Can a business defeat Virginia withholding-tax estimates by saying it closed when it never notified the Department or filed the missing payroll returns?

Plain-English summary

A business did not file Virginia withholding-tax returns for August 2017 through September 2018 and did not answer the Department's request for the missing returns and payments. Virginia issued estimated assessments. The business appealed, saying it had closed in December 2017 and the estimates were too high.

The Department required records before granting relief. The business had not notified Virginia of its closure and provided no evidence establishing when operations stopped. Its failure to file also allowed Virginia to estimate the withholding liability using the best information available.

Proving a business actually closed

The ruling says responsible parties must notify the Department when a business closes. A simple notice will usually suffice if timely. When notice is late, Virginia may require supporting evidence such as:

• bank-account closing statements;
• terminated lease agreements;
• verification of a successor entity; or
• a cessation date from the State Corporation Commission.

The taxpayer supplied none of that evidence, so Virginia could not accept December 2017 as the closure date merely from the appeal statement.

Why Virginia could estimate withholding tax

Employers generally must withhold Virginia income tax from employee wages (Va. Code § 58.1-461), file withholding returns, and remit the amount withheld (Va. Code § 58.1-472).

Because the business did not file or respond, Va. Code § 58.1-111 allowed the Department to reasonably approximate liability from the best information available. The business's references to withholding tables, employee counts, and gross payroll did not establish a different amount without the required returns and records.

The 30-day cure opportunity

The Department gave the business 30 days to submit:

• proof of when it stopped operating;
• withholding returns for August through December 2017;
• annual reconciliation Form VA-16; and
• Forms W-2.

Virginia would review the records and adjust the assessments if warranted. If the business did not submit them on time, the assessments would be treated as correct and collection could resume.

What this means for you

• Tell Virginia promptly when a business closes. Otherwise filing obligations may continue on the Department's records.
• Keep objective closure evidence. A bare statement in an appeal may not eliminate post-closure estimates.
• File the missing returns to challenge the amount. Payroll figures and withholding tables must be put into the required return and reconciliation framework.
• Best-information assessments are not necessarily the final number. Timely records can support an adjustment, but silence lets the estimates stand.

Common questions

Q: Does saying my company closed automatically cancel later withholding assessments?

A: No. When closure was not timely reported, the Department may require bank, lease, successor, or State Corporation Commission documentation.

Q: What did this taxpayer need to file?

A: The August-December 2017 withholding returns, annual Form VA-16, Forms W-2, and proof of closure, all within 30 days.

Q: What happens if the documents are not submitted?

A: The estimated assessments are deemed correct and collection action may resume.

Citations and references

• Va. Code § 58.1-461 — employer withholding duty
• Va. Code § 58.1-472 — filing and remittance duty
• Va. Code § 58.1-111 — best-information assessment

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-74

Original ruling text

July 29, 2019

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will respond to your letter in which you seek correction of the withholding tax assessments issued to * (the “Taxpayer”) for the August 2017 through September 2018 taxable periods.

FACTS

The Taxpayer did not file withholding tax returns for the periods at issue. Under review, the Department requested that the Taxpayer submit the required withholding tax returns and any applicable payments. When no response was received, the Department issued assessments based on the best information available. The Taxpayer appeals, contending the business closed in December 2017, and the assessments are overstated.

DETERMINATION

Business Closing

The Taxpayer argues the assessments for the 2018 taxable periods were issued for periods after it ceased business operations. When a business closes, it is incumbent upon the responsible parties of such entity to notify the Department of its change in taxable status. Without such notification, a significant period of time may elapse before the Department becomes aware of the change in the taxpayer’s filing requirements.

Generally, a simple notification is all that is required. When an entity fails to timely notify the Department, however, additional documentation may be required. Documentation may include bank account closing statements, cessation of lease agreements, verification of a successor entity, or a cessation date from the State Corporation Commission (SCC). In this case, the Taxpayer has provided no evidence to show it was no longer in business.

Employer Withholding

Every employer who pays wages to employees must withhold Virginia income tax from such employee’s wages unless a withholding exemption certificate, in such form and containing such other information as the Department may prescribe, is furnished by the employee to the employer. See Virginia Code § 58.1-461. Additionally, every employer required to deduct and withhold from an employee’s wages must file a return and pay over to the Department the amount required to be withheld. See Virginia Code § 58.1-472.

The Taxpayer asserts that the assessments at issue are incorrect based on the withholding tables, number of employees, and gross pay. Because the Taxpayer failed to respond to the Department’s request for the required returns and applicable payments, the Department was authorized to reasonably approximate the Taxpayer’s withholding liability. See Virginia Code § 58.1-111.

CONCLUSION

If the Taxpayer continues to believe there are errors in the assessments, the Taxpayer should file the required withholding tax returns. The Taxpayer is hereby requested to provide documentation certifying when it ceased operations. In addition, the returns for the August 2017 through December 2017 taxable periods, as well as an annual withholding reconciliation form (VA-16) with forms W-2, should be filed within 30 days of the date of this letter. Upon receipt, the documents 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 correct and collection action may resume.

The Code of Virginia sections 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/1988C