03-40 | Virginia Tax

Tax Type

Individual Income Tax

Description

Estimated underpayment penalty

Topic

Credits

Returns and Payments

Date Issued

04-01-2003

April 18, 2003

Re: § 58.1-1821 Application: Individual Income Tax

Dear ******************:

This will reply to your letter in which you seek correction of the individual income
tax assessments issued to your clients, ********* (the "Taxpayers"), for the taxable years ended December 31, 2000 and 2001. I apologize for the delay in the Department's response.

FACTS

The Taxpayers timely filed, pursuant to an extension, their 1999 individual income tax return. No quarterly estimated payments were made for the first three quarters, but an installment payment was made in the fourth quarter. As filed, the return resulted in an overpayment of tax, and the Taxpayers requested that this overpayment be credited toward their 2000 income tax liability.

Because no estimated tax was paid for the first three quarters of 1999, an addition to tax for the underpayment of estimated tax, commonly known as the estimated underpayment penalty, was assessed. The Department offset the addition to tax with the 1999 overpayment.

The Department's adjustment to the 1999 overpayment reduced the amount of estimated tax payments credited toward the Taxpayers' 2000 income tax liability. The reduced credit for payments eliminated the overpayment claimed by the Taxpayers on the 2000 return, resulting in an assessment of additional tax, estimated underpayment penalty, and interest. Likewise, the overpayment originally claimed on the Taxpayers' 2000 return was disallowed as a credit toward the Taxpayers' 2001 income tax liability, resulting in the assessment of additional tax and interest for 2001.

You acknowledge that the Taxpayers failed to pay estimated tax for the first three quarters of 1999, but contend that under the Code of Virginia, no penalty should have been assessed because the fourth quarter payment was sufficient to cover the entire tax liability.

- - - - DETERMINATION

Va. Code § 58.1-492 provides for a 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. For individuals and fiduciaries, payments of estimated tax are required to be filed on or before May 1 of each year if Virginia estimated tax liability will exceed withholding and tax credits by more than a $150 threshold, and may be amended at a later date to reflect any increase or decrease anticipated in the year's tax liability. If any estimated tax installments are not sufficient to cover the income tax liability as reported on the annual tax return, a taxpayer may be assessed the estimated underpayment penalty unless one of the following estimated underpayment exceptions are met:

1. The total payments of estimated tax equals or exceeds the tax liability on the return for the preceding taxable year.

2. The total payments of estimated tax equal or exceed the tax computed, at the rates applicable to the taxable year, on the basis of the facts shown on the return for, and the law applicable to, the preceding taxable year.

3. The total payments of estimated tax equal or exceed 90% of the tax computed, at the rates applicable to the taxable year, on the basis of the actual taxable income for the months in the taxable year ending before the month in which the installment is required to be paid. The total payments of estimated tax equal or exceed 90% of the tax on the annualized taxable income for the taxable year.

4. Individuals working as farmers, fishermen and merchant seamen (for taxable years beginning on and after January 1, 2002) are granted a special exception. Under this occupational exception, individuals are only required to make one payment of 662/3% of the current year's tax on January 15 of the succeeding calendar year.

All individual income taxpayers who underpay any one of the four estimated income tax installments are subject to the addition to tax for the underpayment of estimated tax. To determine if an estimated underpayment has occurred, each installment is compared to one quarter of the annual income tax liability after being reduced by nonrefundable credits. An underpayment of estimated tax occurs when one quarter of the annual tax liability exceeds one or more of the installments.

Based on the information filed with the Taxpayers' returns, none of the four exceptions to the underpayment of estimated tax was met. Accordingly, the Department correctly assessed the penalty for underpayment of estimated income tax for the 1999 taxable year.

The above determination notwithstanding, the Taxpayers may be able to reduce the amount of the 1999 addition to tax in accordance with the exception 3. Under this exception, the Taxpayers would complete Form 760C to show the actual taxable income for the months in 1999 ending before the month in which the installments were required to be paid. In addition, the Taxpayers would need to provide documentation to show when income was earned during 1999. If the Taxpayers can show that the 1999 addition to tax should be reduced, the assessments for the 2000 and 2001 taxable years will be adjusted to reflect the proper overpayment carried forward from 1999.

Furthermore, because the Taxpayers were not notified of the Department's adjustment to the 1999 overpayment until December 2001, I will waive the estimated underpayment penalty imposed for the taxable year ended December 31, 2000.

If the requested information is not provided, the assessments for the taxable years at issue as shown on the enclosed schedules will be considered correct. Please either send the requested information or remit payment to the Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218, Attention:***** within 30 days from the date of this letter to avoid the accrual of additional interest.

The Code of Virginia sections cited, along with other reference documents and forms, are available online at the Department's web site located at www.tax.state.va.us. If you have any further questions, you may contact ************** at ******************.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/41768B

Rulings of the Tax Commissioner