May 25, 2021
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 “Taxpayers”) for the taxable years ended December 31, 2017, through 2019.
FACTS
The Taxpayers, a husband and wife, filed Virginia resident income tax returns for the 2017 through 2019 taxable years. Under audit, the Department requested documentation to support itemized deductions reported on Schedule A of the federal tax returns for each taxable year. The Department also requested documentation to verify expenses claimed on Schedule E for the 2018 and 2019 taxable years. When a response was not received, the Department disallowed the itemized deductions and expenses, applied the standard deduction, and issued assessments for each taxable year. The Taxpayers appeal, contending they submitted information to substantiate their medical expenses.
DETERMINATION
Conformity
Virginia Code § 58.1-301 provides, with certain exceptions, that 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 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.
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.
Itemized Deductions
Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. When the Taxpayers did not produce documentation to substantiate itemized deductions claimed for medical expenses, real estate taxes, home mortgage interest, unreimbursed business expenses and certain other miscellaneous expenses, the Department denied the deductions and applied the standard deduction. On appeal, the Taxpayers assert that they submitted documentation regarding their medical expenses.
For the taxable years at issue, IRC § 213 allowed as a deduction the expenses paid for medical care of a taxpayer, their spouse, or a dependent to the extent that such expenses exceed 7.5% of FAGI. Treas. Reg. § 1.213-1(h) requires taxpayers to substantiate medical expenses, by providing a statement or itemized invoice from the individual or entity providing the service showing the type of service performed or item purchased, the patient the service was performed on, and the amount and date of payment. The Taxpayers should be aware that the Department has no record of having received documentation regarding their medical expenses.
Supplemental Income and Loss - Schedule E
Schedule E is used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs). Income from such entities is offset by expenses. This income or loss is reported on a taxpayer’s federal income tax return and thus is reflected in FAGI reported on the Virginia return. In this case, the Department disallowed expenses reported on Schedule E when the Taxpayers failed to provide documentation to substantiate them.
CONCLUSION
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. Taxpayers must maintain records sufficient to allow the IRS to determine their correct 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.
In this case, the Department’s audit staff requested information to substantiate the deductions and expenses within one year of the adjustments made to the returns. The adjustments were made on September 24, 2020. As such, the requested documentation would need to be provided to the Department by September 24, 2021.
The auditor who audited your returns is no longer with the Department. As such, the Taxpayers must send the additional information to the Office of Compliance, Desk Audit, RAP, P.O. Box 5610, Richmond, Virginia 23220-0610, Attention: *****. Any questions regarding the requested information should be directed to ***** at *****.
The audit staff will review the documentation once it is received, adjust the assessments as warranted and notify the Taxpayers of the results of the review. If the Taxpayers still disagree with the results, they may file an appeal within 90 days of the date they are notified. If the documentation is not submitted within the time allotted, the assessments will be considered to be correct and collections actions will resume.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3627.B