Can a corporation reduce late-payment penalty and interest by carrying back a later net operating loss, and is a two-year-late appeal timely?

Plain-English summary

A corporation filed its 2016 return but did not pay the balance due, so the Department issued an assessment in November 2017 that included a late-payment penalty and interest. The company later reported a 2017 net operating loss (NOL) and carried it back to 2016, which reduced the 2016 tax. It then appealed, arguing the penalty and interest were excessive because they now exceeded the reduced tax.

The appeal was too late. A taxpayer has 90 days from an assessment to appeal (Va. Code Sec. 58.1-1821), and an assessment is deemed made when the notice is mailed (Va. Code Sec. 58.1-1820). The assessment issued in November 2017; the appeal came in December 2019 -- far outside the window. That alone ended the appeal.

Even on the merits, the penalty and interest stand. The Department treats the original assessment and a later NOL carryback as separate transactions (P.D. 94-116). If the taxpayer had simply paid the assessment (tax + penalty + interest), the later carryback would have generated a refund of the tax only -- never the penalty and interest. Here the carryback functioned as a payment applied first to the tax, so the penalty and interest remained due. The remaining balance is payable, with an updated bill and a computation schedule.

What this means for you

The 90-day appeal clock is strict

You have 90 days from the mailing of an assessment to appeal (Va. Code Secs. 58.1-1821, 58.1-1820). A carryback or other later event does not restart it. Two years late is fatal.

A later NOL carryback cuts tax, not penalty and interest

Penalty and interest attach to the original unpaid assessment. A carryback that reduces the tax does not refund penalty and interest you owed -- it is treated as a separate transaction and applied first against the tax (P.D. 94-116).

Pay the assessment, then claim the carryback

Had this taxpayer paid on time, the carryback would have produced a tax refund cleanly. Leaving the assessment unpaid is what left the penalty and interest standing.

Common questions

My NOL wiped out most of the tax -- why do I still owe penalty and interest? Because they attached to the original unpaid assessment. The carryback reduces tax as a separate transaction and does not refund penalty and interest (P.D. 94-116).

Can I appeal now that I see the numbers? No. The 90-day appeal deadline ran from the November 2017 assessment; a December 2019 appeal is untimely.

Citations and references

• Va. Code Secs. 58.1-1821, 58.1-1820 -- 90-day appeal deadline; assessment deemed made when the notice is mailed.
• P.D. 94-116 -- an assessment and a later NOL carryback are separate transactions; the carryback refunds only tax, not penalty and interest.
• 23 VAC 10-20-165 -- administrative appeal procedures.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-70

Original ruling text

April 28, 2020

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the assessment of corporate income tax issued to your client,* (the “Taxpayer”), for the taxable year ended December 31, 2016.

FACTS

The Taxpayer filed a corporate income tax return for the 2016 taxable year but failed to pay the balance of tax due. As a result, an assessment was issued, which included the late payment penalty and interest. The assessment remained outstanding and unpaid. The Taxpayer reported a net operating loss (NOL) on its 2017 return and carried it back to the 2016 taxable year, reducing the tax due. The balance of penalty and interest due remained unchanged. The Taxpayer appeals, contending the assessment of penalty and interest is excessive because it exceeds the tax due.

DETERMINATION

Statute of Limitations

Virginia Code § 58.1-1821 states, “Any person assessed with any tax administered by the Department of Taxation may, within 90 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 taxpayers contention.” Pursuant to Virginia Code § 58.1-1821 and Title 23 of the Virginia Administrative Code (VAC) 10-20-165, a complete appeal must be filed with the Department within 90 days from the date of assessment. In addition, Virginia Code § 58.1-1820 provides that assessments made by the Department are deemed to be made when a written notice of assessment is mailed to a taxpayer at his last known address.

The assessment was issued in November 2017, and the appeal was not filed until December 2019, long after the 90-day time period for filing an appeal under Virginia Code § 58.1-1821 had expired. Therefore, the Taxpayer’s appeal was not timely filed.

Penalties and Interest

With respect to the penalty and interest assessed, the Department treats an assessment of tax in a given taxable year and any NOL carrybacks that may apply later as separate transactions. See Public Document (P.D.) 94-116 (4/18/1994). If the Taxpayer had paid the assessment, the NOL carryback would have resulted in a refund with applicable refund interest. Under normal circumstances, the Taxpayer would have paid the assessment, including the penalty and interest. When an NOL is carried back to reduce the tax due, a refund would have been issued for the tax only. None of the penalty and interest previously paid would have been eligible for a refund. This action was equivalent to the Department offsetting an outstanding unpaid assessment with a refund that a taxpayer claims in a later year. As such, the NOL carryback effectively becomes a payment and was applied first to reduce the total tax due, in accordance with the ordering of how the Department applies payments to reduce assessment balances.

Because the Taxpayer’s appeal was not timely filed, the appeal is denied. The remainder of the assessment, remains due and payable. A schedule is enclosed explaining how the assessment was computed.

An updated bill will be issued which will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections, regulation 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/3273.M

Related Documents

94-116