Could a taxpayer avoid Virginia's estimated-tax, extension, and late-payment penalties after filing by October 15 but paying nothing?

Subject

Department appropriately applied the underpayment penalty for the failure to pay estimated taxes, the extension penalty and the late payment penalty

Plain-English summary

Virginia upheld all three penalties. The taxpayer reported no withholding, made no estimated payments, paid nothing by the May 1, 2013 original due date, and paid nothing with the return filed during the extension period in October 2013.

The unpaid estimated-tax obligation supported the addition under Va. Code § 58.1-492. Filing within the six-month extension did not extend the time to pay; because no tax was paid by the original due date, Virginia imposed the 12% extension penalty described in the ruling. The continuing unpaid return balance also produced the maximum 30% penalty under Va. Code § 58.1-351.

What this means for you

• A filing extension does not postpone the original payment deadline.
• Use withholding or timely estimated payments when expected liability exceeds the applicable threshold.
• Filing the return without paying can still trigger both extension-period and unpaid-balance penalties.

Common questions

Was the October return itself late? The ruling says it was filed before the extended due date, but the required tax had not been paid.

Why was the extension penalty 12%? The ruling applied 2% per month during the six-month extension because the original-date payment was underestimated by more than 10%.

Citations and references

• Va. Code §§ 58.1-341(A), 58.1-344, 58.1-351, and 58.1-492.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-96

Original ruling text

May 8, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you protest the penalties included in the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed a 2012 Virginia income tax return on October 15, 2013. The Taxpayer made no estimated payments, no employer withholding was reported on the return, and the Taxpayer failed to remit the tax due when the return was filed. The Department processed the return and issued an assessment. The assessment included an addition to tax for the underpayment of estimated tax, commonly known as the estimated underpayment penalty, an extension penalty and a late payment penalty. The Taxpayer appeals the assessment, contending that the penalties applied to the assessment are excessive.

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 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 exceptions enumerated in Va. Code § 58.1-492 is met. See Public Document (P.D.) 03-40 (4/1/2003). In this case, the Taxpayer's liability exceeded the threshold and he had made no estimated payments toward the liability. As such, an underpayment penalty was assessed.

Extension Penalty

Virginia Code § 58.1-341 A requires an individual to file an income tax return by May 1 of the year following the taxable year for which the return is filed. Under Va. Code § 58.1-344, taxpayers are allowed to elect to take a six month extension to file their returns. In order to elect an extension, a taxpayer must (i) file the return within the extended period, and (ii) on or before the original due date for the filing of the return, pay the full amount properly estimated as the balance of the tax due for the taxable year.

If the return is filed by the extended due date, but the amount of the tax paid by the original due day is underestimated by in excess of 10%, a penalty is imposed equal to 2% per month for each month the tax remains unpaid during the extension period. The Taxpayer failed to make any payment of tax by May 1, 2013, but showed a balance due on the return filed in October 2013. A 12% extension penalty was assessed accordingly.

In this case, the Taxpayer filed a return before the extended due date, but did not pay the full amount of the tax due. In fact, the Taxpayer made no payment toward the 2012 tax liability before the extended due date. Because the tax paid was underestimated by more than 10%, the extension penalty was assessed.

Failure to File Penalty

Pursuant to Va. Code § 58.1-351, an individual who does not pay his tax in full as shown on the face of their return is subject to a penalty of 6% of the unpaid balance per month or fraction thereof, not to exceed 30% in the aggregate. The Taxpayer failed to pay the full balance of the tax due with the return in October 2013 and no payments have yet been made toward the taxes due. Accordingly, the 30% penalty was assessed on taxes due for 2012 taxable year.

CONCLUSION

Based on this review, the Department appropriately applied the underpayment penalty for the failure to pay estimated taxes, the extension penalty and the late payment penalty. Accordingly the assessment is upheld and an updated bill will be issued. The Taxpayer 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 ***.

S incerely,

Craig M. Burns
Tax Commissioner

AR/1-5634684120.D