Could taxpayers restore a 2013 estimated-payment carryover by repeatedly ignoring Virginia's earlier out-of-state credit adjustments?

Subject

Prior credit adjustments reduced carryovers, but withholding refund was due

Plain-English summary

Virginia upheld the 2013 assessment after tracing earlier credit reductions through four tax years. An out-of-state credit is limited and must relate to the same year as the Virginia liability. The Department had reduced the taxpayers' 2010 credit, which reduced the overpayment carried into later years.

The taxpayers repeatedly reported the larger, unadjusted amount on later returns. Virginia corrected each carryover to match its records, leaving less estimated-payment credit for 2013.

The Department separately confirmed that the taxpayers had understated Virginia withholding on their 2012 return.

Result: the 2013 assessment stood, but Virginia would refund the difference in 2012 withholding credit.

What this means for you

• Reconcile carryforwards to finalized Department records each year.
• Appeal an adjustment when made instead of silently restoring it on later returns.
• Match out-of-state credits to tax legally due for the same year.
• Verify withholding independently from carryover disputes.

Common questions

Q: Was all relief denied?

A: No. The 2013 assessment was upheld, but a separate 2012 withholding refund was allowed.

Q: Why did the carryover keep shrinking?

A: The original 2010 out-of-state credit reduction flowed into each succeeding year's overpayment balance.

Citations and references

• Va. Code §§ 58.1-332(A), 58.1-499(C), and 58.1-480; 23 VAC 10-110-220.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-193

Original ruling text

October 7, 2015

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 "Taxpayers") for the taxable year ended December 31, 2013.

FACTS

The Taxpayers filed a Virginia resident individual income tax return for the 2013 taxable year. Under review, the Department adjusted the amount of estimated payments claimed by the Taxpayers and issued an assessment. The Taxpayers filed an appeal, contending that the amount claimed was correct because the Department failed to give them full credit for taxes paid to other states for the 2010 taxable year and because the amount of overpayment credit carried over from the 2012 taxable year should have been greater after accounting for a mistake in the withholding reported on their 2012 return.

DETERMINATION

Out-of-State Tax Credit

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). In addition, the credit is allowable only with respect to income tax liability to another state incurred within the same taxable year as the liability is incurred to Virginia. See Title 23 of the Virginia Administrative Code (VAC) 10-110-220.

In January 2012, the Department notified the Taxpayers that it had adjusted the amount of the credit they claimed for taxes paid to other states on their 2010 return. The Department has no record that the Taxpayers questioned or appealed this adjustment.

Credits to Estimated Tax

For those individuals required to make estimated income tax payments under Va. Code § 58.1-490 et seq. , Va. Code § 58.1-499 C permits an overpayment resulting from the filing of an income tax return to be credited against their estimated tax liability for the succeeding taxable year. The adjustment to the 2010 out-of-state tax credit resulted in a corresponding reduction to the overpayment credit available to be carried forward to the 2011 return. Instead of contesting the adjustments, the Taxpayers accounted for them as an unclaimed credit for the 2011 taxable year. On the Taxpayer's 2011 return, the Department reduced the reported overpayment credit to account for its adjustments to the 2010 return. As a result, the overpayment credit available to be carried over to the 2012 taxable year was reduced.

On their 2012 return, the Taxpayers again disregarded the Department's adjustment and claimed an amount exceeding the Department's records, which included the amount they had accounted for as an unclaimed credit carried over from the 2010 taxable year. The Department adjusted the total amount of estimated payments claimed to equal the overpayment credit allowed from the 2011 taxable year plus an estimated payment for the 2012 taxable year the Taxpayers had made, reducing the credit to estimated payments carried over to the 2013 taxable year.

Finally, the Department again adjusted the estimated payments claimed on the 2013 return because the Taxpayers failed to account for the previous adjustments. The Department has no record of the Taxpayers making any other estimated payments for the 2013 taxable year. As a result, the assessment was issued.

2012 Withholding

The amount of Virginia income tax withheld from a taxpayer's wages is allowed as a credit against the taxpayer's Virginia income tax liability for the taxable year. See Va. Code § 58.1-480. The information provided confirms that the Taxpayers were eligible to claim a greater amount of withholding credit than they originally reported on their 2012 return.

CONCLUSION

After carefully reviewing the returns at issue, I find that the Department's adjustment to the Taxpayers' 2013 return is correct. The enclosed schedule shows the Department's adjustments beginning with the 2010 taxable year. The Taxpayers will receive an updated bill with accrued interest to date. They should pay the balance due within 30 days to avoid the accrual of additional interest.

In addition, a refund will be issued for the difference between the amount of withholding the Taxpayers were eligible to claim for the 2012 taxable year and the amount they originally reported.

The Code of Virginia sections, regulation, and public document 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/1-6010084525.M