Can Virginia disallow both Schedule C business expenses and Schedule A itemized deductions on an audit, and uphold the resulting assessment, if the taxpayer never sends in records to support them?

Plain-English summary

A Virginia resident filed state income tax returns for 2022 and 2023 that claimed itemized deductions on federal Schedule A (things like mortgage interest, medical expenses, or charitable gifts) and business expense deductions on federal Schedule C (costs tied to a sole proprietorship). When the Virginia Department of Taxation audited the returns, it asked the taxpayer to send in documentation backing up both sets of deductions. The taxpayer never responded, so the Department disallowed the deductions on both schedules and issued assessments for additional tax.

The taxpayer asked the Tax Commissioner to correct the assessments, but only pushed back on one part of the case: the argument that the Department has no authority to second-guess or adjust amounts reported on federal Schedule C. The ruling rejects that argument. Virginia individual income tax starts with federal adjusted gross income (FAGI) as reported on the federal return, and the Department normally accepts the federal numbers at face value. But Virginia law gives the Department explicit authority to look behind those numbers and adjust FAGI -- including Schedule C business income and Schedule A itemized deductions -- whenever there is clear evidence the reported amounts are inconsistent with the Internal Revenue Code. That authority does not depend on the IRS having taken any action of its own; Virginia can make its own independent adjustments.

The ruling also walks through why documentation matters so much procedurally. Federal law already requires taxpayers to keep records sufficient to establish their correct tax liability, and Virginia law separately gives the Department the right to demand a taxpayer's federal return and all supporting statements, schedules, and inventories. Once the Department issues an assessment, that assessment is presumed correct by law, which shifts the burden onto the taxpayer to prove it wrong -- and a taxpayer who willfully fails to provide the information the Department asked for cannot later get court relief from an assessment that resulted from that silence.

Because the taxpayer here never furnished any documentation for either the Schedule A or the Schedule C deductions, the Tax Commissioner upheld both years' assessments. As a matter of grace, the Department gave the taxpayer one final 30-day window from the date of the letter to submit adequate records to the Office of Compliance; if records come in, the assessments may be revised, and if not, the assessments become final and updated bills (with accrued interest) will follow.

What this means for you

If you claim both business and personal itemized deductions

Virginia's audit authority is not limited to just one type of deduction. This ruling shows the Department can simultaneously disallow Schedule C business expenses (used by sole proprietors and other self-employed taxpayers) and Schedule A itemized deductions (used by any taxpayer who itemizes rather than takes the standard deduction) in the same audit, for the same reason: no supporting documentation was ever produced. Don't assume that pushing back on one category (here, Schedule C) will undo an assessment that also rests on an unchallenged category (here, Schedule A) -- both need to be substantiated or contested on their own terms.

If you get an audit document request

Respond, and respond with actual records. The ruling makes clear that "the Department lacks authority to adjust Schedule C" is not a winning argument once there is a documentation gap -- Va. Code §§ 58.1-219 and 58.1-310 specifically authorize the Department to examine and adjust FAGI, including business and itemized deductions, when reported amounts appear inconsistent with the IRC. If you receive a request for support and don't respond, the assessment that follows is presumed correct, and you carry the burden of disproving it. Keeping receipts, mileage logs, invoices, and other Schedule A/C substantiation contemporaneously -- and producing it promptly when asked -- is the practical takeaway.

If you already have an assessment like this

The ruling shows the Department can still give a taxpayer a final chance. Even after upholding an assessment for lack of documentation, the Tax Commissioner offered a 30-day window to submit records before the assessment became final, with a specific office and mailing address for submission. If you're in this position, treat that kind of window as a real opportunity -- late but adequate documentation can still lead to the assessment being adjusted.

Common questions

Q: Does Virginia automatically accept whatever is on my federal tax return?
A: Generally yes -- the Department relies on the federal return's accuracy and typically doesn't look behind it if the numbers appear reasonable. But it can examine and adjust FAGI, Schedule C income, and Schedule A itemized deductions when there is clear evidence the reported amounts don't match the Internal Revenue Code, and it can do this independently of any IRS action.

Q: Can the Department disallow both my business deductions and my itemized deductions in the same audit?
A: Yes. In this case, the Department disallowed deductions on both federal Schedule A and federal Schedule C after the taxpayer failed to provide supporting documentation for either, and the Tax Commissioner upheld both disallowances.

Q: Who has to prove the assessment is wrong -- me or the Department?
A: You do. Under Va. Code § 58.1-205, any tax assessment by the Department is presumed correct, so the burden of proof falls on the taxpayer to show it is incorrect.

Q: What happens if I never send in my documentation?
A: The assessment is upheld and becomes final, with updated bills reflecting accrued interest. Separately, Va. Code § 58.1-1826 bars a court from granting relief from an assessment where the error is attributable to the taxpayer's willful failure or refusal to provide the Department with information required by law.

Citations and references

• Va. Code § 58.1-1821 -- statutory basis for the taxpayer's application for correction of an assessment
• Va. Code § 58.1-301 -- Virginia income tax terminology and references generally follow Internal Revenue Code meanings
• Va. Code § 58.1-219 -- Department's authority to examine and adjust FAGI and related deductions
• Va. Code § 58.1-310 -- Department's right to require production of federal returns and supporting statements, inventories, and schedules
• Treas. Reg. § 1.6001-1(a) -- federal requirement that taxpayers maintain records sufficient to determine correct tax liability
• Va. Code § 58.1-205 -- assessments by the Department are deemed prima facie correct
• Va. Code § 58.1-1826 -- bars court relief where an erroneous assessment results from the taxpayer's willful failure to provide required information
• 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), P.D. 21-67 (05/25/2021), and P.D. 22-11 (01/18/2022) -- prior rulings cited as consistent exercises of the Department's audit-adjustment authority

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-52

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 2023.

FACTS

The Taxpayer filed Virginia resident income tax returns for the 2022 through 2023 taxable years claiming itemized deductions reportable on federal Schedule A and business expense 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 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 Taxpayer failed to furnish information required by law, the Department must uphold the assessments for the 2022 through 2023 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 5454.T

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67

22-11