We didn't know our farm's venue rentals were taxable, so we never filed returns — can the auditor really go back six years instead of three, and do we owe the 20% amnesty penalty?

Plain-English summary

A farm that rents out its venue was audited for December 2011 through September 2017. The farm had never registered to collect Virginia retail sales and use tax, and the auditor found untaxed sales and purchases. Because the farm had filed no returns during the initial audit period, the auditor extended the audit period back three additional years — six years in total. The farm appealed, arguing the extension was unreasonable because it hadn't willfully neglected to file (it says it was simply unaware that renting space and lodging was taxable), and asked for penalty relief.

The six-year audit period: upheld. Va. Code § 58.1-634 says the Tax Commissioner "shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so." Two things follow:

• The statute does not require willful neglect — good faith is not a shield. The trigger is simply reasonable cause to believe a required return wasn't filed.
• Here, the auditor found the farm should have filed returns during the initial period and didn't. That authorized examining records beyond the three-year window.

The 20% amnesty penalty: avoided, conditionally. The 2017 General Assembly created a Tax Amnesty program (60–75 days, administered by the Department; Guidelines issued as P.D. 17-156 (9/5/2017)). Any tax liability that was eligible for amnesty benefits but remained unpaid picks up a 20% amnesty penalty on top of all other penalties. Key mechanics from the ruling:

• For ongoing field audits, the amnesty-eligible period is April 2017 and prior.
• The penalty is not applied to an assessment from a field audit for an amnesty-eligible period if the liability (uncontested, or what remains after a § 58.1-1821 or § 58.1-1825 appeal) is paid within 30 days of the conclusion of the proceedings.
• Taxpayers may instead enter payment plans for amnesty-eligible assessments and avoid the 20% penalty as long as they remain current.

The farm was already enrolled in a payment plan, so it will not face the 20% amnesty penalty provided it stays current — but interest continues to accrue until the assessments are fully satisfied.

One transparency note: the Department's published subject line for this ruling also mentions "Overpayment Credit Request – Timeliness," but the text of the published letter addresses only the audit-period and amnesty-penalty issues summarized above.

What this means for you

Venue owners, farms, and anyone renting out event space or lodging

The underlying trap here is registration: the farm didn't realize its space rentals and lodging were taxable, so it never registered or filed. If you rent out a barn, field, or rooms — even as a sideline to a farm — get a ruling or professional advice on taxability before the auditor does it for you.

Nonfilers face a six-year window, not three

Virginia's normal audit reach is three years, but failing to file a required return doubles it. And the extension doesn't depend on your state of mind: "we didn't know" defeats a fraud claim, but not the failure-to-file trigger in § 58.1-634.

If you have an amnesty-era assessment

The 20% amnesty penalty on April-2017-and-prior periods is avoidable two ways: pay within 30 days after your audit or appeal wraps up, or get on a payment plan and stay current. Miss a plan payment and the 20% penalty comes back into play — and interest runs the whole time either way.

Common questions

Q: We didn't willfully skip filing — we genuinely didn't know. Doesn't that limit the audit to three years?
A: No. The statute extends the period when there is reasonable cause to believe a required return wasn't filed. Willfulness isn't part of the test — the Department said so explicitly here.

Q: How far back did the audit go?
A: Six years — December 2011 through September 2017. The initial period was extended back three additional years because no returns had been filed.

Q: What is the 20% amnesty penalty and when does it apply?
A: Virginia's 2017 amnesty program (P.D. 17-156) let delinquent taxpayers settle up with benefits; liabilities that were amnesty-eligible but stayed unpaid carry an extra 20% penalty. For field audits, periods through April 2017 are amnesty-eligible. Paying within 30 days of the end of proceedings — or keeping a payment plan current — keeps the penalty off.

Q: Is this taxpayer done paying?
A: Not yet. It's on a payment plan; the ruling warns that interest keeps accruing until the assessments are fully satisfied, and the 20% amnesty penalty stays off only while the plan remains current.

Citations and references

Statutes:

• Va. Code § 58.1-1821 — administrative appeal (application for correction) to the Tax Commissioner
• Va. Code § 58.1-634 — three-year limit on examining records, extendable on reasonable evidence of fraud or reasonable cause to believe a required return was not filed
• Va. Code § 58.1-1825 — judicial application for correction (referenced in the amnesty-penalty 30-day payment rule)

Authorities the Department relied on (described here, not linked): Guidelines for the Virginia Tax Amnesty Program, P.D. 17-156 (9/5/2017) (20% penalty on unpaid amnesty-eligible liabilities; April 2017 and prior eligible for ongoing field audits; 30-day payment and payment-plan exceptions).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-40

Original ruling text

April 2, 2025

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period December 2011 through September 2017.

FACTS

An audit was conducted on the books and records of the Taxpayer, a farm that provides a venue for rent, for the period at issue. The auditor found that the Taxpayer, which was not registered to collect Virginia retail sales and use tax, made untaxed sales and purchases. Because the Taxpayer had not filed returns during the initial audit period, the audit period was extended back for three additional years. The Taxpayer filed an application for correction contending the extension of the audit period is unreasonable because it did not willfully neglect to file returns. The Taxpayer also requests the abatement of penalty.

ANALYSIS

Statute of Limitations

The Taxpayer explains that, before the audit occurred, it was unaware of its responsibility to collect sales tax on its rental of space and lodging. Subsequent to the audit, the Taxpayer has registered to collect and remit sales tax and believes that the tax due for the extended audit period should be abated.

Virginia Code § 58.1-634 provides, in part, that “the Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so .” [Emphasis added]. Thus, the statute does not require a finding of willful neglect in order to extend an audit period. In this case, the auditor found that the Taxpayer should have filed returns during the initial audit period and failed to do so. Under these circumstances, the Department is authorized to examine records beyond the three-year period of limitations.

Amnesty Penalty

The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60- to75-day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program, issued as Public Document (P.D.) 17-156 (9/5/2017), permitted taxpayers with delinquent returns for amnesty-eligible periods to qualified for certain tax payment benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties.

The amnesty-eligible period for ongoing field audits is the month of April 2017 and prior. The penalty, however, will not be applied to any assessment generated from a field audit of a business for an amnesty-eligible period provided that any uncontested liability, or any contested liability remaining upon resolution of an application for correction under Virginia Code § 58.1-1821 or Virginia Code § 58.1-1825, is paid within 30 days from the date of the conclusion of the proceedings, whichever is latest. In addition, taxpayers may enter into payment plans for amnesty-eligible assessments. Such taxpayers will not be subject to the 20% amnesty penalty provided they remain current on their payment plans.

DETERMINATION

Based on the analysis above, the auditor properly expanded the audit period to six years. The Taxpayer is currently enrolled in a payment plan. The Taxpayer should be aware that interest will continue to accrue on the balance until the assessments are fully satisfied. However, the Taxpayer will not be subject to the 20% amnesty penalty provided, it remains current on their pre-existing plans.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this response, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/5111.F

Related Documents

17-156