Could taxpayers recover old payments caused by a preparer's failure to claim withholding credits?

Plain-English summary

The taxpayers omitted income-tax withholding credits from their 2007 and 2008 Virginia returns. After Virginia discovered the error during an offer-in-compromise review, it refunded the amounts still permitted by the refund limitation period but refused to return older payments.

The Tax Commissioner denied the request for more refunds. The taxpayers' correspondence was not a complete appeal because it identified neither an assessment error nor supporting legal authority, and Virginia Code § 58.1-1823(iv) gave the Department no discretion to refund payments beyond the applicable two-year period.

The ruling also said reliance on a tax preparer did not shift responsibility for an accurate return away from the taxpayers. It stated that a taxpayer harmed by erroneous professional advice may have recourse against the professional, but that did not extend Virginia's refund deadline.

Common questions

Did preparer error extend the refund period? No. The Department applied the statutory deadline despite the alleged preparer mistake.

Had Virginia already issued any refunds? Yes. It refunded the amounts the Department determined were still allowable, but not older payments outside the limitation period.

Citations and references

• Va. Code §§ 58.1-1821 and 58.1-1823(iv)
• 23 VAC 10-20-165 A and D
• P.D. 17-92 and P.D. 14-101

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-125

Original ruling text

June 26, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek a refund of the overpayment of individual income tax paid by * (the “Taxpayers”) for the taxable years ended December 31, 2007 and 2008.

FACTS

The Taxpayers filed 2007 and 2008 Virginia individual income tax returns without claiming a credit for income tax withheld. The Department issued assessments and collected some of the liability through liens and offsets. In July 2017, the Taxpayers submitted an offer in compromise with the Department. While the offer in compromise was being considered, the Department discovered the mistake made by the Taxpayers and issued refunds allowable under the statute of limitations. However, portions of the payments were made beyond the statute of limitations and were not refunded to the Taxpayers. The Taxpayers now appeal, asking that the Department refund the payments that were made beyond the statute of limitations.

DETERMINATION

Appeal Requirements

Virginia Code § 58.1-1821 states, in pertinent part, that:

Any person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner. Such application shall be in the form prescribed by the Department, and shall fully set forth the grounds upon which the taxpayer relies and all facts relevant to the taxpayer's contention.

Title 23 of the Virginia Administrative Code (VAC) 10-20-165 A defines a complete appeal as “an administrative appeal containing sufficient information as prescribed in subsection D of this section, so that the grounds upon which the taxpayer relies in contesting an assessment are fully set forth to allow the Tax Commissioner to make an informed final determination.”

Title 23 VAC 10-20-165 D provides that:

1. In order to be complete, an administrative appeal shall contain the following: ... (f) A statement ... setting forth each alleged error in the assessment, the grounds upon which the taxpayer relies and all facts relevant to the taxpayer's contention; and (g) Controlling legal authority (statutes, regulations, rulings of the Tax Commissioner, court decisions, etc.) upon which the taxpayer's position is based.

In this instance, the correspondence filed by the Taxpayers does not constitute a complete appeal. The appeal neither alleges any errors in the assessment, nor provides any legal authority upon which the Taxpayers’ position is based. Because the Taxpayers have not alleged any grounds upon which the Department may act, the appeal must be denied as incomplete.

Statute of Limitations

Regardless of the appeal requirements, the Taxpayers’ payments are beyond the statute of limitations allowed for a refund. Under Virginia Code § 58.1-1823 (iv), a taxpayer has two years from the payment of an assessment to file an amended return, provided that the amended return raises issues relating solely to such assessment and the refund does not exceed the amount of such payment. Here, the Department issued refunds as permitted. However, the statutes are clear and do not provide any discretion to allow for a refund beyond the statute of limitations. Accordingly, the Department cannot grant the Taxpayers' request for an additional income tax refund for the 2007 and 2008 taxable years. See Public Document (P.D.) 17-92 (6/9/2017).

Preparer Liability

The Taxpayers allege that their tax preparer caused the improper assessment by erroneously failing to give credit for income tax withheld. A taxpayer's reliance on a tax preparer, while understandable, does not relieve the taxpayer of the responsibility for ensuring that the return is filed and the information reported on the return is accurate. Further, in a situation where a taxpayer relies on an accountant, lawyer, tax preparer or other tax professional and such professional provides inaccurate or erroneous advice that results in a liability, the taxpayer has recourse against the tax professional for the error. See P.D. 14-101.

The Code of Virginia sections, regulation, 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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1593.C