Would Virginia abate tax when a taxpayer reasonably relied on incorrect written Department advice about a death-benefit subtraction?

Subject

The Department's representative, erroneously advised the Taxpayer in writing that she was eligible for the subtraction. which she was not

Plain-English summary

A Virginia resident claimed the state's subtraction for death-benefit payments after a Department representative told her through the written Live Chat system that she qualified. The Department later concluded that the recurring payments did not satisfy its requirements for the subtraction.

Virginia law nevertheless requires abatement when a taxpayer reasonably relies on binding written advice from an authorized Department representative, provided the taxpayer made a specific request, supplied adequate and accurate facts, and the relevant facts did not change.

The taxpayer's request disclosed that she had received the payments since 1999, yet the representative still approved the subtraction. The Department therefore abated the 2012 assessment and said the same advice could reasonably have supported the 2013 and 2014 returns.

Once an auditor notified the taxpayer in 2015 that the earlier advice was wrong, she could no longer rely on it for the 2015 return.

Citations and references

• Va. Code §§ 58.1-322 C 32, 58.1-1835, 58.1-1845, and 58.1-213.
• P.D. 09-36, P.D. 10-63, P.D. 12-76, and P.D. 13-229.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-160

Original ruling text

August 5, 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, 2012.

FACTS

The Taxpayer, a resident of Virginia, filed a 2012 Virginia individual income tax return and claimed a subtraction for death benefit payments. Under review, the Department disallowed the subtraction and issued an assessment. The Taxpayer filed an appeal, contending she relied on erroneous written advice provided by a Virginia tax official.

DETERMINATION

Virginia Code § 58.1-322 C 32 provides a subtraction of death benefit payments from an annuity contract that is received by a beneficiary of such contract and is subject to federal income tax. In order to qualify for the subtraction, the death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level. See Public Document (P.D.) 09-36 (3/31/2009), P.D. 10-63 (5/7/2010), and P.D. 12-76 (5/9/2012).

The Taxpayer contacted the Department in 2010 through its “Live Chat” messaging program to determine if she was eligible to claim the death benefit subtraction. The Taxpayer explained that she had been receiving the benefit payments since 1999. According to the Live Chat Transcript, the Department's representative advised the Taxpayer she could claim the subtraction.

Virginia Code § 58.1-1835 provides that the Department must abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

2. T he portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

3. The facts of the case described in the written advice and the request thereof are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

Furthermore, Va. Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. Subsection 4 sets forth one of the guaranteed rights is for:

The right to abatement of tax, interest and penalties in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.

Based on the above statutory provisions, the erroneous advice must be reasonably relied upon by a taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision. See Public Document (P.D.) 13-229 (12/18/2013).

In this case, the Taxpayer made a specific request concerning the death benefit subtraction. The facts presented by the Taxpayer specifically contradict the Department's policy, as articulated in P.D. 09-36, with regard to the type of payments that qualify for the subtraction. Regardless of these facts, the Department's representative, duly authorized pursuant to Va. Code § 58.1-213, advised the Taxpayer in writing that she was eligible for the subtraction. Because such advice could have been reasonably relied upon to claim the subtraction for the 2012 taxable year, the Department will abate the 2012 assessment.

Further, the Taxpayer could have reasonably relied on the written advice for the 2013 and 2014 taxable years as well. However, she was contacted by the Department's auditor in 2015 raising questions regarding her eligibility for the death benefit subtraction. At this time, the Taxpayer was notified that the Department's previous advice was erroneous and could no longer be relied upon to claim the subtraction. If the Taxpayer claimed the subtraction on her 2015 return, she should review her 2015 return to determine if she is eligible for the subtraction pursuant to the Department's policy.

The Code of Virginia sections and public documents 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/1-6229124042.D