Tax Type
Individual Income Tax
Description
Department disallowed for medical expenses, charitable contributions, and business expenses.
Topic
Federal Conformity
Records/Returns/Payments
Date Issued
06-26-2013
June 26, 2013
Re: § 58.1-1824 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2011. I note the assessment has been paid in full. I apologize for the delay in responding to your appeal.
FACTS
Under review, the Department adjusted the Taxpayers' itemized deductions reported on their 2011 Virginia income tax return resulting in tax due. The Taxpayers paid the assessment and filed an appeal. They contend they were entitled to deduct certain amounts the Department disallowed for medical expenses, charitable contributions, and business expenses.
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).
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 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.
Medical Expenses
For taxable year 2011, IRC § 213 allows as a deduction the expenses paid for medical care of a taxpayer, his spouse, or a dependent to the extent that such expenses exceed 7.5 percent of FAGI. The auditor disallowed certain medical expenses because the Taxpayer had not submitted sufficient documentation of payment or expenses. The adjustment reduced the total amount of expenses below the 7.5 percent floor, eliminating the deduction.
The Taxpayers have provided a list of expenses they believe should be allowed. Included were some items the auditor had allowed, some the auditor had disallowed, and a few additional expenses. The Taxpayers have been able to substantiate some of the disallowed or additional expenses. Regardless, the amount of expenses included on the Taxpayers' revised list did not exceed the 7.5 percent floor. As such, the Taxpayers were not eligible for the deduction.
Gifts to Charity
Under IRC § 170(a), taxpayers may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year. Treas. Reg. 1.170A-13(a) generally requires contributions of money to be substantiated by cancelled check, receipt, or other reliable written records; however, for any charitable contribution of $250 or more, the taxpayer must have a contemporaneous written acknowledgment described in Treas. Reg. 1.170A-13(f) from the donee organization. Because of Virginia's conformity to the IRC, taxpayers must meet the substantiation requirements established by federal regulations.
The auditor disallowed certain monetary gifts because the Taxpayers were unable to provide the substantiation required. The auditor also disallowed claimed contributions for payments made to individuals instead of charitable organizations, contributions that were included more than once, and amounts for which the purpose was unclear. One payment was disallowed because it was for a raffle ticket. The purchase price of a raffle ticket is not deductible even if paid to a charitable organization. See Rev. Rul. 67-246, 67-2 CB 104.
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.
The auditor disallowed the business expense deduction because there was not a detailed explanation of job duties or travel requirements or an explanation as to how expenses were incurred as part of job-related duties. The Taxpayers argue the expenses were related to consulting work requiring travel to meet with prospective clients. The only supporting documentation submitted, however, was an employer's reimbursement policy that suggests the Taxpayers may have been reimbursed for travel expenses. Reimbursed expenses, if any, would not be deductible.
The Taxpayers also assert that a portion of the business expenses should have been reported on Schedule C of the federal income tax return instead of Schedule A. Even if this were the case, the Taxpayers have been unable to provide documentation to show they were entitled to deduct the business expenses regardless of the schedule on which they should have been reported.
Taxpayer Records
Taxpayers must maintain records sufficient to allow the Internal Revenue Service (IRS) to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Va. Code § 58.1-310 provides:
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- 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 October 12, 2012, and April 12, 2013, the Department requested additional information to substantiate the itemized deductions claimed on the Virginia individual income tax return. The Taxpayers provided some information regarding the medical expenses and employee business expenses. This documentation is reflected in the analysis above. The documentation, however, failed to substantiate the itemized deductions claimed on the original return or change the auditor's adjustments.
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 Taxpayers to show they were not subject to income tax in Virginia. In addition, Va. Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the assessment was attributable to a taxpayer's willful failure or refusal to provide the Department with necessary information as required by law. Despite several requests by the Department, the Taxpayers have 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 2011 taxable year. However, I will give the Taxpayers 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: *****, 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 and 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 *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5202213837.M
Rulings of the Tax Commissioner