March 4, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you request correction of the individual income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 2013. I apologize for the delay in responding to your appeal.
FACTS
Under review, the Department adjusted the deduction claimed by the Taxpayer for unreimbursed employee expenses reported on their 2013 Virginia income tax return and issued an assessment. The Taxpayer appeals the assessment, contending that he was entitled to deduct the business expenses claimed on his return.
DETERMINATION
Conformity
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.
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 FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the Internal Revenue Code (IRC). See Va. Code § 58.1-219. Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes.
Business Expenses
Under IRC § 162, taxpayers are 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. Unreimbursed travel expenses incurred while engaged in a business or trade may be deducted provided that a taxpayer maintains records sufficient to allow the Internal Revenue Service (IRS) to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a).
Taxpayer Records
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.
By correspondence dated March 14, 2014, the Department requested additional information to substantiate the business expenses claimed on the Virginia individual income tax return. The auditor disallowed the business expense deduction because the letter justifying the expense was from the Taxpayer's union, not his employer.
The Taxpayer has provided letters from his employers in which they assert that the Taxpayer is responsible for his own business expenses. The documentation, however, fails to substantiate the amount of business expense deduction claimed on the return or change the auditor's adjustments. Expenses may be substantiated through the preparation of a daily diary or record of expenditures, maintained in sufficient detail to enable a taxpayer to readily identify the amount and nature of any expenditure, and the preservation of supporting documents, especially in connection with large or exceptional expenditures. See Treas. Reg. § 1.162-17 (d)(2). The methodology for business expense record keeping is more fully described in Internal Revenue Service Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Under the provisions of Va. Code § 58.1-205 any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayer to show the assessment is incorrect. Despite the request by the Department, the Taxpayer has not provided objective evidence to show the auditor's adjustments are incorrect.
CONCLUSION
Based on the applicable law cited above and the information presented, there is no basis to abate the Department's assessment for the 2013 taxable year. However, I will give the Taxpayer one last opportunity to provide adequate documentation with regard to the itemized deductions described above. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****, Senior Tax Analyst. Upon receipt, the documentation will be reviewed and assessment will be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered to be correct as issued.
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 ***** at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5745473492.B