Could an employer avoid Virginia withholding tax, penalties, and interest because it did not know the rule and was not notified sooner?

Subject

The fact that the Taxpayer was not immediately notified of its filing deficiency is not a sufficient basis to abate any portion of the assessed tax, penalties or interest.

Plain-English summary

An employee reported Virginia tax withheld for 2014, but the employer had filed no withholding returns or payments. When the employer also failed to register or provide requested wage records, Virginia estimated withholding liabilities for 2013 and 2014.

Virginia rejected the employer's claims that it did not know about the withholding duty and should have been notified sooner. Employers must withhold from covered wages, and Virginia's self-assessment system cannot identify every filing deficiency immediately.

Failure to withhold can trigger a 6% monthly penalty, capped at 30%, under Va. Code § 58.1-475. Interest is mandatory under Va. Code § 58.1-1812 unless the underlying tax changes.

The employer supplied no objective evidence that the estimates were wrong. Virginia nevertheless allowed 30 days to file 2013 and 2014 Forms VA-6 with the related W-2s or 1099s so the assessments could be adjusted if warranted.

Citations and references

• Va. Code §§ 58.1-460, 58.1-461, 58.1-111, 58.1-475, and 58.1-1812.
• IRC §§ 3401(a), 3402, and 3405.
• Brown v. Armistead, 27 Va. 594 (1828), and P.D. 15-199.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-35

Original ruling text

March 23, 2016

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the withholding tax assessments issued to the Taxpayer for the taxable periods January 2013 through December 2014.

FACTS

Under audit, the Department discovered that one of the Taxpayer's employees reported on his 2014 Virginia income tax return that Virginia income tax had been withheld from his wages. A review of the Department's records, however, indicated that the Taxpayer had not filed withholding tax returns or paid withholding taxes for any taxable periods from January 2014 through December 2014. The Department requested that the Taxpayer register with the Department for withholding taxes and submit copies of any federal Wage and Tax Statement (Form W-2) or Form 1099 issued to an employee for 2014. When the Taxpayer did not register or submit the documentation requested, the Department issued an assessment based on the available information. The Department also issued a separate assessment for the taxable periods January 2013 through December 2013. The Taxpayer appeals, contending it was not aware of the requirement to withhold Virginia income tax from its employee's wages. The Taxpayer also asserts that it should have been notified of the requirement sooner.

DETERMINATION

Unaware of the Law

The Supreme Court of Virginia has long accepted the principle that individuals may not avoid the legal consequences of their actions by pleading ignorance of the law. See Brown v. Armistead , 27 Va. 594, 601, 1824 Va. LEXIS 43 (1828). The Taxpayer, therefore, could not avoid the application of Virginia's withholding tax laws merely because it was not aware of them. See Public Document (P.D.) 15-199 (10/19/2015).

Withholding Tax

Virginia Code § 58.1-461 requires that every employer who pays wages to employees must withhold Virginia income tax from such employees' wages. Virginia Code § 58.1-460 defines "wages" for Virginia purposes as wages are defined in Internal Revenue Code (IRC) §§ 3401(a), 3402 and 3405. Virginia Code § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages."

Because the Taxpayer failed to respond to the Department's information request during the audit, the Department was required to reasonably approximate the Taxpayer's withholding liability. Pursuant to Va. Code § 58.1-111, the Department has the authority to estimate the amount of taxes due, based on any available information, when a Taxpayer fails to file a valid state tax return. In this case, the Taxpayer has provided no objective evidence that the Department's assessment was incorrect.

Penalties and Interest

Virginia Code § 58.1-475 provides that any employer who fails to properly withhold taxes shall be subject to a penalty equal to 6% of the amount that properly should have been withheld for each month that the failure to withhold continues, not exceeding 30% in the aggregate. In addition, the application of interest to tax underpayments is mandatory under Va. Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted.

The Taxpayer contends that penalties and interest should not have been assessed because it should have been notified immediately that it was required to make withholding payments. Like the federal tax regime, Virginia's taxing system is based largely on the theory of self-assessment. An employer must compute its withholding tax liability, fill out its own returns, and pay the tax indicated. Virginia has implemented a self-assessment system based on the federal system because it is less intrusive upon taxpayers, simpler, and less costly to administer. Because a large number of businesses are required to file withholding tax returns, only a small portion of such taxpayers can be audited or reviewed annually. As such, it is not possible for the Department to immediately notify every taxpayer of filing deficiencies.

CONCLUSION

The Taxpayer has provided no objective evidence that it was not required to file withholding tax returns and pay withholding tax, and ignorance of the law does exempt taxpayers from the application of Virginia's tax laws. In addition, the fact that the Taxpayer was not immediately notified of its filing deficiency is not a sufficient basis to abate any portion of the assessed tax, penalties or interest.

The withholding tax assessments at issue were based on the best information available to the Department. The Taxpayer, however, may have better information that represents its withholding tax liability for the taxable periods at issue. The Taxpayer, therefore, will be given one final opportunity to file a 2013 and 2014 Annual Summary of Virginia Income Tax Withheld (Form VA-6), including any employee W-2s or 1099s. Unless a waiver has been granted, the Taxpayer must file the forms electronically. The required forms are available at www.tax.virginia.gov/content/eforms.

The required forms should be filed within 30 days of the date of this letter. Upon receipt, they will be reviewed, and the assessments will be adjusted as warranted. If the forms are not submitted in the time allotted, the assessments will be deemed to be correct and collection action will resume.

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/1-6226981461.M