Was a nonresident retiree entitled to interest after Virginia refunded tax that his former employer had wrongly withheld from retirement pay?

Plain-English summary

Virginia refunded the tax mistakenly withheld from a nonresident's retirement pay but denied interest because every refund was issued within the statutory processing window. The former employer withheld Virginia income tax for 2007 through 2012 even though the retiree lived in another state and was not required to file Virginia returns for those years.

After discovering the error, the taxpayer filed returns and received all of the withheld tax back. For refund-interest purposes, however, Virginia law deemed withholding and estimated payments to have been paid on the date the return was filed—not when the employer originally remitted the money.

The taxpayer filed paper returns for 2007 through 2010, and Virginia issued those refunds within 60 days. He filed electronically for 2011 and 2012, and those refunds were issued within 30 days. Because those were the statutory interest-free periods, the Department could not add refund interest.

Virginia also rejected the claim that it should have recognized the erroneous withholding on its own. The ruling described the income-tax system as self-assessed and said taxpayers must retain and review suitable records to determine their proper liability.

What this means for you

• Wrong withholding can be refundable without generating refund interest.
• For the rule applied here, withholding was deemed paid when the return was filed.
• The relevant refund window was 30 days for electronic returns and 60 days for paper returns.
• Review retirement statements and withholding promptly rather than expecting the Department to detect an employer's mistake.

Common questions

Q: Did the retiree get the withheld tax back?
A: Yes. Virginia refunded all income tax paid for 2007 through 2012.

Q: Why was there no interest for the years the money had been withheld?
A: The statute treated the tax as paid when each return was filed, regardless of how long the employer had previously withheld it.

Q: Were the refunds timely?
A: Yes. The paper-return refunds were issued within 60 days and the electronic-return refunds within 30 days.

Q: Was Virginia required to spot the employer's mistake first?
A: No. The ruling placed responsibility on the taxpayer to retain and review records under the self-assessment system.

Citations and references

• Va. Code §§ 58.1-102, 58.1-301, 58.1-322, 58.1-1821, 58.1-1824, and 58.1-1833 B and C 1.

Subject

Taxpayer must retain/review records, documents to determine income tax liability

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-135

Original ruling text

July 16, 2013

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of interest on overpayments of withholding tax made on behalf of * (the "Taxpayer") by his former employer for the taxable years ended December 31, 2007 through 2012.

FACTS

The Taxpayer, a resident of * (State A), was not required to file Virginia income tax returns for the 2007 through 2012 taxable years. The former employer, however, withheld Virginia income tax from his retirement pay. Upon discovery of the error, the Taxpayer filed Virginia income tax returns requesting a refund of the income tax paid for the taxable years at issue. The Department processed the returns and issued refunds of all income tax paid. The Taxpayer has requested that interest be issued on the refunds. He contends that the Department should have known that the tax was erroneously withheld and that the Commonwealth had the use of his money.

DETERMINATION

Protective Claim

Pursuant to the authority granted the Tax Commissioner under Va. Code § 58.1­1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.

Refund Interest

Virginia Code § 58.1-1833 authorizes the Department to issue interest on overpayments of tax under certain circumstances. For individual income tax returns, interest accrues on the amount of the overpayment, beginning (i) 30 days after payment of tax if the income tax return is filed via electronic means; or (ii) 60 days after payment of tax if the income tax return is filed using some other means ( i.e. , United States Postal Service). See Va. Code § 58.1-1833 B.

Pursuant to Va. Code § 58.1-1833 C 1, an individual who has had income tax withheld from wages, retirement benefits, or other forms of compensation or made estimated payments toward their liability, is deemed to have made payment of their income tax liability for a taxable year "on the day on which the return for such year's income was filed." Therefore, any amounts withheld or estimated payments paid to the Department are considered paid at the time a return is filed regardless of the length of time tax is withheld or estimated tax paid prior to the filing of the return. In accordance with Virginia law, the amounts withheld from the Taxpayer's retirement pay were not considered to have been payments toward his income tax liability until he filed his Virginia income tax returns.

Department records show that the Taxpayer's 2007 through 2010 paper Virginia income tax returns were processed and refunds issued within 60 days of the filing of said returns. The records also show that the Taxpayer's electronically filed 2011 and 2012 returns were processed and refunds issued within 30 days of their filing date. Under these circumstances, Va. Code § 58.1-1833 neither requires nor permits the Department to accrue refund interest on the overpayments incurred by the Taxpayer.

Virginia's Tax System

Virginia Code § 58.1-301 provides 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. 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 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 Va. Code § 58.1-322.

Like the federal tax regimen, Virginia's taxing system is based largely on the concept of self-assessment. A taxpayer computes his own income tax, fills-out his 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 taxpayers, simpler, and less costly to administer.

The Taxpayer argues the Department should have known that his withholding tax was erroneously remitted to the Department for the taxable years at issue. Virginia receives approximately 3.5 million individual income tax returns per year. Of these returns, approximately 130,000 are filed by nonresidents. As such, the fact that the Taxpayer was not a resident of Virginia does not negate the possibility that he may have been liable for Virginia income tax. Further, only a small portion of the individual taxpayers can be audited or reviewed annually. As such, it is incumbent upon the taxpayer to retain and review suitable records and documents to determine his proper Virginia income tax liability. See Va. Code § 58.1-102.

CONCLUSION

While I empathize with your situation, the Department is not authorized to issue refund interest on your overpayments for the 2007 through 2012 taxable years. Accordingly, I am unable to grant the Taxpayer's request for refund interest.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5351823973.B