Document Number
03-62
Tax Type
Individual Income Tax
Description
Failure to File Individual Tax Returns
Topic
Basis of Tax
Collection of Tax
Persons Subject to Tax
Taxpayers
Date Issued
08-19-2003

August 19, 2003


Re: § 58.1-1821 Application: Individual Income Tax


Dear *****:

This will reply to your letter contesting the Virginia individual income tax assessments issued to ***** (the "Taxpayer") for the taxable years ended December 31, 1991 through 1993. I apologize for the delay in responding to your letter.
FACTS

During the taxable years 1991 through 1993, the Taxpayer, a Certified Public Accountant ("CPA") practicing in Virginia, failed to file his Virginia individual income tax returns. The Department conducted a criminal investigation and an audit resulting in the issuance of assessments for individual income tax, penalty, and interest. The Taxpayer is contesting these assessments on the grounds that he was not properly notified of the Department's actions and he is not subject to Virginia income tax.
DETERMINATION

Generally

Virginia Code § 58.1-301 provides 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. 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 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 Va. Code § 58.1-322.

Definition of Taxpayer

The Taxpayer contends that the term "person" is a legal term that must be specifically defined since, in statute, it is typically limited to a juristic, corporate entity, or a body politic. The Taxpayer states that he is a "natural person" and not liable for federal income tax as a person under the Internal Revenue Code ("IRC"). Further, the Taxpayer asserts that he is a "nontaxpayer" and as a "natural person" is not included in the definition of "taxpayer" under Va. Code § 58.1-1. Based on this logic, the Taxpayer believes he is not subject to Virginia taxation and is not required to file Virginia individual income tax returns.

Article 1 of Title 58.1 of the Code of Virginia sets forth the general provisions for taxes administered within the Commonwealth of Virginia. Virginia Code § 58.1-1, which is included in Article 1 of this Title, defines "taxpayer" to mean:
    • every person, corporation, partnership, organization, trust or estate subject to taxation under the laws of this Commonwealth, or under the ordinances, resolutions or orders of any county, city, town or other political subdivision of this Commonwealth. (Emphasis added.)

Taxpayers, therefore, are identified as persons, corporations, partnerships, organizations, trusts, and estates. The term, "person" includes individuals who would be subject to taxation under the laws of Virginia.

Chapter 3 of Title 58.1 of the Code of Virginia specifically sets forth the income tax laws administered by the Department. Virginia Code § 58.1-302 defines "individual" to mean:
    • all natural persons whether married or unmarried and fiduciaries acting for natural persons, but not fiduciaries acting for trusts or estates. (Emphasis added.)

In this statute, an individual is specifically defined as a natural person. Partnerships, corporations, estates, trusts, and similar entities are excluded from this definition. As the Taxpayer has correctly stated, he is a natural person and, as such, is considered an individual for Virginia tax purposes.

Virginia Code § 58.1-320 provides, "A tax is hereby annually imposed on the Virginia taxable income for each taxable year of every individual . . . ." (Emphasis added.) Any individual who receives Virginia taxable income is subject to Virginia income tax.

Virginia Code § 58.1-341 provides that any individual who is a resident who is required to file a federal income tax return is also required to file a Virginia income tax return unless the resident is exempt from filing under Va. Code § 58.1-321. Virginia Code § 58.1-302 specifically defines "resident" to include every person domiciled in Virginia and every person who maintains a place of abode in Virginia for an aggregate of more than 183 days of the taxable year. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return.

As an individual and a domiciliary resident of Virginia, the Taxpayer is subject to Virginia taxation. Consequently, the Taxpayer was required to file Virginia individual income tax returns for the taxable years 1991 through 1993.

Audit Program

The Taxpayer further contends that the Department did not notify him of its intent to audit his records. An investigation was initiated by the Department to determine if the Taxpayer intended to evade taxes by failing or refusing to file income tax returns. In conducting such an investigation, the Department may examine a taxpayer's accounting records, when possible, to determine the nature of income and expense items. Virginia Code § 58.1-103, which provides for the examination of records, sets forth that:
    • All records and documents required by this subtitle or by rule or regulation shall be available during regular business hours for inspection by the Tax Commissioner or his duly authorized agents.

Audits and investigations may be conducted at the taxpayer's place of business during their regular business hours. If this is not possible and there are no alternative sites, the investigation can be conducted at the office of the Department.

Virginia Code § 58.1-111 provides that:
    • Whenever any taxpayer liable under the law to file a state tax return with the Department shall fail or refuse on demand to file a correct and proper return, the Department may make an estimate of the amount of taxes due the Commonwealth by such taxpayer, from any information in its possession, and assess the taxes, penalties and interest due the Commonwealth by such taxpayer.

When a taxpayer is required to file an income tax return and fails or refuses to file the return, the Department may estimate the tax, penalty and interest based on any information, including subpoenaed records, in its possession. Further, IRC § 6103(d) authorizes the Department to obtain information from the Internal Revenue Service ("IRS") that will help in determining the resident's tax liability.

The Department contacted the Taxpayer concerning scheduling an investigation of Virginia tax returns for the 1991 through 1993 taxable years. The scheduling of this investigation was unsuccessful. As a result, the business and personal bank account records were subpoenaed, pursuant to Va. Code § 58.1-216, and examined to determine if the Taxpayer's income was underreported.

An analysis was made of deposits and disbursements from these bank accounts. Schedules analyzing income were prepared and made available to the Taxpayer in the audit report. The Department generated an audit report based on information received and submitted to the Taxpayer for review.

In response, the Taxpayer furnished a federal audit report issued by the IRS that included the contested taxable years. The federal audit estimated the Taxpayer's federal income and business expenses because he had not filed federal tax returns with the IRS. The estimated FAGI on the IRS report was less than the amount generated as a result of the Virginia audit. The business income in the federal audit was based on estimates based on the average charge to complete a tax return (based on taxable year 1990) multiplied by the actual number of tax returns completed for each subsequent taxable year in the audit period. The expenses allowed for the 1991 taxable year were also allowed for each subsequent year in the audit period even though the accounting operations moved from a business location into an office at the Taxpayer's home. The Taxpayer indicated that he has appealed the federal audit report while requesting the Department to accept this report instead of its finding in the investigation.

The Department proceeded to assess tax, penalty, and interest for the taxable years 1991 through 1993 based on the information gathered from the criminal investigation. While Virginia is a state that conforms with the terminology of the IRC, it is not obligated to conform to the audit methods of the IRS when the Department has information to show that the federal methods may have the effect of distorting Virginia taxable income. The Department's audit assessment was based on an examination of actual documents subpoenaed from the Taxpayer's banks. This examination conclusively showed that the Taxpayer received income that was not reported to the Department. Additionally, the Taxpayer's appeal of the federal audit report implies that he does not agree with the estimates of that report. Accordingly, the audit methods used by the Department to determine the underreported income for the taxable years 1991 through 1993 were proper under the circumstances.

For the taxable year 1991, the audit report includes the sales price of realty and stocks. The Taxpayer has provided documentation with his appeal to substantiate the basis of the items sold. These items, therefore, will be adjusted to show the resulting gain from these sales. The assessment will be adjusted as shown on the enclosed schedule.

Fraud

As a CPA, the Taxpayer should have been knowledgeable of the requirements for filing Virginia income tax returns. The Taxpayer's claims that he is not subject to Virginia income taxation have no basis in fact or Virginia law. An individual who fails to file income tax returns based solely on such claims has intentionally understated his income tax liability with the intent to evade tax, and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308. Furthermore, one who files an application for correction pursuant to Va. Code § 58.1-1821 based solely on such claims has no purpose other than to hinder and delay collection of the proper tax liability. Consequently, collection activity need not be suspended while such applications for correction are being considered.

Based on the information presented, there is no basis for abating the contested assessments. The 1991 assessment, however, has been adjusted as previously mentioned. The balances of these assessments for the 1991, 1992, and 1993 taxable years have been updated through the date of this letter, as shown on the enclosed schedules. No further interest will accrue provided the outstanding balances are paid within 30 days from the date of this letter. The Taxpayer should remit his payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

Additionally, a review of our records shows that the Taxpayer has not filed Virginia individual income tax returns subsequent to the 1993 taxable year. Based on the Taxpayer's continued residence in Virginia, these returns must be filed consistent with the Code of Virginia. The Taxpayer is, hereby, requested to submit valid Virginia individual income tax returns for all applicable subsequent years. The completed returns should be sent to *****, Office of Policy and Administration, Policy Development Unit, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880.

Although you requested a meeting, this determination has been issued without one because the application of the law and regulations is clear in this case. If you are not satisfied with the determination, you may apply to a circuit court for relief pursuant to Va. Code § 58.1-1825.

Copies of the Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have further questions, you may contact ***** at *****.
                • Sincerely,


                • Kenneth W. Thorson
                  Tax Commissioner


PD/12933N


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46