Can Virginia disallow or adjust the Schedule C business deductions on my state return, and what happens if I don't give the auditor documentation?

Plain-English summary

Two married taxpayers filed a Virginia resident return claiming business deductions on federal Schedule C. The Department audited, asked for documentation to support the deductions, received no response, disallowed the deductions, and assessed additional tax. The taxpayers appealed, arguing that the Department "lacks the authority to adjust amounts reported on Schedule C." The Tax Commissioner rejected that argument and upheld the assessment — with two adjustments in the taxpayers' favor.

Why Virginia can adjust a Schedule C:

• Virginia individual income tax starts from federal adjusted gross income (FAGI) (§ 58.1-301). The Department usually accepts the federal figures, but it may examine and adjust FAGI and deductions where there is clear evidence the reported amounts are inconsistent with the Internal Revenue Code (§ 58.1-219, § 58.1-310) — and it can do so independently of any IRS action.
• The Department may require the taxpayer to produce the federal return and all supporting schedules (§ 58.1-310), and taxpayers must keep records sufficient to determine their correct tax (Treas. Reg. § 1.6001-1(a)).
• An assessment is "prima facie correct," so the burden is on the taxpayer to prove it wrong (§ 58.1-205). And § 58.1-1826 bars a court from granting relief where the erroneous assessment is due to the taxpayer's willful failure to provide required information.

Because the taxpayers did not furnish the requested documentation, the assessment stood. Two taxpayer-favorable notes: the Department credited $67.39 of Virginia withholding that had not been applied (§ 58.1-480), and it gave the taxpayers one final 30-day window to submit records that could still reduce the bill.

What this means for you

Sole proprietors and gig / 1099 workers (Schedule C)

Keep receipts and records for every deduction you claim. Virginia can review your Schedule C even if the IRS never audits you, and "the IRS accepted it" is not a defense. If you cannot document a deduction when the auditor asks, expect it to be disallowed.

Anyone under a Virginia desk audit

Respond to the auditor's documentation request within the deadline. Once assessed, the number is presumed correct and you carry the burden to disprove it. If you ignore the request entirely, § 58.1-1826 can even bar you from obtaining court relief later.

Taxpayers who think Virginia can't touch federal numbers

It can. Virginia conforms to the Internal Revenue Code as a starting point, but it has express authority to adjust FAGI and deductions that are inconsistent with federal law.

Common questions

Q: Can Virginia disallow deductions the IRS never questioned?
A: Yes. The Department can examine and adjust FAGI and deductions independently of the IRS (§ 58.1-219, § 58.1-310).

Q: Who has to prove the assessment is right or wrong?
A: The taxpayer. A Virginia assessment is prima facie correct (§ 58.1-205); the burden is on you to show it is wrong, with documentation.

Q: What if I ignore the auditor's request for records?
A: The deductions are disallowed, the assessment stands, and § 58.1-1826 can bar a court from granting relief when the assessment resulted from your willful failure to provide required information.

Q: Is there any way to still fix it?
A: This ruling gave the taxpayers a final 30 days to submit documentation, after which the assessment becomes final. Provide the records promptly.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-301 — Virginia conforms to IRC terminology; computation starts from FAGI
• Va. Code § 58.1-219 and § 58.1-310 — Department may examine/adjust amounts inconsistent with the IRC and require the federal return and 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 the assessment is attributable to a willful failure to provide required information
• Va. Code § 58.1-480 — wage withholding is credited against income tax liability
• Treas. Reg. § 1.6001-1(a) — taxpayers must keep records sufficient to determine the correct tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-40

Original ruling text

May 25, 2026

Re: § 58.1-1821 Application: Individual Income Tax

Dear * and ***:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to you (the “Taxpayers”) for the taxable year ended December 31, 2024.

FACTS

The Taxpayers filed Virginia resident income tax returns for the 2024 taxable year 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 an assessment. 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 assessment for the 2024 taxable year. The Department’s review also determined that the Taxpayers had unreported W-2 income that was properly included in the adjustment to federal adjusted gross income. However, the associated Virginia income tax withholding of $67.39 was not credited against the Taxpayers’ liability. Pursuant to Virginia Code § 58.1-480, amounts withheld from a taxpayer’s wages are credited against their income tax liability for the taxable year. Accordingly, the assessment will be adjusted to reflect the withholding credit.

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 assessment may be adjusted as appropriate. If the documentation is not received within the allotted time, the assessment will be considered correct. In either case, the Taxpayers will receive an updated bill that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date 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 **@tax.virginia.gov.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR 5517.H

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