Tax Type
Individual Income Tax
Description
Department retains the authority to adjust the FAGI and itemized deductions
Topic
Federal Conformity
Records/Returns/Payments
Subtractions and Exclusions
Date Issued
08-28-2014
August 28, 2014
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 assessment issued to your client, ***** (the "Taxpayer"), for the taxable year ended December 31, 2009. I apologize for the delay in responding to your appeal.
FACTS
The Department audited the Taxpayer for the 2009 taxable year and made a number of adjustments. The Taxpayer filed an appeal contesting several of the adjustments. Each of the adjustments will be addressed separately below.
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). See Va. Code
§ 58.1-322 A.
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 the FAGI and itemized deductions 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.
Itemized Deductions
Virginia Code § 58.1-322 D 1 a allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes.
State and Local Tax
The Taxpayer questions the auditor's adjustment to the state and local income tax reduction. Internal Revenue Code (IRC) § 164 provides a deduction for certain state and local income taxes paid for business and non-business purposes. For Virginia income tax purposes, federal itemized deductions are reduced by the amount of income taxes imposed by Virginia or any other taxing jurisdiction and reported as an itemized deduction. See Va. Code § 58.1-322 D 1 a.
On his Virginia return, the Taxpayer reduced his itemized deductions to account for income taxes reported on Schedule A of his federal income tax return. Under review, however, the Department found the Taxpayer's adjustment did not match the amount reported. The auditor, therefore, adjusted the state and local income tax deduction to correspond with the amount of state and local income taxes reported as an itemized deduction.
Real Estate and Personal Property Taxes
The Taxpayer appeals the auditor's adjustment to disallow amounts reported as real estate and personal property taxes included in his federal itemized deductions. In addition to state and local income taxes, IRC § 164 provides a deduction for certain state and local real estate and personal property taxes paid for business and non-business purposes.
By letter dated August 10, 2012, the Department requested the Taxpayer to provide documentation concerning all deductions claimed on his 2009 Schedule A. The Taxpayer provided copies of property tax bills but failed to present proof of payment (i.e., receipts, canceled checks, etc.).
Charitable Contributions
The Taxpayer contests the auditor's adjustment to disallow amounts reported as charitable contributions included in his federal itemized deductions. IRC § 170 provides a deduction for certain charitable contributions.
By letter dated August 10, 2012, the Department requested the Taxpayer to provide documentation concerning all deductions claimed on his 2009 Schedule A. No documentation (i.e., receipts, canceled checks, etc.) has been provided to support either the cash gifts or gifts made by means other than cash.
Miscellaneous Deductions
The Taxpayer also disagrees with the auditor's adjustment to disallow job expenses and certain miscellaneous deductions reported on Schedule A. Under IRC § 67, an individual may only deduct certain miscellaneous itemized deductions to the extent that they collectively exceed 2% of FAGI, commonly referred to as "2% floor".
For the 2009 taxable year, the Taxpayer claimed a miscellaneous deduction including a tax preparation fee and employee business mileage expenses, which exceeded the 2% floor. Under IRC § 162 a, individuals are permitted a miscellaneous deduction for ordinary and necessary expenses incurred in carrying on a trade or business for an employer. In PLR 8023052 (3/12/1980), the IRS determined an individual working several jobs in the same locality may deduct the transportation expenses incurred in traveling between jobs. However, travel costs incurred from home to the first job and from the last job to home are generally nondeductible commuting expenses.
By letter dated August 10, 2012, the Department requested the Taxpayer to provide documentation concerning all deductions claimed on his 2009 Schedule A. When no documentation was provided, the auditor disallowed the mileage deduction reducing the miscellaneous deduction below the 2% floor.
Under appeal, the Taxpayer provided a calendar detailing his work days and distance claimed between job locations. The Department computed the mileage between the Taxpayer's two job locations. This computation, copy enclosed, indicates the mileage reported for the unreimbursed employee expense was substantially greater than the actual distance.
CONCLUSION
Because, the state and local income tax deduction must be equal to the amount reported on Schedule A, the adjustment to the state and local tax deduction is correct. In addition, the miscellaneous deduction will be adjusted in accordance with Department's findings.
With regard to the property tax and charitable deductions, 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, under Va. Code § 58.1-310, when the Department determines it is necessary to examine the federal income returns of any individual, estate, trust, partnership or corporation in order to properly audit such returns, the Department may require the taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof. See Public Document (P.D.) 10-78 (5/18/2010).
Virginia Code § 58.1-205 provides that 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 he was not subject to income tax in Virginia.
The Taxpayer will be granted one last opportunity to provide the information required to support deductions claimed on his 2009 Schedule A. The documentation must be provided within 30 days from the date of this letter. Please send the requested information to the Department's Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****. If the information is not received within the allotted time, the Department's assessment will be upheld and collection actions may resume.
The Code of Virginia sections and public document 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/1-5265382914.D
Rulings of the Tax Commissioner