10-110 | Virginia Tax

Tax Type

Individual Income Tax

Description

Taxpayer was entitled to relief, but failed to act within the statute of limitations.

Topic

Federal Conformity

Statute of Limitations

Date Issued

06-22-2010

June 22, 2010

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 assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2001. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers were audited by the Internal Revenue Service (IRS) for the 2001 and 2002 taxable years. The IRS issued a closing agreement for the audit dated August 21, 2006. The Taxpayers filed amended 2001 and 2002 Virginia income tax returns on November 2, 2007, reflecting the IRS adjustments.

The Department issued an assessment for the 2001 taxable year and denied the Taxpayers' request to apply the 2002 overpayment to the 2001 liability on the basis that the returns were not timely filed. The Taxpayers paid the assessment, but contend the amended 2002 return claiming a refund was timely filed. They request that the 2002 amended return be accepted and the overpayment be refunded.

DETERMINATION

Limitations Period

Under Va. Code § 58.1-311, a taxpayer audited by the IRS is required to file an amended return and report the changes to the Department within one year of the final determination of the change. Further, under Va. Code § 58.1-1823, a taxpayer has three years from the last day prescribed by law for the timely filing of the return, or one year from the final determination of a federal change or correction to file an amended return to request a refund. If such amended returns are not filed, the Department may make an assessment of additional tax based on the federal adjustments at any time pursuant to Va. Code § 58.1-312.

The Department has consistently denied refund offset requests in circumstances similar to the Taxpayers. See Public Document (P.D.) 90-20 (01/11/1990), P.D. 95-155 (6/13/1995), P.D. 96-137 (6/17/1996), P.D. 97-224 (5/16/1997), P.D. 00-140 (7/31/2000), P.D. 06-37 (4/5/2006), and P.D. 09-89 (5/28/2009).

The Department acknowledges that not all federal determinations are final. Under Title 23 of the Virginia Administrative Code (VAC) 10-20-180 B, a final determination of a change in liability for the federal tax includes, with certain exceptions, the refund by the IRS of any federal income or estate tax. A final determination may also include a copy of an RAR, Form 870, 90-day letter, closing agreement, or court decision. Thus, under Title 23 VAC 10-20-180 B, a taxpayer may have more than one final determination for a given taxable year.

The Taxpayers have provided additional documentation regarding the final determination for the 2002 taxable year. The IRS notice dated October 30, 2006 confirms the changes made pursuant to the closing agreement executed in August 21, 2006. As this notice does not further change the Taxpayers' federal adjusted gross income or federal tax liability, it is not considered to be a new final determination. Likewise subsequent notices adjusting the amount of interest changed on an assessment are not new final determinations.

The Taxpayers also argue that their representatives did not notify them that the closing agreement had been signed by the IRS until sometime in 2007. However, the representatives were aware that the closing agreement had been fully executed by the end of August 2006. Generally, the IRS provides notices or other written communication to both a taxpayer and the representative. See Treas. Reg. § 601.506. The fact that the Taxpayers were not notified timely by their representatives would not affect the statute of limitations.

Equitable Recoupment

The Taxpayers also propose that, should the Department rule that the statute of limitations were not met, equitable recoupment would be an appropriate alternative. They believe that Virginia law does not preclude the defense of the equitable recoupment in this case.

Equitable recoupment is a common law doctrine. As applied to tax law, the doctrine allows the government to collect a tax or a taxpayer to collect a refund of tax after the running of the statute of limitations for such collection in cases where the statute of limitations creates an inequitable result.

The Department has addressed the doctrine of equitable recoupment in Public Document (P.D.) 94-312 (10/12/1994). The Department found that the Virginia Supreme Court set the standard for equitable recoupment in Virginia when it stated, "It is well settled that the common law continues in force in Virginia except as altered by statute." See Commonwealth v. Holland, 211 Va. 530, 178 S.E.2d 506 (1971).

Equitable recoupment is not applicable to this situation. On the date the federal changes were made, Virginia statutes did not bar the Taxpayers from filing an amended return and claiming a refund. It was only after the expiration of an additional year that the Taxpayers were barred from claiming a refund. The Taxpayer was entitled to relief, but failed to act within the statute of limitations.

The Department must rely on the clear language of Va. Code §§ 58.1-311 and 58.1-1823. Based on the law, the Department does not have the authority to issue a refund requested more than one year after the final federal determination of the change. Accordingly, the Taxpayers' request for a refund of income taxes overpaid for the 2002 taxable year must be denied.

The Code of Virginia sections, regulation and public documents cited are available on-line www.tax.virginiai.gov in the Tax Policy Library 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,

- - - - Linda D. Foster
        Deputy Tax Commissioner

AR/1-3360987168.B

Rulings of the Tax Commissioner