An erroneous W-2 -- possibly from identity theft -- inflated my Virginia income tax assessment, and correcting it means I actually overpaid; can I get that overpayment refunded even though I never filed a return for that year?

Plain-English summary

The Department received information from the IRS suggesting a taxpayer may have needed to file a Virginia individual income tax return for 2017. He hadn't filed one. The Department requested more information, and after reviewing it, determined he did need to file and issued an assessment. The taxpayer agreed he owed Virginia tax for 2017 -- he just disputed the AMOUNT, saying the assessment was too high.

Virginia's audit staff dug in and found the problem: a company ("Company A") had issued a W-2 under the taxpayer's Social Security number reporting income, but with no Virginia tax withheld -- and that W-2 turned out to be erroneous. The ruling notes several possible explanations for this kind of discrepancy, including employer keying errors, employee inaccuracies, or identity theft (with a pointer to the Federal Trade Commission's identity theft resources). The Department removed that improper W-2 income entirely from the taxpayer's account and recalculated his Virginia taxable income using only his real employer's ("Company B") reported wages and Virginia withholding.

Because Virginia generally starts the computation of Virginia taxable income with federal adjusted gross income, and the Department may assess tax at any time when no return was filed (Va. Code § 58.1-312(A)(1)), the assessment itself wasn't barred by any time limit. But once the erroneous W-2 income was stripped out, the taxpayer's real Virginia tax liability turned out to be LESS than the Virginia income tax his actual employer had withheld -- meaning he'd technically overpaid and would normally be due a refund of the difference, and the assessment was abated as a result.

That's where the taxpayer ran into a different, harder deadline. Virginia Code § 58.1-499(A) generally requires the Department to refund an overpayment, but § 58.1-499(D) cuts that off: no refund is allowed unless the overpayment is discovered (by the Department) or claimed (by the taxpayer) within THREE YEARS of the original due date for the return. The 2017 return was due May 1, 2018 under Va. Code § 58.1-341(A), making the refund deadline May 3, 2021 (since May 1, 2021 fell on a Saturday). Because the taxpayer never actually filed a 2017 Virginia return before that three-year deadline passed, the overpayment -- even though it was real, and even though the underlying assessment was fully abated -- could not be refunded.

What this means for you

Anyone who discovers a W-2 was issued under their Social Security number for income they never actually earned

Report it -- this kind of discrepancy (employer error, employee mistake, or identity theft) can be corrected by the Department once flagged, and the FTC's identity theft resources are a useful starting point if you suspect the latter. Correcting it can substantially reduce or eliminate an assessment based on incorrect income.

Taxpayers who are assessed for a year they never filed a return

Even a complete correction of the underlying facts (as happened here) won't get you a refund of any resulting overpayment if you never actually filed a return for that year within the applicable window. The three-year refund deadline runs from the ORIGINAL due date of the return, regardless of when the Department later assesses tax against you or when the underlying error is discovered.

Anyone who thinks they might be entitled to a refund from a prior tax year but hasn't filed

File your return as soon as possible. The clock for claiming a refund is separate from -- and often less forgiving than -- the Department's own unlimited time to assess tax against a non-filer. Waiting to sort out disputes before filing can permanently forfeit a refund you'd otherwise be owed.

Common questions

Q: If a fraudulent or erroneous W-2 caused my assessment to be too high, will Virginia fix it?
A: Yes -- the Department will remove improperly reported income once verified, as it did here, recalculating the assessment based on your actual, correct income and withholding.

Q: If correcting the error means I actually overpaid, will I get a refund?
A: Only if the overpayment is claimed or discovered within three years of the ORIGINAL due date of the return for that tax year. If you never filed a return and that three-year window has already closed, no refund can be issued even if the assessment itself is fully abated.

Q: Does the Department have a time limit to assess tax against someone who never filed a return?
A: No -- Va. Code § 58.1-312(A)(1) lets the Department assess tax at any time when no return was filed. It's the separate, three-year REFUND deadline under § 58.1-499(D) that can expire and block a refund, even years after an assessment issue is resolved in the taxpayer's favor.

Citations and references

• Va. Code § 58.1-301 (Virginia's Title 58.1 terminology generally conforms to the Internal Revenue Code)
• Va. Code § 58.1-312(A)(1) (Department may assess income tax at any time if no return was filed)
• Va. Code § 58.1-499(A) (Department must order a refund of any overpayment of tax)
• Va. Code § 58.1-499(D) (no refund unless discovered by the Department or claimed by the taxpayer within three years of the return's due date)
• Va. Code § 58.1-341(A) (individual income tax returns are due May 1 of the year following the tax year)

Subject

Administration : Return - Identity Theft, Statute of Limitations - Refund

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-143

Original ruling text

November 9, 2021

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, 2017.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia income tax return for the 2017 taxable year. A review of the Department’s records showed that the Taxpayer had not filed a return for that year. The Department requested additional information from the Taxpayer in order to determine if his income was taxable in Virginia. After reviewing the information provided, the Department determined that the Taxpayer was required to file a return and issued an assessment. The Taxpayer concedes that he was required to file a Virginia income tax return for 2017, but contends that the amount of the assessment exceeded the amount of his liability.

A review of the Taxpayer’s information indicates that the company, * (Company A), issued a W-2 reporting income earned by the Taxpayer under his social security number, but did not withhold any Virginia income tax.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, that the terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia . In addition, under Virginia Code § 58.1-312 A 1, the Department may assess income tax at any time if no return is filed.

Under review by our audit staff, the Department determined that the information regarding the W-2 issued under the Taxpayer’s social security number by Company A was improper. The Department has removed this information and eliminated any impact on the Taxpayer’s account. Many different circumstances can cause this type of discrepancy such as keying errors by employers, employee inaccuracy and identity theft. The Federal Trade Commission provides general identity theft guidelines at their website: http://www.ftc.gov .

Accordingly, the assessment was adjusted to reflect the Taxpayer’s proper amount of FAGI, also taking into account the amount of Virginia income tax withheld by his employer, * (Company B). Because the amount of income tax withheld exceeded the Taxpayer’s liability, the assessment has been abated.

Because the amount of Virginia income tax that was withheld exceeded the Taxpayer’s liability, the Taxpayer would normally be eligible for a refund. Virginia Code § 58.1-499 A provides that in the case of any overpayment of any tax, whether by reason of excessive withholding, overestimated and overpaying estimated tax, or error on the part of the taxpayer, the Department shall order a refund of the overpayment. Virginia Code § 58.1-499 D specifies, however, in pertinent part that:

No refund under this section . . . shall be made . . . whether on discovery by the Department or on written application of the taxpayer, if such discovery is not made or such written application is not received within three years from the last day prescribed by law for the timely filing of the return … [Emphasis added.]

Virginia Code § 58.1-341 A requires that a taxpayer file an individual income tax return by May 1 of the year following the tax year for which the return is filed. Based on Virginia statutes, the due date for the Taxpayer’s 2017 individual income tax return was May 1, 2018. As such, a return was required to be filed by May 3, 2021 (May 1 was a Saturday), in order to receive a refund for the 2017 taxable year. Because the Taxpayer did not file a return before the statute of limitations expired, the refund cannot be issued.

The Code of Virginia sections cited is 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/3782.B