Tax Type
Individual Income Tax
Description
Tax Software; Department does not guarantee computational accuracy of software
Topic
Computation of Tax
Out of State Tax Credits
Returns and Payments
Date Issued
06-02-2011
June 2, 2011
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 "Taxpayers") for the taxable year ended December 31, 2007. I apologize for the delay in the Department's response.
FACTS
The Taxpayers claimed a credit on their 2007 Virginia individual income tax return for income tax paid to ***** (State A). Under audit, the Department adjusted the out-of-state tax credit and issued an assessment on June 12, 2010.
The Taxpayers filed an appeal, contending the assessment should not have been issued because the return had previously been adjusted. The Taxpayers also assert that they relied on the accuracy of tax software approved by the Department and request that the assessment be abated.
DETERMINATION
Credit for Taxes Paid Other States
Virginia Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and another state on these types of income during the same taxable year.
When the Taxpayers filed their original 2007 Virginia income tax return, the Department identified an error in the amount of Virginia income tax used in the out-ofstate credit computation and adjusted the amount of the credit. As a result, the Department reduced that amount of the refund claimed on the return by the Taxpayers.
In 2010, the Taxpayers' return was selected for audit and an additional error was discovered in the out-of-state credit computation. Under audit, the Department adjusted the amount of State A taxable income, adjusted the out-of-state credit accordingly, and issued an assessment.
Tax Audits
The Taxpayers assert that the Department should have discovered the error on their return earlier to prevent interest from accruing. The Taxpayers also believe the Department should not be able to audit income tax returns that have previously been adjusted.
Virginia's taxing system is based largely on the theory of self assessment. The taxpayer is given the responsibility to compute, file and pay their own income tax. Virginia has implemented a self assessment system based on the federal system because it is less intrusive upon the taxpayer, and less costly to the administration of the tax. Because only a small portion of the individual returns filed annually can be audited, the fact that a return is processed by the Department does not mean that the tax return was computed correctly.
The Department does, however, make every effort to correct mathematical and matching errors on tax returns when they are filed. Mathematical errors most often occur when amounts are added or subtracted incorrectly. Matching errors occur when amounts are not transposed accurately from one line or form to another. These types of errors can be identified through automated checks and do not significantly slow processing. In the Taxpayers' case, the error on the original return occurred when the amount of Virginia tax reported in the out-of-state tax credit computation did not match the amount on the Virginia return.
In order to record returns and issue refunds as rapidly as possible, however, information from another state's income tax return is not captured during the initial processing. As such, the discrepancy between income reported on State A's tax return and State A income included in the out-of-state tax credit computation would not have been identified in the automated check system during return processing.
Under Va. Code § 58.1-219, the Department has the authority to investigate any books and records of a taxpayer in order to ascertain the proper tax liability. The Department's audit and review programs select returns for review based on the available resources and information. Information used in such reviews is often not available for review until well after each year's processing is completed.
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, Va. Code § 58.1-312 provides that 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 that can extend the period beyond three years, but none apply in this case. In the Taxpayer's case, the assessment was issued well within the three-year limitations period.
Tax Software
The refund issued to the Taxpayer in 2008 and the assessment made in 2010 were not made as a result of errors made by the Department, but due to errors in transferring amounts from the Virginia and State A returns to the applicable lines of the Virginia Schedule OSC, on which the credit is computed. While the tax return was completed using tax software, it is unknown whether the errors resulted from software computational errors, incorrect or confusing software instructions, or entry errors.
Tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department is not meant to imply its computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department's processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software.
CONCLUSION
Based on the foregoing, there is no basis to waive the assessment of tax or interest assessed as a result of the Department's adjustment to the Taxpayers' 2007 individual income tax return. Accordingly, the Taxpayers' request for abatement is denied.
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 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 *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4554166743.E
Rulings of the Tax Commissioner