Is Virginia bound by my federal Schedule C, and who has the burden when the Department disallows my deductions on audit?

Plain-English summary

This is one of a series of materially identical Virginia "Schedule C desk-audit" determinations the Tax Commissioner issued in 2026. In each, joint filers claimed business deductions on federal Schedule C, the Department requested documentation under audit, received no response, disallowed the deductions, and assessed the tax. Here the assessments covered 2022 through 2024 taxable years. The taxpayers appealed, arguing the Department "lacks the authority to adjust amounts reported on Schedule C." The Commissioner disagreed and upheld the assessments — subject to a final chance to produce records.

The reasoning is the same in every case in this series:

• Virginia individual income tax starts from federal adjusted gross income (FAGI) (§ 58.1-301), but the Department may examine and adjust FAGI and deductions that are inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310) — independently of the IRS.
• A Virginia assessment is "prima facie correct," so the taxpayer bears the burden of disproving it (§ 58.1-205); and § 58.1-1826 can bar later court relief where the error stems from a willful failure to provide required information.
• Because no documentation was furnished, the assessments stood — but the Department gave a final 30-day window to submit records that could still reduce the bill.

For the full analysis of this recurring determination, see P.D. 26-42.

What this means for you

If you deduct business expenses on a federal Schedule C, keep contemporaneous records: Virginia can review and disallow those deductions on its own, and reporting them on an accepted federal return does not protect you. Once the Department assesses, the burden shifts to you — meet the documentation deadline rather than arguing the Department "can't touch" your federal Schedule C, which does not work and can also forfeit court relief under § 58.1-1826.

Common questions

Q: Is Virginia bound by what's on my federal Schedule C?
A: No. Virginia starts from your federal numbers but can examine and adjust deductions inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310).

Q: I didn't respond to the audit. Can I still fix it?
A: In this determination the Department allowed a final 30 days to submit documentation; after that the assessments become final. Ignoring the request can also bar court relief under § 58.1-1826.

Citations and references

Same statutes as the representative ruling P.D. 26-42: Va. Code § 58.1-301 (conformity; FAGI starting point), §§ 58.1-219 and 58.1-310 (authority to adjust and to require the federal return and schedules), § 58.1-205 (assessment prima facie correct; burden on the taxpayer), and § 58.1-1826 (no court relief for a willful failure to provide required information); plus Treas. Reg. § 1.6001-1(a) (recordkeeping).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-37

Original ruling text

May 25, 2026

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 assessments issued to you (the “Taxpayers”) for the taxable years ended December 31, 2022, through 2024.

FACTS

The Taxpayers filed Virginia resident income tax returns for the 2022 through 2024 taxable years claiming deductions on federal Schedule C. 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 applied for correction, contending the Department lacks the authority to adjust amounts reported on Schedule C.

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 .

Generally, 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 appears reasonable, then, typically, the Department does not look behind those computations. The Department, however, may examine and adjust the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are inconsistent with the IRC. See Virginia Code § 58.1-219 and § 58.1-310. 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. See P.D. 22-11 (1/18/2022).

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 Taxpayers 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 failed to furnish information required by law, the Department must uphold the assessments for the 2022 through 2024 taxable years. The Department 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. In either case, the Taxpayers will receive updated bills that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill dates to avoid the accrual of additional interest and possible collection actions.

The Code of Virginia sections 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 and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR 5448.H

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67

22-11