December 28, 2021
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 “Taxpayers”) for the taxable years ended December 31, 2018, and 2020.
FACTS
The Taxpayers filed Virginia resident income tax returns for the 2018 and 2020 taxable years (1) reflecting adjustments to federal gross income for student loan interest and employee business expenses, and (2) claiming itemized deductions for medical expenses, real estate taxes, home mortgage interest, personal property taxes, and gifts to charity. Under audit, the Department requested documentation to support the adjustments and deductions. When insufficient documentation was provided, the Department disallowed the adjustments and all the itemized deductions except the 2020 real estate taxes. As a result, the Department applied the standard deduction and issued assessments for both taxable years. The Taxpayers appeal the assessments.
DETERMINATION
Conformity
Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. 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 properly 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 Virginia Code § 58.1-322.01 through § 58.1-322.04.
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. The Department, however, 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 Virginia Code § 58.1-219.
Adjustments to Federal Gross Income
The Taxpayers claimed adjustments to federal gross income on Schedule 1 of their 2018 and 2020 federal Forms 1040. In both years, the Taxpayers claimed a deduction for student loan interest. The auditor requested a copy of Form 1098-E, Student Loan Interest Statement, to support the deduction. When the Taxpayers did not submit the requested document, the auditor disallowed the adjustment.
The Taxpayers also claimed an adjustment to federal gross income in 2020 for employee business expenses on Form 2106. For the 2020 taxable year, Form 2016 may only be used by certain individuals, including Armed Forces reservists, qualified performing artists, fee-based state or local officials, and employees with impairment-related work expenses. The Taxpayers response indicated that they were not members of the first three classes of individuals and regardless, they did not provide any documentation to support the claimed expenses. Accordingly, the auditor disallowed the adjustment.
Itemized Deductions
Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. These deductions include those for real estate taxes, home mortgage interest, personal property taxes, medical expenses and charitable contributions provided they are claimed in accordance with the IRC and its related regulations.
The auditor requested that the Taxpayers provide documentation supporting the itemized deductions claimed on their 2018 and 2020 returns. The requests clearly indicated the documentation required to substantiate each type of deduction. The Taxpayers sent copies of personal property and real estate tax bills, invoices for medical services and prescriptions, and explanation of benefit statements issued by their insurance company. The requested proof of payment was not provided for any of the deductions claimed with the exception of one $30 receipt. Substantiating payment of property taxes and medical expenses through items such as a receipts or cancelled checks is required to claim the deductions. See Public Document (P.D.) 14-155 (8/28/2014) and P.D. 19-78 (7/29/2019). The Taxpayers provided no documentation at all to support either the home mortgage interest or charitable contribution deductions.
The auditor allowed the deduction of the real estate taxes in 2020, but otherwise disallowed the itemized deductions claimed each year because the Taxpayers provided insufficient documentation. The standard deduction was allowed each year as it benefitted the Taxpayers more than the allowable itemized deductions. The Taxpayers provided no additional information regarding the itemized deductions with their appeal and made no arguments regarding how the Department erred in disallowing the deductions.
CONCLUSION
Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, 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 properly to 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.
Under the provisions of Virginia 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 that the assessment was erroneous.
Sufficient documentation has not been provided by the Taxpayers to support the adjustments to income or itemized deductions claimed on the 2018 and 2020 returns. Based on the applicable law cited above and the information presented, there is no basis to abate the Department’s assessments for the 2018 and 2020 taxable years.
I will, however, give the Taxpayers one last opportunity to provide adequate documentation. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Compliance, Desk Audit, RAP, P.O. Box 5610, Richmond, Virginia 23220-0610, Attention: *****, Tax Auditor. Upon receipt, the documentation will be reviewed and the assessment may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered correct.
The Code of Virginia sections, regulations, 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/3941.X