September 18, 2019
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2016, and 2017.
FACTS
The Taxpayer filed Virginia resident income tax returns for the 2016 and 2017 taxable years. The Department audited the Taxpayer and denied various business expense and itemized deductions claimed for both years and a deduction for alimony paid for the 2017 taxable year. The Taxpayer appeals, contending the Internal Revenue Service (IRS) has made no adjustments to either his federal adjusted gross income (FAGI) or deductions for either year.
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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with 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 Virginia Code § 58.1-322.01 through § 58.1-322.04.
As a general rule, 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 looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219.
Virginia Code § 58.1-322.03 1 a allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes. IRC § 211 allows additional deductions for individuals, including but not limited to educator expenses, alimony, moving expenses and contributions to IRAs. Under IRC § 162, taxpayers are also permitted to deduct all of the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Such expenses must be directly connected with or pertaining to the taxpayer’s trade or business. See Treas. Reg. § 1.162-1.
In addition, 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 to properly 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.
The fact that the IRS has not adjusted the Taxpayer’s FAGI or deductions has no bearing on the Department’s ability to make such adjustments to the Taxpayer’s returns and issue assessments. As stated above, the Department has the authority to make such adjustments.
The Taxpayer will be given 30 additional days to supply the records requested. The Taxpayer should send the documentation to *****, Office of Compliance, Desk Audit, RAP, P.O. Box 5610, Richmond, Virginia 23220-0610. Once the documentation is received, the audit staff will review it, adjust the assessments as warranted and notify the Taxpayer of the results of the review. If the Taxpayer still disagrees with the results, he may file an appeal within 90 days of the date he is notified. If the documentation is not submitted within the time allotted, the assessments will be considered to be correct and collections actions will resume.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****. Specific questions about what documentation must be provided to the audit staff should be directed to ***** at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2062.M