How did Virginia resolve estimated withholding assessments when an employer had missing returns and incomplete payroll records?

Plain-English summary

Virginia adjusted the employer's 2009 withholding assessment but required more proof before changing the 2010 and 2011 assessments. Missing returns and payroll records allowed the Department to estimate liability from available information.

The employer failed to file Virginia withholding returns from July 2009 through December 2011. Va. Code §§ 58.1-460 and 58.1-461 required employers paying wages for Virginia services to withhold Virginia income tax. Sections 58.1-102 and 58.1-103 required suitable records, and § 58.1-111 allowed estimated assessments when the employer did not provide them.

For 2009, the employer supplied federal Forms W-2 covering the unreported third and fourth quarters. The Department sent that information to the auditor and directed an adjustment.

For 2010, the employer said it lacked payroll documents for October through December. The Department had an annual Virginia withholding summary and W-2s filed by the employer, and the quarterly and reconciliation assessments were based on that filing. No change would be made without additional evidence, though the employer received one final opportunity to provide it.

For 2011, the employer said it ceased operations in November 2010, closed the business in May 2011, entered bankruptcy in July 2011, and had filed first- and second-quarter withholding returns. Virginia said it appeared withholding was no longer required after the second quarter, but required the 2011 annual or final withholding summary and W-2s to verify that conclusion.

The requested 2010 and 2011 information had to arrive within 30 days or the assessments would be upheld and immediately due.

What this means for you

• Filing gaps allow the Department to estimate withholding from returns and information already available.
• Annual reconciliations and W-2s can both support and constrain an appeal.
• Business closure or bankruptcy does not replace a final withholding reconciliation.
• Preserve payroll records even when operations are winding down.

Common questions

Q: Was the 2009 assessment left unchanged?
A: No. The Department directed an adjustment based on the W-2 records supplied.

Q: Why did the 2010 assessments remain?
A: They were based on the employer's own annual summary, and no better evidence had been provided.

Q: Did Virginia accept that the business stopped withholding in 2011?
A: Only tentatively. The employer still had to provide the final annual summary and W-2s.

Citations and references

• Va. Code §§ 58.1-102, 58.1-103, 58.1-111, 58.1-460, and 58.1-461.
• IRC §§ 3401(a), 3402, and 3405, incorporated by the Virginia wage definition discussed in the ruling.

Subject

Taxpayer failed to file Virginia withholding tax returns

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-11

Original ruling text

January 12, 2015

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter submitted on behalf of your client, * (the "Taxpayer"), in which you seek correction of the withholding tax assessments issued for the taxable periods January 2009 through December 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer failed to file Virginia withholding tax returns from July 2009 through December 2011. Under review, the Department issued assessments for the taxable periods January 2009 through December 2011. The Taxpayer has appealed each assessment for various reasons, which are addressed separately below.

DETERMINATION

Withholding Tax

Virginia Code § 58.1-461 requires that every employer who pays wages to employees must withhold Virginia income tax from such employees' wages. Virginia Code § 58.1-460 defines "wages" for Virginia purposes as wages as defined in Internal Revenue Code (IRC) §§ 3401(a), 3402 and 3405. Virginia Code § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages".

Estimated Assessments

Virginia Code § 58.1-102 requires taxpayers to maintain suitable records that substantiate information required by the Department. In conducting an audit, the Department may examine a taxpayer's accounting records when possible to determine the nature of income and expense items. See Va. Code § 58.1-103. Because the Taxpayer failed to provide the requisite records, the Department estimated the Taxpayer's withholding tax liability pursuant to Va. Code § 58.1-111.

2009

The Taxpayer failed to report employee withholding for the third and fourth quarters of 2009. The Taxpayer appealed the 2009 assessment, claiming it has provided sufficient records to accurately reflect its Virginia withholding and provided copies of the 2009 Federal Form W-2s issued to its employees for the 2009. The information will be forwarded to the auditor and the 2009 assessment will be adjusted accordingly.

2010

The Taxpayer contends that it has insufficient payroll documents to reconstruct the withholding records from October 2010 to December 2010 and questions the Department's basis for the 2010 assessments. The Department's records show that the Taxpayer filed an Employer's Annual or Final Summary of Virginia Income Tax Withheld (copy enclosed) including Form W-2s for 2010. The assessments are based on this return filed by the Taxpayer. Without additional evidence from the Taxpayer, no adjustments can be made to the four quarterly assessments and the annual reconciliation assessment.

2011

The Taxpayer filed first and second quarter withholding returns in 2011. The Department issued an assessment for the remainder of the year based on available information.

The Taxpayer contends it ceased operations in November 2010 and closed out the business in May 2011. The Taxpayer filed bankruptcy in July 2011 and filed a final corporate income tax return for the 2011 taxable year in 2012.

CONCLUSION

In accordance with the documentation provided with the appeal, the Department will make the appropriate adjustments to the 2009 assessment. A revised bill will be issued shortly.

For 2010, the assessments are based on information previously submitted by the Taxpayer. However, the Taxpayer will be granted one last opportunity to provide the information required to correct the withholding tax liability.

Based on the information provided, it appears the Taxpayer was no longer required to withhold individual income tax after the second quarter of 2011. In order to verify this, the Department requests the Taxpayer provide a 2011 Employer's Annual or Final Summary of Virginia Income Tax Withheld, including Form W-2s.

The requested information for 2010 and 2011 should be provided within 30 days from the date of this letter to: Virginia Department of Taxation, Appeals and Rulings, Attention: *, Post Office Box 27203, Richmond, Virginia 23261-7203. If not received within the time granted, the assessments will be upheld and become immediately due and payable

The Code of Virginia sections 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/1-5318428951.D