Could Virginia recover a refund after the taxpayer filed a second return showing fewer deductions and more tax due?

Subject

An erroneous refund is considered an underpayment of tax on the date the refund is made.

Plain-English summary

A taxpayer's first electronically filed 2011 Virginia return reported an overpayment, and the Department issued a refund. The next month, he filed a second return with fewer itemized deductions and a higher tax liability.

Virginia treated the second filing as an amended return. Because the revised liability exceeded the tax shown on the first return after a refund had already been paid, the Department assessed the additional amount needed to recover the erroneous refund.

State law treats an erroneous refund as an underpayment on the date of the refund. The regulation allowed assessment within five years when the refund resulted from a taxpayer's material misstatement, including an inadvertent omission or incorrect item affecting taxable income or liability. The assessment was upheld.

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. 16-152

Original ruling text

July 28, 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, 2011.

FACTS

In March 2012, the Taxpayer electronically filed his 2011 Virginia individual income tax return, and he received a refund for the overpayment of tax reported on the return. The following month, the Taxpayer filed a second return and reported a decrease in itemized deductions, which increased his Virginia income tax liability. Because a refund had previously been issued, the Department issued an assessment for additional income tax due. The Taxpayer filed an appeal, contending his return was professionally prepared and 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 the Taxpayer's original 2011 Virginia income tax return, which reported an overpayment. As required under Va. Code § 58.1-499, a refund was issued to the Taxpayer.

When the second return was filed, the Department treated it as an amended return. The second return reported a decrease in the Taxpayer's itemized deductions, which increased the Taxpayer's 2011 tax liability. The tax due on the amended return exceeded the tax liability on the first return. Because a refund had previously been issued, the Department issued an assessment to recover the additional tax due.

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. An updated bill will be issued shortly. The Taxpayer should pay the balance due within 30 days to avoid additional interest.

The Code of Virginia sections and regulations 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/1-6204032237.D