Tax Type
Withholding Taxes
Description
100% fraud penalty, and interest for failure to withhold taxes.
Topic
Accounting Periods and Methods
Penalties and Interest
Taxability of Persons and Transactions
Withholding of Tax
Date Issued
03-04-2002
March 4, 2002
Re: § 58.1-1821 Application: Withholding Tax
Dear *****
This will reply to your letter in which you seek correction of withholding tax assessments issued to your client, ***** (the "Taxpayer") for the periods March 1997 through May 2001. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates as a supermarket. Under audit, it was assessed tax, a 100% fraud penalty, and interest for failure to withhold taxes from certain individuals who worked for the Taxpayer during the period of March 1997 through May 2001.
The Taxpayer contends that the assessments are incorrect because the individuals who worked for the Taxpayer are family and friends who worked either part-time or only for a portion for the periods at issue and received either no compensation or food for their services.
DETERMINATION
Code of Virginia § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages . . . ." For purposes of defining "wages", the Code of Virginia relies on Internal Revenue Code ("IRC") § 3401(a), which encompasses any and all remuneration for services provided, including non-cash remuneration.
In the instant case, the Taxpayer maintained no records regarding the compensation paid to its workers. You have provided affidavits from the workers that estimate the compensation they received from the Taxpayer, and you have provided spreadsheets that estimate the amount of withholding tax due. Code of Virginia § 58.1-102 requires taxpayers to maintain suitable records that substantiate information required by the department. Because the Taxpayer failed to maintain the requisite records, the department estimated the Taxpayer's withholding tax liability based on the best available information.
Code of Virginia § 58.1-205 provides that any assessment of a tax by the department is prima facie correct. The burden is on the Taxpayer to prove otherwise. The documentation that you have provided is insufficient to prove the department's assessment is erroneous. Mere declarations of liability are not sufficient without other substantiating evidence.
However, you have shown that as of April 2001, the Taxpayer's payroll was prepared by a commercial payroll service. As such, assessments for the months of April and May 2001 have been abated.
The 100% fraud penalty was assessed in the audit. Code of Virginia § 58.1-475 provides that any employer who fails to properly withhold taxes shall be subject to a penalty equal to six percent of the amount that properly should have been withheld for each month that the failure to withhold continues, not exceeding thirty percent in the aggregate. Code of Virginia § 58.1-308 provides that if the failure to pay tax is false or fraudulent with the intent to evade that tax, a penalty of 100% with interest shall be added together with interest on the tax. In this case, the evidence does not support intent by the Taxpayer to evade the tax. Therefore, the 100% fraud penalty will be reduced to 30% of the tax to reflect the maximum penalty allowed for the failure to withhold.
Accordingly, the assessments issued to the Taxpayer for withholding tax have been adjusted according to the enclosed schedule. Please remit the amount due to the Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218-1880, Attention: *****. Payment should be made within 45 days of the date of this letter to avoid the accrual of additional interest. If payment is not received within the allotted time, interest will accrue on the outstanding balance and collection action will resume.
If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/37100B
Rulings of the Tax Commissioner