Can Virginia disallow federal Schedule C business-expense deductions and uphold an income tax assessment when a taxpayer under audit fails to provide documentation to support those deductions?

Plain-English summary

This ruling is one of a small group of near-identical determinations the Virginia Tax Commissioner issued on May 26, 2026, in response to essentially the same Schedule-C-documentation fact pattern. The fuller Plain-English writeup lives on the companion ruling, P.D. 26-49 (same date, same DETERMINATION text) — see that ruling in this library for the complete summary, Q&A, and citations, since the substantive analysis here is word-for-word the same.

In short: this taxpayer claimed federal Schedule C business-expense deductions on Virginia resident income tax returns for the 2022 through 2024 taxable years. Under audit, the Department asked for documentation to support the deductions; when none was provided, the deductions were disallowed and assessments issued. The taxpayer applied for correction, arguing the Department lacks authority to adjust amounts reported on Schedule C — but Virginia's income tax starts from federal adjusted gross income (FAGI), and the Department may examine and adjust FAGI where there's clear evidence the reported amounts are inconsistent with the Internal Revenue Code. Because no documentation was ever produced, the assessments were upheld, though the taxpayer was given a final 30-day window to submit records before the bills become final.

What this means for you

See the companion ruling P.D. 26-49 in this library for the full practical discussion of what this means for self-employed taxpayers and sole proprietors facing a Schedule C documentation audit.

Common questions

Q: Is this ruling different from P.D. 26-49?
A: No — the operative text, statutes, and outcome are the same (both are Schedule C documentation-audit determinations upheld on the same grounds). Only the requesting taxpayer and the specific tax years differ (here, 2022 through 2024), and both are redacted in the published letter.

Citations and references

• Va. Code § 58.1-301: ties Virginia income tax terminology to the Internal Revenue Code, starting Virginia taxable income from federal adjusted gross income (FAGI).
• Va. Code § 58.1-219, § 58.1-310: authorize the Department to examine and adjust FAGI and itemized deductions where there is clear evidence of inconsistency with the IRC.
• Va. Code § 58.1-205: an assessment is prima facie correct, placing the burden on the taxpayer to prove otherwise.
• Va. Code § 58.1-1821: the statutory basis for a taxpayer's application to correct an assessment.
• Va. Code § 58.1-1826: governs relief where a taxpayer fails to provide requested information.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-50

Original ruling text

May 26, 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 “Taxpayer”) for the taxable years ended December 31, 2022, through 2024.

FACTS

The Taxpayer 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 Taxpayer 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 Taxpayer to establish that the assessments are incorrect. Further, Virginia Code § 58.1-1826 precludes a court from granting relief to Taxpayer 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 Taxpayer 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 Taxpayer 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 Taxpayer will receive updated bills that will include accrued interest to date. The Taxpayer 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 Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR 5358.H

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67

22-11