Were 1993 amended Virginia returns timely when IRS adjustments for 1984-1989 continued after the Department's claimed final date?

Subject

Continuing IRS adjustments made old amended returns timely, while setoff counted as refund

Plain-English summary

Virginia accepted the taxpayers' October 1993 amended returns for 1984 through 1989 because the federal audits were still producing adjustments after the Department's claimed 1992 final date. The historical rule allowed a refund return within three years of the original due date or, if later, within 90 days of a final federal change.

IRS notices from 1996 showed that overpayments for several years increased after the 1992 revenue-agent reports. Virginia's regulation recognized that a tax year could have more than one final federal determination, including later IRS refunds, reports, agreements, or court decisions.

Whether the relevant final date was in 1994 or 1996, the taxpayers had already filed the Virginia amendments in October 1993. Virginia therefore treated them as timely and directed processing of refunds as appropriate, limited to the federal adjustments actually reported on those returns.

The 2004 issue had a different result. Virginia had applied that year's overpayment to an outstanding 1981 assessment. Under the debt-setoff regulation, a refund transferred to a claimant agency through final setoff was deemed paid to the taxpayers, so no additional 2004 refund was due on that ground.

What this means for you

• A federal audit may create more than one final determination for the same tax year.
• Preserve IRS reports, closing documents, later adjustment notices, and refund records.
• Virginia refund deadlines after federal changes depend on the law for the relevant period.
• A refund intercepted for a valid debt can be legally treated as paid.

Common questions

When were the amended Virginia returns filed?

October 1993.

Why were they timely?

Later IRS documents showed continued adjustments, so the relevant final federal determinations occurred after the Virginia filings.

What happened to the 2004 refund?

It had been applied to a 1981 assessment and was deemed paid through debt setoff.

Citations and references

• Va. Code § 58.1-1823.
• 23 VAC 10-20-180(B).
• 1998 Va. Acts chs. 358 and 374.
• Va. Code § 58.1-520 et seq.
• 23 VAC 10-110-60(B)(2).
• Virginia Public Document 06-42.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-59

Original ruling text

May 7, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter concerning the denial of Virginia individual income tax refunds for * (the "Taxpayers") for the taxable years ended December 31, 1984 through 1989 and 2004. I apologize for the delay in this response.

FACTS

The Taxpayers were audited by the Internal Revenue Service (IRS) for the 1984 through 1989 taxable years. The Taxpayers filed amended Virginia income tax returns reflecting these changes in October 1993.

The Department concluded that the federal audits were finalized on May 1, 1992 and denied the refunds because the returns were filed beyond the period of limitations. In April 2008, after numerous communications, the Department advised the Taxpayers they could file an appeal under Va. Code § 58.1-1821.

In May 2008, the Taxpayers filed an appeal contending that the IRS audits were not final until June 1994, and the amended Virginia returns were timely filed. In the alternative, the Taxpayers have provided notices dated in 1996 from the IRS concerning the final dispositions of the overpayments resulting from the audits for the 1984 through 1989 taxable years.

The Taxpayers also timely filed a Virginia individual income tax return for the 2004 taxable year, but did not receive the refund claimed. Instead, the Department applied the refund to an outstanding 1981 income tax assessment. The Taxpayers believe they are still due a refund of the 2004 taxable year.

DETERMINATION

1984 through 1989

Pursuant to Va. Code § 58.1-1823, as enacted at the time the audits for the 1984 through 1989 taxable years took place, an amended return claiming a refund had to be filed within three years of the due date of the return or, if later, within 90 days from the final determination of a change in the taxpayer's federal taxable income. It should be noted that, in 1998, the General Assembly increased the period of limitation for filing an amended return to claim a refund as a result of a change in federal tax liability from 90 days to one year. (See Chapters 358 and 374, 1998 Acts of Assembly ).

In the Taxpayers' case, the amended returns claiming refunds were filed more than three years after the due date of the returns. Consequently, a refund could only be issued if they were filed within 90 days from the date of the final IRS determination.

Under appeal, the Taxpayers have provided additional documentation with respect to the taxable years included in the RARs issued in 1992. While the letters signed by the IRS district director in 1994 are not conclusive, the IRS notices issued in 1996 show that the amount of the overpayments for several of the taxable years at issue had been increased from the 1992 RARs. As such, it would appear that the audits for the 1984 through 1989 taxable years were still under review by the IRS subsequent to the issuance of the RARs dated in 1992.

The Department acknowledges that not all federal determinations are final. Under Title 23 of the Virginia Administrative Code (VAC) 10-20-180 B, a final determination of a change in liability for the federal tax includes, with certain exceptions, the refund by the IRS of any federal income or estate tax. A final determination may also include a copy of an RAR, Form 870, 90-day (letter, closing agreement, or court decision. Thus, under Title 23 VAC 10-20-180 B, a taxpayer may have more than one final determination for a given taxable year.

Based on the information provided, the IRS made further adjustments to some of the taxable years included in the RAR issued in 1992. Thus, it is reasonable to conclude that the IRS was considering additional adjustments for those taxable years after the RAR was issued.

The Taxpayers' amended Virginia income tax returns were filed in October 1993. Whether the Department considers the final determination date to be in 1994 or 1996, the Taxpayers met their burden of reporting the changes in federal income tax liability prior to the expiration of the 90-day limitations period.

Accordingly, the amended returns filed in 1993 for the 1984 through 1989 taxable years were filed within the period allowed by Virginia law. These returns will be processed and refunds will be issued, as appropriate. Any such refunds will be limited to those federal adjustments reported on the amended returns.

2004

The Taxpayers contend that the Department did not issue a refund for the 2004 taxable year. The overpayment computed on the Taxpayer's return was held in payment of an assessment for the 1981 taxable year as provided under Va. Code § 58.1-520 et seq .

Pursuant to Title 23 VAC 10-110-60 B 2, "a tax refund which has been transmitted to a claimant agency pursuant to a final debt set-off is deemed to have been paid to the taxpayer." As such, the portion of the overpayment claimed on the 2004 original return that was withheld and remitted to the Commonwealth is deemed to be a refund paid to the Taxpayers. See Public Document (P.D.) 06-42 (4/10/2006).

The Code of Virginia sections, regulations, and public document cited are available on-line www.tax.virginiai.gov in the Tax Policy Library 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,

Janie E. Bowen

Tax Commissioner

AR/1-2372788865.E