final IRS determination).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-16

Original ruling text

February 12, 2025

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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, 2018.

FACTS

The Internal Revenue Service (IRS) notified the Department that it had adjusted the Taxpayer’s 2018 federal income tax account. 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 change 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 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, the information obtained by the Department indicated that the Taxpayer’s FAGI was increased due to an IRS examination.

For the taxable year at issue, the Taxpayer mailed paper income tax returns to both the IRS and Virginia. It appears that the IRS did not receive the Taxpayer’s return and issued an assessment based on a substitute return that did not include the Taxpayer’s business expenses. The Taxpayer asserts that he is working with the IRS to correct the assessment. The Department has requested evidence to support that claim but, to date, no evidence has been provided. In addition, as of December 2024, the IRS account transcript did not reflect any IRS adjustments to the Taxpayer’s account. 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).

Under these circumstances, the Department finds no basis to abate the assessment. The Department will, however, allow the Taxpayer one final opportunity to submit documentation evidencing that he is actively working with the IRS to resolve the matter. The documentation should be submitted within 60 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *.

If sufficient documentation is not received within the allotted time, the assessment will be considered correct, the Taxpayer will receive an updated bill that will include accrued interest to date, and collections actions may result.

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 determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4916.X

Related Documents

11-107