What does Virginia Ruling of the Tax Commissioner P.D. 21-15 conclude about Residency : Part year - Income Allocation; Administration: Interest - Accrual; Administration : Reliance on Tax Preparer - Tax Preparation Software?

Plain-English summary

A married couple moved to Virginia during 2017 and filed a joint part-year resident Virginia income tax return. On that return, they did not allocate any of their retirement income to their period of Virginia residency -- they reported the retirement income, but excluded all of it from their Virginia taxable income. On audit, the Department found that some of the retirement income was actually received monthly after the couple became Virginia residents, and it assessed additional tax plus interest.

The Taxpayers appealed on two grounds. First, on the underlying tax, they argued they had used tax preparation software, had declared the retirement income on their return, and had not permanently moved to Virginia until March 31 (later than the date the Department used). The Commissioner rejected this: Virginia Code § 58.1-303 taxes a part-year resident only on income attributable to the period of Virginia residency, but the couple's own Virginia and prior-state ("State A") returns both said their residency changed on February 1, not March 31. Because retirement income was received monthly, all of it received on or after February 1 had to be allocated to Virginia, and using approved tax software doesn't guarantee a return is computed correctly -- the Department only tests software for processing conformity, not computational accuracy.

Second, on the interest charged on the resulting underpayment, the Taxpayers argued the interest was excessive since they had only recently received the assessment. The Commissioner rejected this too: interest on underpayments is mandatory under Virginia Code § 58.1-1812 and cannot be waived unless the underlying tax itself is adjusted. Interest is not a penalty -- it is a charge for the use of money that was owed to the Commonwealth -- and it runs from the original due date of the tax, not from the date the assessment bill is issued.

The assessment was upheld in full on both issues. The Taxpayers were told they could still file an amended return with documentation if they wanted to dispute the February 1 residency-change date itself.

What this means for you

People who move into or out of Virginia mid-year

If you become (or stop being) a Virginia resident partway through the year, you must apportion all of your income -- including retirement income received in installments -- between your period of Virginia residency and your period of residency elsewhere, using a Virginia Schedule of Income. Simply disclosing income on your return is not the same as correctly allocating it: if you report income but allocate none of it to your Virginia residency period, the Department can still add it back to your Virginia taxable income. Also, the residency-change date you report on your other state's return can be used against you if it conflicts with what you claim on your Virginia return.

Anyone relying on tax preparation software

Using Department-approved tax software is not a defense to an incorrect return. The Department only certifies that software conforms to its processing/format requirements -- it does not guarantee the software calculates your tax correctly. You remain responsible for the accuracy of your allocation and computations even if the software produced the numbers.

Taxpayers disputing interest on an assessment

Interest on a tax underpayment in Virginia is mandatory and cannot be waived just because you feel the total looks large or because you only recently received the bill. It accrues automatically from the original due date of the tax, not from the assessment or bill date, and can only be reduced if the underlying tax itself is reduced.

Common questions

Q: The Taxpayers said they didn't permanently move until March 31 -- why didn't that change the outcome?
A: Because it contradicted their own paperwork. Both their Virginia and State A income tax returns reported a change of residence effective February 1, so the Department used that self-reported date rather than the later date asserted in the appeal.

Q: They disclosed the retirement income on their return -- why was it still adjusted?
A: Disclosing income and allocating it are different things. The Taxpayers reported the retirement income but allocated none of it to their Virginia residency period, which excluded the entire amount from their Virginia taxable income. Because it was received monthly, the portion received on or after the residency-change date had to be allocated to Virginia.

Q: Does using approved tax preparation software protect you if the return turns out wrong?
A: No. The Department's approval of a software product only means it was tested for conformity with the Department's processing requirements -- it is not a guarantee of computational accuracy, and using it doesn't excuse an incorrect allocation.

Q: Can interest on an assessment be waived if it feels too high or the bill just arrived?
A: No. Interest on underpayments is mandatory under Virginia Code § 58.1-1812 and is not a penalty -- it is a charge for the use of money owed to the Commonwealth. It accrues from the original due date of the tax, not from the date the assessment or bill was issued, and can be reduced only if the tax itself is adjusted.

Q: Is there anything the Taxpayers could still do?
A: The Department said that if they continued to dispute the February 1 residency-change date, they could file an amended 2017 return with supporting documentation showing a different date and reallocating the retirement income accordingly.

Citations and references

Statutes:

• Va. Code § 58.1-303 (a part-year resident is taxable as a resident only for the portion of the year of Virginia residency)
• Va. Code § 58.1-1812 (mandatory accrual of interest on tax underpayments)
• Va. Code § 58.1-1821 (appeal of an assessment)
• 23 VAC 10-110-40 (computation of a part-year resident's Virginia taxable income based on the period of residence)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-15

Original ruling text

February 16, 2021

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers moved to Virginia and filed a joint part-year resident individual income tax return for the 2017 taxable year. The Taxpayers did not allocate any of their retirement income to their period of residency in Virginia. Under audit, the Department determined that some of their retirement income was received after the Taxpayers became Virginia residents. The Department issued an assessment for the increased tax liability plus interest. The Taxpayers appeal, contending that they used tax preparation software to prepare their returns, they declared their retirement income on their returns, they did not permanently move to Virginia until March 31, and they believe the interest is excessive.

DETERMINATION

Tax Preparation Software

The Taxpayers’ appeal states that they input their income information into a tax preparation software that completes their state and federal tax returns for them. The Department recognizes that tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department, however, is not meant to imply computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department’s processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software. See Public Document (P.D.) 13-50 (4/24/2013).

Part-Year Residency

Virginia Code § 58.1-303 provides that any person who becomes a resident of Virginia during a taxable year shall be taxable as a resident for only that portion of the taxable year during which that person was a resident of the Commonwealth. Title 23 of the Virginia Administrative Code (VAC) 10-110-40 further explains that the Virginia taxable income of a part-year resident shall be computed by determining income, deductions, subtractions, additions, and modifications attributable to the period of residence in Virginia. As such, any person who becomes a Virginia resident during a taxable year must apportion their income between their period of residence in and outside of Virginia on a Virginia Schedule of Income filed with their return.

The Taxpayers provided their Virginia and * (State A) income tax returns, which both reflected a change of residence to Virginia on February 1. Along with their Virginia return, the Taxpayers provided a Virginia Schedule of Income, which apportioned all of their retirement income to their period of residence outside of Virginia. The Department determined that the retirement income was received monthly and that all of the income received on or after February 1 should have been allocated to their period of residence in Virginia and included in their Virginia taxable income (VTI).

In their appeal, the Taxpayers assert that their retirement income was declared on their return. While it is true that the Taxpayers disclosed the retirement income on their Virginia return, they did not allocate any of the income to their period of residence in Virginia, which excluded the entire amount from their VTI. The Taxpayers also assert that they did not move permanently to Virginia until March 31. As described above, this is inconsistent with what the Taxpayers self-reported on their State A and Virginia returns.

Interest

The application of interest to tax underpayments is mandatory pursuant to Virginia Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due to the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.

The Taxpayers contend that the interest is excessive when considering that they just received the assessment recently. It should be noted that interest is accrued from the date that a tax liability was originally due and not from the date that an assessment is issued.

CONCLUSION

The Taxpayers did not allocate any of their retirement income to their period of residence in Virginia for the 2017 taxable year. Because the Taxpayers received some of their retirement income after they established residence in Virginia, the Department was correct to adjust the Taxpayers’ return to include the additional income.

On both their Virginia and State A income tax returns, the Taxpayers self-reported that they changed their residence from State A to Virginia beginning on February 1. The Department was correct in using that date to determine the amount of income the Taxpayers received while Virginia residents. If the Taxpayers continue to dispute the date, they may file an amended return for the 2017 taxable year and provided supporting documentation showing that the date is incorrect and allocating the retirement income to Virginia in accordance with this determination.

Accordingly, the assessment at issue is upheld. The Taxpayers will received an updated bill, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections, regulation, and public document cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. 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/3328.C

Related Documents

13-50