Could a taxpayer use overpayments from 2004-2006 returns filed in December 2010 to offset 2007 tax and avoid Virginia penalty and interest?

Plain-English summary

Virginia denied the 2004-2006 refunds and upheld penalty and interest for 2007. The taxpayer filed returns for 2004 through 2009 on December 5, 2010, after the Department contacted the taxpayer about 2007.

Refund claims generally had to arrive within three years of each return's timely filing deadline. The deadlines for the 2004, 2005, and 2006 refunds expired on May 2, 2008, May 1, 2009, and May 1, 2010. The December 2010 filings were too late, so those overpayments could not support the requested refund or eliminate the 2007 balance.

The 2007 return was due May 1, 2008 but was also filed in December 2010. Virginia upheld the aggregate 30% late-filing and late-payment penalty and the required interest. The ruling described interest as compensation for the use of money due to the Commonwealth, not a penalty.

Common questions

Q: Could older overpayments be applied after their refund periods expired?
A: Not as requested here. Virginia treated the refund deadlines as controlling.

Q: Why was interest not waived with the penalties?
A: The ruling said interest was statutorily required and was not a penalty for noncompliance.

Citations and references

• Va. Code § 58.1-499(A), (D).
• Va. Code §§ 58.1-347, 58.1-351, and 58.1-1812.

Subject

Returns not timely filed refunds denied.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-126

Original ruling text

July 31, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the Department's denial of refunds claimed on Virginia individual income tax returns filed by * (the "Taxpayer") for the taxable years ended December 31, 2004 through 2006. You also seek relief from the assessment of penalty and interest issued for the taxable year ended December 31, 2007.

FACTS

The Taxpayer filed 2004 through 2009 individual income tax returns on December 5, 2010, after being contacted by the Department regarding the filing of an income tax return for the 2007 taxable year. The Department, disallowed refunds claimed for the 2004 through 2006 taxable years, issued an assessment for the 2007 taxable year, and offset refunds for the 2008 through 2010 taxable years against the balance due for 2007.

The Taxpayer paid the remainder of the assessment for the 2007 taxable year and filed an appeal, contending the 2004 through 2006 overpayments exceeded the amount of the tax due for the 2007 taxable year. Under this reasoning, the Taxpayer argues that the Department should not have assessed penalty and interest for 2007 and requests a refund of the net tax overpayment.

DETERMINATION

Statute of Limitations

Virginia Code § 58.1-499 A provides that in the case of any overpayment of any tax, whether by reason of excessive withholding, overestimating and overpaying estimated tax, or error on the part of the taxpayer, the Tax Commissioner shall order a refund of the overpayment. Virginia Code § 58.1-499 D specifies, however, in pertinent part:

No refund under this section . . . shall be made . . . whether on discovery by the Department or on written application of the taxpayer, if such discovery is not made or such written application is not received within three years from the last day prescribed by law for the timely filing of the return . . . . [Emphasis added.]

The 2004 through 2006 individual income tax returns were due on May 2, 2005 (because May 1 was on a Sunday), May 1, 2006, and May 1, 2007, respectively. The three-year statutory period for filing the returns for the purpose of receiving a refund expired for the taxable years at issue on May 2, 2008, May 1, 2009, and May 1, 2010, respectively. The returns were not filed until December 5, 2010, well after the statute of limitations had expired.

The Department is bound by the clear requirements under the law. Accordingly, your request for refund must be denied.

Penalty and Interest

Pursuant to Va. Code § 58.1-347, an individual who fails to file a return by the due date or extended due date of such return is subject to a penalty equal to 6% of the tax liability per month or fraction thereof during which such failure to file continues, not to exceed 30%, in the aggregate. In addition, Va. Code § 58.1-351 imposes a penalty equal to 6% of the assessable tax due per month or fraction thereof, not exceeding 30% in the aggregate, on an individual who does not pay his tax in full by the due date.

The due date for the 2007 individual income tax return was May 1, 2008. Because the 2007 return was not filed until December 5, 2010, the aggregate 30% penalty was appropriately applied.

In addition, Virginia Code § 58.1-1812 mandates the application of interest to any assessment of tax. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money that was properly due the Commonwealth. As such, the Department's assessment of interest for 2007 was proper under the statute.

CONCLUSION

The refunds claimed by the Taxpayer for the 2004 through 2006 taxable years were properly denied in accordance with Va. Code § 58.1-499 D. In addition, the Department correctly assessed penalty and interest for the 2007 taxable year as required under Virginia law. Accordingly, the assessment for the 2007 taxable year is upheld, and the Taxpayer's request for refund must be denied.

The Code of Virginia sections and public documents cited are available on line www.tax.virginia.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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4815053958.E