May 17, 2023
Re: § 58.1 1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you appeal an individual income tax assessment issued to *****(the “Taxpayers”) for the taxable year ended December 31, 2019.
FACTS
The Taxpayers reported the proper amount of deductible mortgage interest on their 2019 Virginia resident income tax return. When the return was processed, however, the amount of mortgage interest deduction was increased by the Department. As a result, a refund was issued in an amount larger than what the Taxpayers claimed.
Subsequently, the Department received information from the Internal Revenue Service (IRS) indicating that the amount of itemized deductions reported on their federal income tax return did not match the amount the Department had on record, as adjusted. Accordingly, the Department corrected the mortgage interest deduction and issued an assessment to the Taxpayers to recover the excess refund that had been issued plus interest. The Taxpayers paid the assessment but contend they should not have to pay interest because the Department made a mistake in issuing an erroneous refund.
DETERMINATION
Virginia Code § 58.1-312 provides that an erroneous refund is considered to be an underpayment of tax, which may be assessed by the Department within two years from the date the erroneous refund was made. Title 23 of the Virginia Administrative Code (VAC) 10 110 90 B 7 b defines the term “erroneous refund” as the “issuance of refund to which a taxpayer is not entitled.” The regulation further states that “where a taxpayer provides complete and current information and an erroneous refund results from a departmental error, such as a clerical error, the department is limited to recovery within the two year statute of limitations.” Under Virginia Code § 58.1-1812 B, penalty and interest may not be assessed on an erroneous refund, provided that if the bill is paid within 30 days from the date of the bill. If the bill is not paid within 30 days, interest accrues from the date the assessment is issued instead of from the date the erroneous refund was made.
In this case, the Taxpayers reported the correct amount of deductible mortgage interest on their Virginia return. The Department erroneously recorded a different amount of mortgage interest when processing the return, resulting in a greater refund being issued than was reported by the Taxpayers. The refund, however, was issued to the Taxpayers in June 2020. The assessment to recover the refund was issued in November 2022, which is more than two years after the erroneous refund was made. As such, the Department was outside the limitations period for issuing the assessment. Accordingly, the assessment will be abated and the entire amount paid will be issued to the Taxpayers as a refund, including any statutory refund interest.
The Code of Virginia sections and regulation 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 determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4436.B