05-104 | Virginia Tax

Tax Type

Individual Income Tax

Description

Income tax based on the false deductions

Topic

Assessment

Penalties

Records/Returns/Payments

Date Issued

07-05-2005

July 5, 2005

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 you (the "Taxpayer") for the taxable years ended December 31, 2001 through 2003.

FACTS

Pursuant to a criminal investigation of a tax preparer, the Department audited a number of individual income tax returns belonging to clients of the tax preparer. As a result, the Department audited the Taxpayer's 2001 through 2003 individual income tax returns. During the course of the review, the Department identified false deductions for charitable contributions and unreimbursed employee expenses. In response to the audit, the Taxpayer filed amended Virginia income tax returns for the years at issue.

In reviewing the amended returns, the Department made an adjustment to the mortgage interest included in itemized deductions when the Taxpayer failed to provide documentation supporting the amount reported. The auditor recalculated the itemized deductions and assessed tax, interest and fraud penalty. The Taxpayer concedes that she owes income tax based on the false deductions, but contests the assessment with regard to the mortgage interest deduction. The Taxpayer also requests waiver of the fraud penalty.

DETERMINATION

Itemized Deductions

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Virginia Code will generally have the same meanings as provided in the Internal Revenue Code ("IRC") unless a different meaning is clearly required. Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct the amount of itemized deductions reported for federal income tax purposes, with certain reductions.

Internal Revenue Code § 163(h)(3) permits a deduction for interest paid or accrued during a taxable year on debt incurred in acquiring, constructing, or substantially improving a qualified residence when the debt is secured by such residence. Further, a tenant-stockholder in a cooperative housing corporation is allowed to deduct a proportionate share of interest paid or incurred by the cooperative under IRC § 216(a)(2).

The Taxpayer has provided documentation from her lenders concerning the amount of mortgage interest. As such, the mortgage interest deduction will be adjusted based on the reports provided by the lenders.

Fraud Penalty

For the taxable years at issue, the Taxpayer's returns included false deductions. Virginia Code § 58.1-308 sets forth the provisions for the imposition of penalty and interest in cases where income tax returns are audited and additional tax assessed. The statute provides "if the return was made in good faith and the understatement of the amount in the return was not due to any fault of the taxpayer, there shall be no penalty on the additional tax because of such understatement . . . . If the understatement is false or fraudulent with intent to evade the tax, a penalty of 100 percent shall be added together with interest on the tax . . . ." Further, Virginia Code § 58.1-105 grants the Tax Commissioner the authority to waive penalty in cases where reasonable cause is demonstrated.

A taxpayer is obligated to review his or her return for accuracy prior to it being filed. Virginia taxpayers are required to sign their tax returns immediately beneath the following statement: "I (We), the undersigned, declare under penalty of law that I (we) have examined this return and to the best of my (our) knowledge, it is a true, correct and complete return." In this case, a cursory review by the Taxpayer would have revealed to her that the returns at issue included deducted expenses that she never incurred. Therefore, I find the understatement of tax in this case is false with intent to evade the tax. Accordingly, the assessment of the fraud penalty is proper and there is no basis for relief.

CONCLUSION

The assessments have been revised pursuant to the enclosed schedule to reflect the adjustment for the mortgage interest deduction. Please remit payment for the total outstanding balance due to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. Payment must be received within 30 days from the date of this letter to avoid the accrual of additional interest.

If the Taxpayer is unable to pay the balance due in full within 30 days from the date of this letter, she may contact ***** in the Department's Collections Unit at *****, to arrange a payment plan. Please note that while a payment plan will provide an extended period for payment of the balance due, interest will continue to accrue on the outstanding balance until paid in full, pursuant to Va. Code § 58.1-1812.

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.policylibrary.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/52512B

Rulings of the Tax Commissioner