My tax software wrongly claimed a Virginia credit for D.C. tax my commuting spouse never owed — can the assessment be abated because it was a software error?

Plain-English summary

A Virginia husband and wife filed a joint 2021 resident return claiming a credit for income tax paid to the District of Columbia, where the wife commuted to work. The Department disallowed the credit and assessed additional tax. On appeal under Va. Code § 58.1-1821, the couple conceded the credit wasn't allowed — their argument was that their tax preparation software claimed it unintentionally, so the assessment should be abated. The Department upheld the assessment.

Why there was no credit. Virginia taxes its residents on all income, wherever earned (New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937); Va. Code § 58.1-301 conformity). The relief valve for cross-border workers is Va. Code § 58.1-332 A: a credit for income tax paid to another state on earned or business income, capped at the lesser of the other state's tax or the Virginia tax on that same income (P.D. 97-301). But D.C. generally cannot tax nonresidents (D.C. Code § 47-1806.01). A Virginia resident who commutes to D.C. and earns only salaries and wages owes D.C. nothing and files no D.C. return — and this wife in fact received a full refund of the D.C. tax her employer had withheld. No tax actually paid to another state means no credit, and the statute leaves the Department no discretion to allow one anyway.

Why the software error didn't help. The Department's "approval" of a tax-software product means it passed testing against the Department's processing requirements — approval does not guarantee computational accuracy (P.D. 13-50, 22-85). And just as with professional preparers, relying on software does not relieve the taxpayer of responsibility for the accuracy of what's on the return (P.D. 19-69, 22-17). The Department expressed empathy but had no authority to abate a correctly computed tax; the couple received an updated bill including accrued interest, payable within 30 days to avoid further interest and possible collection action.

What this means for you

Virginia residents commuting to D.C.

Your D.C. salary is taxable by Virginia only. D.C. can't tax nonresident wages, so don't let D.C. tax be withheld in the first place (or claim your refund from D.C.) — and never claim the Virginia out-of-state credit for D.C. withholding, because withholding that gets refunded is not tax "actually paid." The same logic applies to any credit claim: the credit follows tax you were legally liable for and paid, not amounts merely withheld.

Anyone whose software makes a mistake

The responsibility for the return is yours. A software glitch — even in a Department-approved product — doesn't abate tax that's correctly due, and the same rule applies to mistakes by professional preparers. Review the return before filing, especially credits the software claims automatically; interest accrues from the original due date while the error is sorted out.

Preparers

This ruling is a clean citation chain for the client conversation: software approval ≠ accuracy guarantee (P.D. 13-50, 22-85), preparer/software reliance ≠ excuse (P.D. 19-69, 22-17), and § 58.1-332's limits are non-discretionary.

Common questions

Q: My employer withheld D.C. tax — doesn't that mean I paid tax to D.C.?
A: Not if you're a Virginia resident earning only wages there. D.C. law doesn't tax nonresident salaries, so the withholding comes back as a refund — as it did here — and refunded withholding is not tax paid to another state for purposes of Virginia's credit.

Q: The error was entirely the software's fault. Why can't Virginia waive the tax?
A: Because the tax itself is correct — the credit was never allowable, and Va. Code § 58.1-332 gives the Department no discretion to allow a credit for tax that wasn't actually paid. Reliance on software, like reliance on a preparer, doesn't shift responsibility for the return's accuracy.

Q: Doesn't the Department approve tax software? Shouldn't approval mean it computes correctly?
A: No. Approval only means the software conforms to the Department's processing requirements (formats, test cases). The Department expressly does not guarantee computational accuracy.

Q: When does the out-of-state credit actually apply?
A: When a Virginia resident pays another state's income tax on earned or business income (or capital gain) that Virginia also taxes — for example, a state that taxes nonresident workers. Even then it's limited to the lesser of the other state's tax or the Virginia tax attributable to that income.

Citations and references

Statutes:

• Va. Code § 58.1-1821 — administrative appeal (application for correction) to the Tax Commissioner
• Va. Code § 58.1-301 — conformity; Virginia taxable income starts from federal adjusted gross income
• Va. Code § 58.1-332 A — the out-of-state credit and its lesser-of limitation
• D.C. Code § 47-1806.01 — D.C. generally does not tax nonresidents

Authorities the Department relied on (described here, not linked): New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937) (a state may tax all its residents' income); P.D. 97-301 (7/7/1997) (the credit's lesser-of limitation); P.D. 13-50 (4/24/2013) and P.D. 22-85 (4/28/2022) (software approval doesn't guarantee computational accuracy); P.D. 19-69 (6/25/2019) and P.D. 22-17 (1/25/2022) (reliance on preparers/software doesn't relieve the taxpayer of responsibility).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-55

Original ruling text

April 25, 2025

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * and *** (the “Taxpayers”) for the taxable year ended December 31, 2021.

FACTS

The Taxpayers, a wife and husband, filed a Virginia resident individual income tax return jointly for the 2021 taxable year, claiming a credit for tax paid to the District of Columbia (D.C.). Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appeal, contending that they used tax preparation software to complete their return, and the Department should abate the assessment because the credit was claimed unintentionally and was solely attributable to a software error.

DETERMINATION

Taxation of Virginia Residents

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 .

It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, 312-313 (1937), the United States Supreme Court explained, “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.” As such, even if the wife had no Virginia source income, she would have been subject to Virginia income tax as a Virginia resident.

Credit for Taxes Paid to Another State

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income or gain from the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). The limitation is computed by multiplying the individual’s Virginia tax liability by a fraction, the numerator of which is the income upon which the other state’s tax is imposed, and the denominator of which is Virginia taxable income.

Nonresidents of D.C. are not generally subject to D.C.’s income tax, although they may be subject to the Unincorporated Business Franchise Tax on income from a trade or business conducted there. See D.C. Code § 47-1806.01. Virginia residents commuting to work in D.C. and earning only salaries and wages are not subject to tax in D.C. on such income and are not required to file a D.C. income tax return. During the taxable year at issue, the Taxpayers resided in Virginia, and the wife commuted to work in D.C. As such, the wife was not subject to income tax in D.C. and, in fact, received a full refund of D.C. tax withheld by her employer.

Tax Preparation Software

The Taxpayers do not dispute that they were not eligible to claim a credit for tax paid to D.C. Rather, they contend that they should not be penalized for the error caused by their tax preparation software. 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 P.D. 13-50 (4/24/2013) and P.D. 22-85 (4/28/2022). In addition, just as the Department has stated with respect to the use of professional tax preparers, a taxpayer’s reliance on tax software to prepare income tax returns does not relieve the taxpayer of the responsibility for ensuring that information reported on the return is accurate. See P.D. 19-69 (6/25/2019) and P.D. 22-17 (1/25/2022).

CONCLUSION

The provisions of Virginia Code § 58.1-332 are clear and do not provide the Department with any discretion to allow the Taxpayers to claim a credit for tax that was not actually paid to another state. Accordingly, although the Department empathizes with the Taxpayer’s situation, the Department’s adjustment was correct, and the Department cannot grant the Taxpayers’ request for an abatement of the resulting tax due.

The Taxpayers will receive an updated bill that 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 and possible collection actions.

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 determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/5050.Q

Related Documents

97-301

13-50

19-69

22-17

22-85