Could Virginia recover a refund after a second return reported higher federal adjusted gross income?

Subject

Erroneous refund results from “a misrepresentation of a material fact by the taxpayer including inadvertent taxpayer errors," and is collectible by the Department.

Plain-English summary

An individual filed a 2014 Virginia return that showed an overpayment, and Virginia issued the resulting refund. Later that month she filed a second return reporting higher federal adjusted gross income.

Virginia treated the second filing as an amended return. The higher income increased her tax liability, and because the original refund had already been paid, the Department assessed the additional amount needed to recover it.

Virginia law treats an erroneous refund as an underpayment on the date of the refund. The applicable regulation allowed recovery within five years when the refund resulted from a material misstatement, including an inadvertent omission or incorrect entry affecting taxable income or liability.

The assessment was upheld. Because the taxpayer had already paid it, the ruling required no further action.

Citations and references

• Va. Code §§ 58.1-499 A and 58.1-312 E.
• 23 VAC 10-110-90 B 7 b.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-126

Original ruling text

June 22, 2016

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 “Taxpayer”) for the taxable year ended December 31, 2014.

FACTS

In April 2015, the Taxpayer filed a 2014 Virginia income tax return was electronically filed. A refund was issued for overpayment of tax. Later in the same month, the Taxpayer filed a second return and reported an increase in her federal adjusted gross income (FAGI). Because a refund had previously been issued, the Department issued an assessment for additional income tax. The Taxpayer paid the assessment and filed an appeal, requesting an explanation of the assessment.

DETERMINATION

Virginia Code § 58.1-499 A provides that in the case of any overpayment of any tax, whether by reason of excessive withholding, overestimating and overpaying estimated tax, or error on the part of the taxpayer, the Tax Commissioner shall order a refund of the overpayment. The Department processed two 2014 Virginia income tax returns for the Taxpayer. The initial return reported an overpayment. As required under Va. Code § 58.1-499, a refund was issued to the Taxpayer.

When the second return was filed, it was treated as an amended return. The only change reported was an increase in the Taxpayer's FAGI, which increased the Taxpayer's 2014 tax liability. Because a refund had previously been issued, the Taxpayer's withholding had to be correspondingly reduced to match the liability on the first return. When the tax due on the amended return exceeded the tax liability on the original return, the Department issued an assessment to recover the additional tax.

Virginia Code § 58.1-312 E provides that an erroneous refund is considered an underpayment of tax on the date the refund is made. Title 23 of the Virginia Administrative Code (VAC) 10-110-90 B 7 b defines the term “erroneous refund” as the issuance of a refund to which a taxpayer is not entitled. The regulation also provides that the Department may make an assessment for recovery of the amount erroneously refunded within five years from the date of the refund if the issuance of the erroneous refund results from “a misrepresentation of a material fact by the taxpayer including inadvertent taxpayer errors, e.g., the omission of information or the incorrect listing of information which has a direct bearing on the computation of Virginia taxable income or tax liability.”

Based on the foregoing authorities, the Department's assessment was properly issued and is upheld. Because the Taxpayer has paid the assessment, no further action is required.

The Code of Virginia sections and regulation 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

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AR/1-6178906794.D