June 8, 2016
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 ***** (the “Taxpayer”) for the taxable years ended December 31, 2011 through 2013
FACTS
According to pass-through entity returns filed by ***** a Virginia Subchapter S corporation (VSC), the Taxpayer was listed as a shareholder for the 2011 through 2013 taxable years. Under audit, the Department issued individual income tax assessments against the Taxpayer, a Virginia resident, based on income passed through from VSC and information obtained from the Internal Revenue Service (IRS).
The Taxpayer contested the audit and provided Virginia income tax returns he filed reporting no income and no tax liability. Because the Taxpayer's returns could not be reconciled to the pass through income reported by VSC, no adjustments were made to the assessments. The Taxpayer filed an appeal, contending VSC engaged in no activity, the information obtained from the IRS is erroneous and his individual income tax returns should be accepted as filed.
DETERMINATION
Income of VSC
The Taxpayer argues that VSC had no exercisable activity for state or federal income tax purposes. VSC, however, remitted income tax withholding for employees within Virginia and reported income and expenses on both federal Subchapter S return and Virginia pass-through entity (PTE) returns. The Taxpayer asserts the corporate officer filed the returns based on assumptions and misinterpretation of tax statutes.
Under Va. Code § 58.1-392, pass-through entities (including S corporations, partnerships and limited liability companies) doing business in Virginia or having income from Virginia sources are required to file a return with the Department. Pursuant to Va. Code § 58.1-302, an entity has income from Virginia sources if it has any items of income, gain, loss and deduction attributable to ownership in real or tangible personal property in Virginia or resulting from a business, trade, profession or occupation carried on in Virginia. Generally, a pass-through entity will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the applicable apportionment factors positive. The Department finds it unlikely that VSC would maintain employees for consecutive years, absent economic business activity.
Conformity
The Taxpayer also requested an explanation of the calculation of the Virginal tax liability. 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 the 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.
Further, Va. Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Va. Code § 58.1-321. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will help in determining the resident's tax liability. See Public Document (P.D.) 14-33 (3/7/2014) and P.D. 15-49 (4/3/2015).
In this case, federal records show that that Taxpayer received business income from two entities located in ***** (State A) in addition to his proportional share of income from VSC. The Taxpayer contends that all of the financial statements were erroneous, and he filed amended statements to support his claim. Absent objective evidence of FAGI reported by the Taxpayer, the Department will consider the information provided by the IRS to be correct. Because the Department's assessment was based on the information received from the IRS, the Taxpayer must contact the IRS to dispute the discrepancies in his income. See P.D. 15-204 (10/20/2015).
CONCLUSION
The claim that the Taxpayer's income was not subject to Virginia taxation has no basis in fact or Virginia law. An individual who fails to file Virginia income tax returns based solely on such claims has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308.
Based on the applicable law cited above and the information presented, the Department finds no basis on which to abate 2011 through 2013 assessments. Accordingly, the assessments are upheld. An updated bill will be mailed shortly, which will include accrued interest. Payment of the outstanding balance of the bill should be made within 30 days of the bill date in order to avoid the accrual of additional 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/1-6211358069D