07-102 | Virginia Tax

Tax Type

Individual Income Tax

Description

The Taxpayer asserts assessment is for the recovery of an erroneous refund

Topic

Credits

Taxable Income

Date Issued

06-27-2007

June 27, 2007

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This is in reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayer") for the taxable year 2003.

FACTS

The Taxpayer, a Virginia resident, claimed a credit on his 2003 taxable year Virginia individual income tax return for income tax paid to other states. The Department processed the return in May 2004 and issued a refund, which was credited to the Taxpayer's 2004 estimated payments. Upon audit in 2006, the Department adjusted the out-of-state tax credit and issued an assessment.

The Taxpayer contends that the out-of-state tax credit was incorrectly adjusted to remove tax paid to several states. The issue with the tax paid to some of the states has been resolved and appropriate adjustments made to the assessment. However, the assessment with regard to the out-of-state tax credit claimed for tax paid to California remains.

The Taxpayer does not dispute the adjustment related to California, but contends that the assessment was issued beyond the statutory period for recovering an erroneous refund and must be abated.

DETERMINATION

The Taxpayer asserts that the assessment is for the recovery of an erroneous refund. Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-110-90 B 7, an assessment for the recovery of an erroneous assessment must be made within two years of the date such refund is made. According to the Taxpayer, the 2003 refund was issued May 3, 2004, the date the Taxpayer signed the return, and the Department's assessment was not made until November 6, 2006. By this reasoning, the Taxpayer claims that the Department failed to make the assessment within the statutory period of limitations.

Virginia Code § 58.1-312 D provides that an erroneous refund is considered to be an underpayment of tax on the date the refund is made. Contrary to the Taxpayer's assertion, this is not the date a return is signed or delivered to the Department. Rather, it is the latter of the date of a refund check or the statutory due date of the return, without any extensions. For taxpayers that choose to have a refund credited to the next year's estimated payments, the date of the refund is the date the Department applies the refund to estimated payments for the next taxable year.

The statute further provides that if any part of the refund was induced by fraud or misrepresentation of a material fact, an assessment may be made within five years. Therefore, the statute clearly sets forth two types of erroneous refunds. One in which a taxpayer simply receives a refund to which he is not entitled, and the other that is the result of incorrect information provided by a taxpayer. Title 23 VAC 10-110-90 B 7 provides clarification as to when the Department may assess the erroneous refund within two or five years.

Under Title 23 VAC 10-110-90 B 7 b, the two-year statute of limitations applies when the erroneous refund results from a clerical or processing error made by the Department after the taxpayer has provided complete and current information. The five-year limitations period applies in cases where the erroneous refund results from "a misrepresentation of a material fact by the taxpayer including inadvertent taxpayer errors e.g., the omission of information or the incorrect listing of information which has a direct bearing on the computation of Virginia taxable income or tax liability."

In this case, the Department processed the 2003 income tax return as completed by the Taxpayer. The refund issued to the Taxpayer was not made as a result of an error made by the Department. The refund was issued based on the listing of information (the credit claimed for taxes paid to other states) by the Taxpayer that has a direct bearing on Virginia tax liability. Under review, the Department determined that certain out-of-state tax credits were computed incorrectly and credit was improperly claimed for income tax paid to California. Virginia Code § 58.1-332 does not allow a resident to claim a credit on his Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on his California nonresident return. This is clearly indicated in the instructions for both Virginia and California.

Further, the Department has the authority to assess the additional tax plus any penalty and interest, as required by law, when it finds that any taxpayer "has failed to make a proper return or to pay in full any proper tax." See Va. Code § 58.1-1812. In general, the Department must assess omitted taxes within three years of the latter of the due date of the return or the actual date that the return was filed. There are exceptions to the three-year period that extend the period, but none apply in this case.

According to Department records, the 2003 income tax return was processed and the refund was credited toward the Taxpayer's 2004 income tax liability on May 14, 2004. As such, the assessment dated November 6, 2006 was issued well within the five-year limitations period provided under Va. Code § 58.1-312, and within the three-year limitations period permitted under Va. Code § 58.1-1812.

As previously stated, the issue regarding the computation of the allowable out-of- state credits has been resolved and the assessment adjusted accordingly. The adjusted assessment is upheld and is now due and payable. Payment of the remaining balance due, as shown on the enclosed schedule, should be made to: Virginia Department of Taxation, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: ****. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1053244731E

Rulings of the Tax Commissioner