July 9, 2024
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond 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, 2020, through 2022.
FACTS
The Taxpayers filed Virginia resident income tax returns for the 2020 through 2022 taxable years, claiming itemized deductions reportable on federal Schedule A. The returns were processed, and refunds were issued. Under audit, the Department requested documentation to support the itemized deductions. Based on the documentation provided, the Department adjusted the deductions and issued assessments. The Taxpayers filed an application for correction, contending that they should be able to keep the refunds issued because they were unaware of the requirement to provide appraisals for charitable donations of goods over $5,000 and they are now unable to obtain them because of the timing of the audit.
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 Chapter 3 of Title 58.1 of the Code of Virginia.
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 rarely a 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.
Responsibilities of Taxpayers
The Taxpayers contend that they should be able to keep the refunds issued because they were unaware of the documentation requirements for charitable contributions over $5,000 and they are no longer able to obtain such documentation because of the timing of the audit.
Virginia’s taxing system is largely based on the theory of self-assessment. An individual computes their own income and tax, fills out their own return, files the return, and pays the tax indicated. Virginia has implemented a self-assessment system based on the federal system because it is less intrusive upon individuals, simpler, and less costly to administer. Consequently, individuals are responsible for the information provided on income tax returns.
The fact that the Taxpayers failed to maintain records to substantiate their itemized deductions as required by the IRC and Virginia law in no way limits the Department’s authority to audit the Taxpayers’ returns, deny any unsubstantiated deductions, and issue assessments for additional tax due. Further, the Department generally has three years from the last day for timely filing a return in which it may audit the return and issue an assessment. See Virginia Code § 58.1-312. In this case, all of the assessments were issued before the expiration of each respective taxable year’s statute of limitations to make an assessment.
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 the related federal regulations.
The auditor requested that the Taxpayers provide documentation supporting the deductions claimed. The request clearly indicated the documentation required to substantiate each deduction. Deductions for property taxes, charitable contributions, and other expenses are allowable only when payment can be substantiated through items such as receipts or cancelled checks. See Public Document (P.D.) 14-155 (8/28/2014) and P.D. 19-78 (7/29/2019). In the case of certain charitable contributions, further substantiation requirements apply, as discussed below.
Although the Taxpayers’ application for correction specifically addressed the charitable contributions of over $5,000, the Taxpayers also requested that they be allowed to keep the full amount of the refunds issued. Thus, they are effectively contesting all of the adjustments. As such, every category of itemized deductions the Department adjusted will be addressed.
Personal Property Taxes
In addition to state and local income taxes, IRC § 164 provides a deduction for personal property taxes paid for business and non-business purposes. Personal property taxes can be substantiated through a copy of the tax bill along with a receipt or cancelled check. The Taxpayers have not provided a copy of their tax bills, cancelled checks, or receipts showing the payment of their personal property taxes. The deductions for these taxes, therefore, were properly denied.
Real Estate Taxes and Home Mortgage Interest
IRC § 164 provides a deduction for certain state and local real estate taxes paid for business and non-business purposes. Before a taxpayer may claim a deduction for taxes paid, the taxpayer must show that they actually paid the tax. Additionally, IRC § 163(a) allows taxpayers to deduct mortgage interest paid on a principal residence. Real estate taxes and home mortgage interest can be substantiated through Form 1098 or through items such as a receipt or cancelled check. Based on the Form 1098s that were provided by the Taxpayers, the mortgage interest and real estate tax deductions were reduced for the 2020 taxable year. The mortgage interest and real estate tax deductions reported on the 2021 and 2022 Virginia returns were allowed as reported.
Charitable Deductions
Under IRC § 170(a), a taxpayer may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year. The Taxpayers claimed deductions for the donations of cash and tangible personal property for each of the taxable years at issue. The Department disallowed the deduction of all the charitable donations.
Cash Donations
Treas. Reg. § 1.170A-13(a)(1)(ii) provides that a contribution of money may be substantiated by a receipt from the donee charitable organization showing the name of the donee, the date of the contribution, and the amount of the contribution. A letter or other communication from the donee charitable organization acknowledging receipt of a contribution and showing the date and amount of the contribution constitutes a receipt. Id.
The Taxpayers reported cash donations to a church for each of the taxable years at issue. They have provided two letters from the church confirming cash donations, one for the 2020 and 2021 taxable years, and one for the 2022 taxable year. These letters constitute valid receipts to substantiate donations. The amount of the cash donations reported on the returns, however, exceeded the amount of the donations reported on the letters from the church. The Taxpayers have not provided any documentation substantiating the balance of the cash donations.
Tangible Personal Property Donations
Under federal regulations, substantiation requirements for gifts of property other than money vary depending on the amount of the deduction claimed. The regulations set up three tiers of deductions, for amounts up to and including $500, greater than $500 but less than $5,000, and greater than $5,000, and require greater substantiation for each tier. See Treas. Reg. § 1.170A-13. For purposes of determining the applicable threshold values, property and all similar items of property donated to one or more donees are treated as one property. See IRC § 170(f)(11)(F).
Under Treas. Reg. § 1.170A-13(b)(1), for items valued below $500, a taxpayer need only have a receipt from the donee containing the name and address of the donee, the date and place of the contribution, and a reasonably detailed description of the property donated.
Treas. Reg. § 1.170A-13(b)(3) provides that in addition to the receipt required by Treas. Reg. § 1.170A-13(b)(1), the donation of non-cash property with a value between $500 and $5,000 necessitates a written record of the manner and approximate date of acquisition and the cost basis.
Under Treas. Reg. § 1.170A-13(c)(2), if a taxpayer claims a deduction for property valued in excess of $5,000, the taxpayer generally must obtain a qualified appraisal and attach an appraisal summary to their return.
The Taxpayers claimed deductions for the donation of computer equipment, clothing, furniture, tools, and food. It appears that nearly every category of property exceeded the $500 threshold and some exceeded the $5,000 threshold. The Taxpayers provided a number of receipts from a charity that listed the items and dates of various donations but did not include the monetary value of such contributions. In addition, the only information showing the date of acquisition and cost basis for the donations were listed on the federal Forms 8283. Mere statements on the form without underlying documentation in support are insufficient to substantiate the deductions. Further, no appraisals were submitted for any of the donations that exceeded $5,000.
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 Taxpayers to show that the assessments were erroneous.
Because the Taxpayers have provided documentation to substantiate a portion of the cash donations to charity claimed on their 2020 through 2022 returns, we are remanding the case back to the Department’s auditor to allow deductions for the donations as indicated on the enclosed schedule and issue revised assessments accordingly. Otherwise, the disallowance of the remainder of the deductions is upheld.
The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
Attachment
AR/4822.B