The ruling was announced a year ago but families across Virginia are just now receiving greetings. Based upon Tax Commissioner Janie Bowen’s interpretation of the verb “account,” a disproportionate number of military families will be penalized and pay higher state tax bills. Good job, Bob. The troops salute you.
Here’s the short of it: in order to claim your actual expenses as itemized deductions Virginia tax code requires you to account (verb) for your expenses. In many cases, military spouses must file married filing separate returns necessitating this accounting. Bowen has decided that if you pay those expenses out of a joint bank account (noun), you have not paid those expenses out of your funds; effectively making Virginia a community property state (or maybe enforcing sharia law).
In the ruling, Bowen specifically cites the Service Members Civil Relief Act as amended in 2009. Prima facie, this is enough to demonstrate that the ruling is a response to the act. Unlike other states, Virginia was quick to move to stem the loss of tax revenue that this poorly conceived and patronizing act caused. But it must have brought the attention of the green eye-shade clerks to another potential way to squeeze revenue from military families. By applying the noun form of a verb, no longer was documentation that the Internal Revenue Service accepts sufficient (lifestyle choices matter in Virginia). De facto, Virginia requires separate bank accounts for couples if they want to be treated fairly.
To add insult to injury, Virginia is looking back as far as 2006 to challenge the itemization claims of these filers. And when they tag them, there are penalties and interest that will run the revenue sky high. Absolutely no concept of ex post facto application, though they’ll claim that the meaning of “account” never changed.
Virginia resident spouses of military members who are nonresidents often find that filing separately is their only practical option. There are many similar situations with non-military couples too.
“In the case of a married couple, one of whom is a nonresident of Virginia filing separately, each spouse must account separately for items of income deductions, and exemptions. Where such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon income attributable to each.” – Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B
While in the case used as a basis for the Commissioner’s ruling there is cause to suspect error in the return in question, the ruling has been extended absurdly. In current enforcement practice, when expenses directly related to the Virginia resident’s job are claimed and the claim is accepted by the Internal Revenue Service, if the check that was written to pay the credit card bill that documents those expenses is from a joint bank account, Virginia’s position is that those expenses were not paid using the taxpayer’s funds.
“In fact, the documentation that the Taxpayer provided to the Department indicates that the deductible expenses were paid out of a bank account held jointly with her husband. As such, the payments were not made out of the Taxpayer’s funds.” – Ruling of the Tax Commissioner 10-54
In another current appeal for reconsideration of challenged deduction expenses that the Virginia taxpayer clearly incurred directly as a result of the taxpayer’s employment, the civilian spouse of a military member has been denied relief. During the review of the case, the taxpayer’s representative was told that the state has brought on new employees to enforce this ruling. On that return, that was the single adjustment claimed. However, like most military couples, the only practical way to manage finances is jointly and the expenses were paid out of their joint account.
“Don’t quote Federal law. This is state tax. Pay now or we’ll garnish” – Virginia Department of Taxation response to an appeal for time to document job expenses paid from a joint account
The state appears to have settled on an enforcement policy of denying all returns where deductions have not been allocated proportionately. In adopting a higher standard for accounting than the Internal Revenue Service, Virginia is gunning for spouses of military members. Based upon the ruling by the Commissioner, one can reasonably conclude it is political retribution for the Military Spouse Relief Act.