14-11 | Virginia Tax

Tax Type

Individual Income Tax

Description

Taxpayer failed to provide sufficient documentation to support the itemized deductions.

Topic

Federal Conformity

Filing Status

Records/Returns/Payments

Subtractions and Exclusions

Date Issued

01-27-2014

January 27, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the Department's adjustments made to the Virginia individual income tax return filed by ***** (the "Taxpayer") for the taxable year ended December 31, 2010. I apologize for the delay in responding to your request.

FACTS

The Taxpayer filed a 2010 Virginia part-year resident income tax return, claiming itemized deductions. Under review, the Department disallowed certain itemized deductions, resulting in a reduction in the Taxpayer's income tax refund.

The Taxpayer appeals the adjustments, contending she was entitled to the deductions as reported on the return. In the alternative, she claims she should be allowed the standard deduction, instead of the adjusted itemized deductions because the Department's adjustment reduced her deductions below the standard deduction rate.

DETERMINATION

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 IRC. See Va. Code § 58.1-219.

Filing Status

The Taxpayer moved into Virginia during the 2010 taxable year. The Taxpayer elected to itemize deductions on her federal income tax return. Under audit, the Taxpayer failed to provide sufficient documentation to support the itemized deductions. The Department disallowed the deductions, thus reducing the Taxpayer's income tax refund. The Taxpayer argues that the Department's adjustment provides a deduction less than the standard deduction and requests the Department grant the standard deduction.

Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of another state during the taxable year is subject to taxation for the period in which he was a Virginia resident. Accordingly, Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes.

Deductions

In general, a taxpayer does not have a right to any tax deduction. Credits, deductions or exemptions allowed in the computation of an income tax are privileges accorded as a matter of legislative grace and not as a matter of taxpayer right. By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

Itemized Deductions

The Taxpayer states that she donated large amounts of clothing, cash and food to charities. The Taxpayer also attests that as a contractor, she incurred business and job hunting expenses. The auditor disallowed all deductions on the basis that the deductions were not supported with appropriate documentation.

Under IRC § 170(a), taxpayers may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year. IRC § 162, provides a deduction for 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. IRC §67(b) provides a deduction for job hunting expenses incurred when an unemployed taxpayer re-enters the job market. Because of Virginia's conformity to the IRC, taxpayers must meet the requirements established by federal regulation and, upon request, provide sufficient evidence that such expenses were incurred.

Taxpayer Records

The Taxpayer attests that the documents required to support the deductions claimed on the federal schedule were placed in storage and were not accessible during the audit or the appeal. Treas. Reg. § 1.6001-1(a) provides that taxpayers must maintain sufficient records to allow the Internal Revenue Service (IRS) to determine their correct tax liability. Similarly, Va. Code § 58.1-310 mandates that if the Department determines 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 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.

The Taxpayer provided some information regarding the deductions; however, the documentation was insufficient to support the amount of itemized deductions claimed. Under Va. Code § 58.1-205, in 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 not correct.

Standard Deduction

Under Va. Code § 58.1-322 D 1 b, a taxpayer may claim the Virginia standard deduction only if he has not elected to itemize deductions on his federal income tax return. Therefore, whether an individual itemizes deductions or claims the standard deduction on his Virginia return is dependent upon which election he makes on his federal income tax return. The intent of this provision is to retain conformity with the Internal Revenue Code, which reduces the costs of administering and ensures compliance with Virginia's income tax laws. See P.D. 82-92 (7/1/1982). As such, the Department will not generally allow a standard deduction when a taxpayer has elected to itemize deductions for federal income tax purposes.

However, when looking behind federal deductions to determine the accuracy of Virginia taxable income, the Department must be cognizant of Internal Revenue Service (IRS) policies and procedures. Under IRS procedures, it will allow a standard deduction when it is larger than the amount of allowable itemized deductions. Likewise, when looking behind federal itemized deductions, the Department will allow the greater of Virginia itemized deductions (before the adjustment for state income tax) or the Virginia standard deduction when substantiated itemized deductions are less than the federal standard deduction.

In this case, the Taxpayer has not provided sufficient evidence to support the itemized deductions claimed. The substantiated itemized deductions before adjusting for state income taxes were less than the federal standard deduction and the Virginia standard deduction. As such, the Taxpayer will be granted a standard deduction on her 2010 individual income tax return.

The audit will be returned to the audit staff to be adjusted in accordance with this determination. After the auditor makes the appropriate adjustments, an additional refund for the 2010 taxable year will be issued to the Taxpayer along with any applicable refund interest.

The Code of Virginia sections and public documents 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/1-5188477965.D

This PD supersedes PD 11-165

Rulings of the Tax Commissioner