I never filed my Virginia return because my taxes were too complicated, and the Department assessed me based on IRS data -- can I get the penalty and interest waived?

Plain-English summary

A married couple, both Virginia residents, never filed a Virginia individual income tax return for the 2017 taxable year. The Department learned from the IRS that they may have owed Virginia tax, asked them for more information, got no response, and issued an estimated assessment based on the IRS data it had. The couple appealed, explaining they had tried to prepare their own returns but found their finances too complicated, and asked the Department to waive both the penalties and the interest.

Filing obligation and the estimated assessment. Any Virginia resident required to file a federal return must also file a Virginia return. When a resident simply doesn't file (despite the Department's repeated requests), Virginia law lets the Department estimate the tax owed from whatever information it has -- here, the IRS's federal income data -- and issue an assessment on that basis.

Why "too complicated" didn't excuse the penalties. The Department can waive penalties for "reasonable cause," but it does not treat a taxpayer's own difficulty preparing a complex return as reasonable cause -- Virginia's self-assessment system is built on fixed, known deadlines (including an automatic extension option for taxpayers who need more time), and the couple's problem was ultimately a missed deadline caused by the return's complexity, not some external or unavoidable obstacle. Both the late-filing penalty (6% per month, capped at 30%) and the estimated-tax underpayment penalty applied, and both stood.

Why the interest could never be waived, period. Separately, interest on an underpayment is not discretionary at all -- Virginia law makes it mandatory, and the Department has no authority to waive it unless the underlying TAX amount itself changes. Interest isn't framed as a punishment for wrongdoing; it's simply treated as the ongoing cost of having had the use of money that belonged to the Commonwealth.

The path forward. Because the Department's estimated assessment is presumed correct until the taxpayer proves otherwise, and the couple hadn't yet provided real numbers, the Department gave them 60 days to file an actual 2017 return with legitimate deductions and expenses -- which could genuinely reduce the assessed tax (and, since interest tracks the tax, the interest along with it). Only once that return is processed and the assessment adjusted can the couple pursue a SEPARATE offer in compromise specifically asking to waive whatever penalty remains.

What this means for you

Non-filers assessed from IRS/third-party data

File the real return with actual deductions as soon as possible -- an estimated "best information available" assessment is often higher than your true liability, and a genuine return is your fastest path to reducing both the tax and any tax-linked interest.

Anyone hoping "my taxes were too complicated" will waive a late-filing penalty

It generally won't -- the Department treats complexity as a reason to seek professional help or use the automatic extension, not as reasonable cause to excuse a late filing after the fact.

Anyone assuming interest can be waived like a penalty

It can't, on its own. Interest is mandatory and only goes down if the underlying tax amount itself is reduced -- don't request an interest waiver as if it were a discretionary penalty.

Common questions

Q: Will the Department waive a late-filing penalty because my return was too complex to prepare myself?
A: Generally no -- that isn't treated as reasonable cause; Virginia's system expects taxpayers to use the automatic extension or get help rather than simply miss the deadline.

Q: Can interest on unpaid tax ever be waived?
A: Only indirectly -- interest itself is mandatory and can't be waived, but if the underlying tax amount is reduced (e.g., by filing an accurate return), the interest calculated on that lower amount goes down too.

Q: What can I do if the Department assessed me based on estimated/IRS data and I think it's too high?
A: File an actual return with your real income, deductions, and expenses -- the Department will review it and adjust the assessment (and resulting interest) accordingly.

Q: Can I ask the Department to waive the penalty after my assessment is corrected?
A: Yes -- once the assessment is adjusted based on your actual return, you can file a separate offer in compromise requesting a waiver of any remaining penalty.

Subject

Administration : Offers in Compromise - Interest and Penalty Waiver

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-43

Original ruling text

March 23, 2021

Re: Offer in Compromise: Individual Income Tax

Dear *:

This will reply 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. You also request a waiver of the assessed interest and penalties for the same taxable year.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayers may have been required to file a Virginia income tax return for the 2017 taxable year. A review of the Department’s records shows that the Taxpayers had not filed a return. The Department requested additional information from the Taxpayers to determine if their income was taxable in Virginia. When a response was not received, the Department issued an assessment. The Taxpayers, who were residents of Virginia, appeal, contending they attempted to complete their returns on their own but were unable to due to the complex nature of their finances. The Taxpayers further request that the interest and penalties be abated.

DETERMINATION

Filing a Return

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 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 Virginia Code § 58.1-322.0 through § 58.1-322.04.

Under Virginia Code § 58.1-341 a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Virginia Code § 58.1-321. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will help in determining the resident’s tax liability. See Public Document (P.D.) 14-33 (3/7/2014).

The Department’s records indicate that the Taxpayers had taxable income reported to the IRS for the 2017 taxable year. As Virginia residents, any income they received that year that was taxable for federal income tax purposes would also have been general subject to Virginia income tax. Although the Department has made several requests, the Taxpayers have failed to file an income tax return sufficient to calculate accurate liabilities. Under such circumstances, Virginia Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to such taxpayer.

Interest and Penalty Waiver

The Taxpayer requests that penalty and interest be waived based on their inability to self-prepare their return due to its complexity. Virginia Code § 58.1-105 grants the Department the authority to waive penalty in cases where reasonable cause is demonstrated.

Pursuant to Virginia Code §58.1-347, an individual who fails to file a return by the due date or extended due date of such return is subject to a penalty equal to 6% of the tax liability per month or fraction thereof during which such failure to file continues, not to exceed 30%, in the aggregate.

In addition, Virginia Code § 58.1-492 provides for an “addition to tax” (commonly called the estimated tax underpayment penalty) in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year. The underestimated penalty and the late filed penalty were applied to the 2017 assessment because the Taxpayer failed to make estimated payments.

Virginia’s income tax system is designed to allow individuals to compute their own liability. Under this regime, specific deadlines have been established, which allow individuals to know when their liability is due and plan accordingly. In fact, Virginia law permits an automatic extension for circumstances under which a return cannot be filed by the original due date. Accordingly, the Department does not waive penalties in cases of simple oversight by a taxpayer. In this case, the Taxpayers ignored the deadline because their tax computation was to complicated for them. Based on the circumstances presented, the Department does not find reasonable cause to waive the penalties.

The application of interest to tax underpayments, however, is mandatory under 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 the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.

CONCLUSION

Under the provisions of Virginia Code § 58.1-205, in any proceeding related to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facia correct.” As such, the burden of proof is on the Taxpayers to show the Department assessment is incorrect.

The Department issued assessment based on the best information available to the Department pursuant to Virginia Code § 58.1-111, and no information has been provided by the Taxpayers to show this assessment to be incorrect. The Taxpayers, however, may have information that better represents their Virginia income tax liability for the taxable year at issue. Therefore, they should file a 2017 Virginia income tax return that includes the appropriate adjustments for expenses and deductions. The return should be submitted within 60 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *.

The return will be reviewed and processed, and the assessment will be adjusted as warranted. Once the assessment has been adjusted, the Taxpayers may file an offer in compromise for the waiver of penalty, if any. The offer should be addressed to: Virginia Department of Taxation, Office of Customer Service, P.O. Box 1115, Richmond, Virginia 23218-1115. If the return is not received within the allotted time, the assessment will be considered correct and collection action will 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3528.A

Related Documents

14-33