Did paying the full balance with a 2014 part-year return eliminate Virginia's estimated-tax underpayment addition and accrued interest?

Subject

Insufficient withholding and installments triggered estimated-tax addition

Plain-English summary

Virginia upheld the estimated-tax underpayment addition. The couple paid the balance with their 2014 part-year return, but their withholding and estimated payments during the year were substantially below the final tax.

Virginia required timely payment through withholding or installments. The couple did not meet either exception discussed in the ruling: payments based on the prior year's tax or 90% of tax on actual or annualized current-year income.

Interest on an assessment under administrative appeal was mandatory and represented the cost of using money due to Virginia, not a discretionary penalty.

Result: both the underpayment addition and accrued interest remained due.

What this means for you

• Paying at filing time does not erase missed estimated-payment obligations.
• Test both prior-year and annualized-income safe harbors during the year.
• Part-year residence does not automatically eliminate estimated-tax rules.
• Statutory interest is distinct from a penalty and may be mandatory.

Common questions

Q: Did full payment with the return avoid the addition?

A: No. The issue was whether enough tax was paid on time throughout the year.

Q: Could Virginia waive the accrued interest?

A: No. The ruling treated it as mandatory under the cited statute.

Citations and references

• Va. Code §§ 58.1-492 and 58.1-1822.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-200

Original ruling text

October 19, 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, 2014.

FACTS

The Taxpayers, a husband and a wife, filed a joint part-year Virginia individual income tax return for the 2014 taxable year and paid the balance due with the return. Because the amount of withholding reported was substantially less than the tax due, an assessment for an addition to tax for the underpayment of estimated tax, commonly known as the estimated tax underpayment penalty, was issued. The Taxpayers appealed, contending the assessment did not provide them adequate notice as to the reason for the assessment. They also contend that they were residents of * (State A) for much of the 2014 taxable year and that they paid their taxes in full. In addition, the Taxpayers contest the assessment of accrued interest.

DETERMINATION

Addition to Tax

Virginia Code § 58.1-492 provides for an addition to tax in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year.

For individuals and fiduciaries, payments of estimated tax are required to be filed on or before May 1 of each year if the Virginia estimated tax liability will exceed withholding and tax credits by more than a $150 threshold, and may be amended at a later date to reflect any increase or decrease anticipated in the year's tax liability. If any estimated tax installments are not sufficient to cover the income tax liability as reported on the annual tax return, a taxpayer may be assessed the estimated tax underpayment penalty unless one of the following exceptions is met:

1. The total payments of estimated tax equal or exceed the tax computed, at the rates applicable to the taxable year, on the basis of the facts shown on the return for, and the law applicable to, the preceding taxable year.

2. The total payments of estimated tax equal or exceed 90% of the tax computed, at the rates applicable to the taxable year, on the basis of the actual taxable income for the months in the taxable year ending before the month in which the installment is required to be paid. The total payments of estimated tax equal or exceed 90% of the tax on the annualized taxable income for the taxable year.

For the purposes of applying these exceptions, the amount of the withholding credit allowed is deemed a payment of estimated tax. See Va. Code § 58.1-492 D 2 and Public Document (P.D.) 05-108 (7/8/2005). In this case, however, a review of the Taxpayers' 2013 and 2014 returns indicates that they did not have enough income tax withheld during the 2014 taxable year to satisfy either of these exceptions.

Accrued Interest

The application of interest to outstanding liabilities upon which an application for correction has been filed is mandatory under Va. Code § 58.1-1822. Interest is not assessed as a penalty for noncompliance, but represents a fee for the use of money that was properly due the Commonwealth. The Virginia statute is clear with regard to the assessment of interest. Therefore, your request that the Department waive any accrued interest is denied.

CONCLUSION

Because the Taxpayers failed to have sufficient income tax withheld or estimated tax paid, the Department correctly assessed the estimated tax underpayment penalty. Accordingly, the assessment is upheld, and an updated bill will be issued. The Taxpayers should remit payment for the outstanding balance as shown on the revised bill within 30 days from the date of the revised bill to avoid the accrual of additional interest.

The Code of Virginia sections 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/1-6088407132.M