Does an employer's failure to withhold enough Virginia tax excuse an employee from filing a resident return and paying the remaining tax?

Subject

Employer underwithholding did not excuse the resident return

Plain-English summary

Virginia held that the employer's failure to withhold enough tax did not excuse the taxpayer from filing and paying the remaining resident income tax. The Department had received federal information, requested a response, and issued an assessment when the taxpayer did not reply or file.

Employer withholding is a payment mechanism, not a limit on the employee's tax obligation. The employee still had to report the income and pay the full liability.

Because the assessment was based on the best information available rather than an actual Virginia return, the Department gave the taxpayer 30 days to file the 2010 return. It would then adjust the assessment if the filed information justified a change.

What this means for you

• Check withholding during the year; inadequate withholding does not erase the balance due.
• File the required resident return even if the employer made a payroll error.
• Respond to Department information requests before an estimated assessment becomes final.
• A proper return can replace estimates with actual income, deductions, credits, and withholding.

Citations and references

• Va. Code §§ 58.1-301, 58.1-321, 58.1-322, 58.1-341, and 58.1-461 et seq.
• IRC § 6103(d).
• Public Document 95-119.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-233

Original ruling text

December 18, 2013

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2010.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may be required to file a Virginia individual income tax return for the 2010 taxable year. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When a response was not received, the Department issued an assessment based on available information. The Taxpayer filed an appeal, contending that he should not be liable for the full assessment amount because his employer was negligent in failing to withhold enough Virginia income taxes.

DETERMINATION

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 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 Va. Code § 58.1-322. A resident of Virginia includes any natural person domiciled in Virginia at any time during a taxable year or who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.

Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Va. Code § 58.1-321. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes that Department to obtain information from the IRS that will enable the Department to determine the resident's tax liability.

In John M. and Alice D. Church v. Commissioner of the Internal Revenue Service , 810 F2d 1959, A.F.T.R.2d 87-469 (2nd Cir., 1987), the United States Court of Appeals has held that "the failure of the employer to withhold taxes, as it should have, did not lessen the taxpayers' obligation to report and pay taxes on income that they in fact received." Thus, while an employer may have been required to withhold Virginia income tax from an employee's compensation under Va. Code § 58.1-461 et seq. , the employee is responsible for reporting the income and paying the entire tax. See Public Document (P.D.) 95-119 (5/16/1995).

In this case, an assessment was issued because the Taxpayer failed to file a Virginia return and the Taxpayer did not provide any documentation indicating he was not required to file one. In addition, even if his employer failed to withhold sufficient taxes, the Taxpayer was still required to file a return to report his income and pay the balance of taxes due.

As indicated above, the assessment was made based on the best information available to the Department. The Taxpayer, however, may have additional information that more accurately reflects his Virginia income tax liability. Accordingly, the Taxpayer is hereby requested to file a Virginia individual income tax return for the 2010 taxable year to more accurately reflect his Virginia income tax liability.

The return should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. Upon receipt, the return will be reviewed and processed, and the assessment for the taxable year in question will be adjusted as warranted. If the return is not received within the time provided, the assessment will be upheld as issued and collection action will resume.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,

Craig M. Burns

Tax Commissioner

AR/1-5480754504.M