We got a refund of the Virginia tax withheld from my wife's wages when we filed our part-year-resident return, but Virginia later assessed us on those same wages -- can we still use that withholding to pay the new bill?

Plain-English summary

A married couple filed a joint Virginia individual income tax return for 2018 as part-year residents, reporting that all of their income was earned during the period they lived outside Virginia. Based on that return, Virginia refunded the tax that had been withheld from the wife's wages -- the refund went out in June 2019. Virginia later reviewed the return and determined the wife's wages should actually have been included in the couple's Virginia taxable income, and issued an assessment for the resulting tax.

The couple's appeal didn't dispute that the wages were taxable -- they agreed on that point. Instead, they argued that because Virginia tax had already been withheld from the wife's paycheck, that withholding should be applied to satisfy the new assessment. The problem was timing: that same withholding had already been paid back to them as a refund the year before. Once withheld tax has been refunded, it isn't sitting in an account somewhere waiting to be credited a second time against a later bill for the same wages -- it's gone.

Virginia Code § 58.1-303 and 23 VAC 10-110-40 require a part-year resident to apportion income between the Virginia-residence and non-residence periods of the year. Because the couple's original return sent all of the wife's wages to the "non-Virginia" side of that apportionment, the withholding tied to those wages went out the door as a refund instead of being held against possible future exposure. When Virginia corrected the underlying income sourcing, there was no offsetting withholding left, and the Department upheld the assessment, with interest continuing to accrue until paid.

What this means for you

Part-year Virginia residents who already received a refund tied to disputed wages

If you're contesting an assessment on wages you previously reported as non-Virginia income, check whether the withholding from those same wages was already refunded to you. If it was, that withholding is no longer available to offset a later, corrected assessment -- you'll need to pay the new bill directly rather than expecting the earlier refund to be applied against it.

Anyone reviewing a part-year return before filing

Get the Virginia-residence/non-residence apportionment right the first time. An error that sends wages to the wrong side of that split can trigger a refund now and a fresh assessment later, with no double-dipping on the withholding in between.

Common questions

Q: I already got a refund of withholding tied to certain wages -- can I use that same withholding again if Virginia later assesses tax on those wages?
A: No. Once withheld tax has been refunded to you, it's no longer available to credit against a later assessment on the same wages; you'd need to pay the new assessment separately.

Q: Does this mean the couple was wrong that the wages were taxable?
A: No -- they didn't contest that point at all. Their only argument was that the existing withholding should satisfy the bill, and that argument failed only because the withholding had already been refunded.

Q: What happens to interest on an assessment like this?
A: Interest continues to accrue on the unpaid balance from the original due date; the Department in this case issued a revised bill and asked for payment within 30 days to avoid further interest and possible collections action.

Citations and references

• Va. Code § 58.1-303 (a part-year resident is taxed as a Virginia resident only for the portion of the year actually residing in Virginia)
• 23 VAC 10-110-40 (a part-year resident's Virginia taxable income is computed only for the Virginia-residence period, requiring apportionment on the Virginia Schedule of Income)

Subject

Virginia Taxable Income : Part-Year Resident; Administration : Assessment - Recovering Refund

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-166

Original ruling text

December 28, 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, 2018.

FACTS

The Taxpayers, a husband and wife, filed a joint part-year Virginia individual income tax return and reported that all of their income was attributable to their period of residency outside of Virginia. As a result, the Taxpayers were issued a refund of the Virginia tax that had been withheld from the wife’s wages. Under review, the Department determined that the wife’s wages should have been included in the Taxpayers’ Virginia taxable income (VTI) and issued an assessment. The Taxpayers appealed, contending that the assessment is incorrect because the wife had Virginia taxes withheld that should satisfy the amount owed.

DETERMINATION

Virginia Code § 58.1-303 provides that any person who becomes a resident of another state 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 VTI 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 is a part-year resident of Virginia 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.

Because the Taxpayers reported that none of their income was attributable to their period of Virginia residence, the Taxpayers received a refund of the amount of Virginia income tax withheld from the wife’s wages. The refund was issued in June 2019. The Taxpayers did not contest that the wife’s wages were taxable, only that she had enough income tax withheld to satisfy the assessment. As stated above, however, all the income tax that was withheld was refunded. Because the wife’s Virginia income tax withholdings were previously refunded, when the assessment was issued, the Taxpayers did not have any withholding to credit against the assessment.

Based in the facts in this case, the Department was correct in issuing the assessment and it remains due and payable. The Department will issue a revised bill, which will include accrued interest to date. The Taxpayers should remit payment within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections and regulation 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/3831-C