Did tax software's automatic annuity death-benefit subtraction prove that a Virginia taxpayer qualified for the refund?

Subject

The fact that a particular software program has been approved by the Department is not meant to imply its computational accuracy.

Plain-English summary

Virginia upheld the assessment even though the taxpayer's software automatically claimed the subtraction. Department approval tested whether software conformed to return-processing requirements; it did not guarantee computational accuracy.

The ruling said a qualifying annuity death-benefit subtraction required an insurance-company annuity contract, a lump-sum payment to the beneficiary, and federal taxation of the payment. It did not state which requirement the taxpayer's payment failed.

What this means for you

• Review software-generated state modifications against the statute and source documents.
• Approval for electronic filing is not a Department warranty of tax calculations.
• Preserve annuity contracts, beneficiary statements, payment-form evidence, and federal tax treatment.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(32).
• IRC §§ 72 and 101.
• Public Documents 09-36, 10-63, 13-50, and 13-149.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-27

Original ruling text

February 28, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of individual income tax paid by * (the “Taxpayer”) for the taxable year ending December 31, 2012.

FACTS

The Taxpayer claimed a subtraction on her 2012 individual income tax return for an annuity death benefit resulting from income received after the death of her husband. Under review, the Department disallowed the subtraction and issued an assessment for additional tax and interest. The Taxpayer paid the assessment and filed an appeal, contending that the tax preparation software used to complete the tax return automatically claimed the subtraction.

DETERMINATION

Death Benefit Subtraction

Virginia Code § 58.1-301 provides that the 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 the 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.

Under IRC § 101 (as amended in 2006), life insurance benefit payments paid by reason of the death of the insured are exempt from federal taxation, and thus exempt from Virginia taxation. IRC § 72 (as amended in 2013), however, provides that a portion of the death benefits from an annuity, including life insurance contracts, are taxable. Because death benefits were treated dissimilarly for income tax purposes, the General Assembly sought to provide relief to individuals who are unable to obtain standard life insurance. As a result, the death benefits subtraction for certain annuity contract payments was enacted. See Public Document (P.D.) 13-149 (7/31/2013).

Pursuant to Va. Code § 58.1-322 C 32, a taxpayer is allowed a subtraction of "the death benefit payments from an annuity contract that is received by a beneficiary of such contract and is subject to federal income taxation." In order to qualify for the subtraction, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level. See P.D. 09-36 (3/31/2009) and P.D. 10-63 (5/7/2010). In 2012, the General Assembly enacted legislation to clarify the intent of the law regarding the subtraction of annuity death benefits by amending Va. Code § 58.1-322 C 32 to codify the Department's policy implemented in P.D. 09-36. See Chapter 305, Acts of Assembly .

Tax Preparation Software

The Taxpayer contends that the tax software used to prepare her return automatically computed the subtraction. She indicates that she also reported death benefit payments on her 2010 and 2011 tax returns while using the same software, but no subtraction was allowed.

Tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department is not meant to imply its computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department's processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software. See P.D. 13-50 (4/24/2013).

CONCLUSION

Based on this determination, the assessment for the 2012 taxable year is upheld. Because the Taxpayer has satisfied the assessment, no further action is required.

The Code of Virginia sections and public documents 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 about this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5534219352.B