May 16, 2016
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek reconsideration of the Department's determination letter, issued as Public Document (P.D.) 15-252 (12/28/2015), to ***** (the "Taxpayer") for the taxable year ended December 31, 2012.
FACTS
In P.D. 15-252, the Department upheld the denial of the Taxpayer's request to apply his overpayment for the 2011 taxable year against his income tax liability for the 2012 taxable year, because he had not filed his 2011 individual income tax return within three years of the last day prescribed by law for the timely filing of the return. The Taxpayer filed a request for reconsideration, contending that the Department's policy of applying the statute of limitations on refunds to overpayment credits is an erroneous interpretation of Virginia law and acts as an additional penalty for late filing returns that the legislature did not intend.
DETERMINATION
In P.D. 15-252, the Department determined that the Taxpayer's request to credit his overpayment for the 2011 taxable year against his income tax liability for the 2012 taxable year was not timely made because he did not file his 2011 return until June 2015, after the three year limitations period had expired on May 1, 2015. The Taxpayer contends that because Va. Code § 58.1-499 distinguishes between refunds and overpayment credits and Va. Code § 58.1-499 D refers only to refunds, the statute of limitations on refunds does not apply to overpayment credits.
Virginia Code § 58.1-499 A provides that:
In the case of any overpayment of any tax, addition to tax, interest or penalties imposed on an individual income taxpayer by this chapter, whether by reason of excessive withholding, overestimating and overpaying estimated tax, error on the part of the taxpayer, or an erroneous assessment of tax, the Tax Commissioner shall order a refund of the overpayment to the taxpayer.
The phrase "shall order a refund" indicates the Department is required to order a refund of any amount of overpayment. Virginia Code § 58.1-499 A contains no exceptions or qualifications to that requirement. Virginia Code § 58.1-499 C, however, permits a taxpayer to elect to credit an overpayment towards his following year's estimated tax. Construing Va. Code § 58.1-499 A and C together, the Department's requirement to order a refund must be satisfied when the taxpayer elects an overpayment credit. A refund and overpayment credit, therefore, are functionally equivalent under Va. Code § 58.1-499 in that the Department's duty to order a refund under Va. Code § 58.1-499 A is discharged in either case. Either way, a taxpayer receives something of value, whether it is an actual refund or the equivalent credited towards the following year's liability. As such, it has been the Department's longstanding policy to apply the statute of limitations under Va. Code § 58.1-499 D to both refunds and overpayment credits. The policy extends back at least to the publication of P.D. 01-223 (12/21/2001) and has been consistently applied. See, e.g., P.D. 06-136 (10/30/2006), P.D. 09-88 (5/28/2009), P.D. 11-202 (12/13/2011) and P.D. 13-92 (6/10/2013).
As explained in P.D. 15-252, the Taxpayer's interpretation would allow non-filers who had enough income tax withheld from their wages or made sufficient estimated payments in order to be entitled to a refund to file original income tax returns for any taxable year since Virginia first imposed an income tax. Instead of claiming refunds, however, such taxpayers could simply carry forward overpayment credits into each successive taxable year until they were carried over into a year that came within the statute of limitations to claim refunds. The Taxpayer claims that such a scenario is improbable, but it is not unusual for wage earners to consistently have enough income tax withheld from their wages to be entitled to both state and federal income tax refunds. To require the Department to review taxable years long since past would present exactly the kinds of administrative challenges that statutes of limitations are designed to address. As stated in P.D. 15-252, statutes of limitations serve to protect businesses, individuals and governments from situations "in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or otherwise." See U.S. v. Kubrick, 444 U.S. 111, 117, 100 S.Ct. 352, 317 (1979).
The Taxpayer also argues that the Department's interpretation of Va. Code § 58.1-499 D effectively imposes a late-filing penalty in excess of the 30% limit under Va. Code § 58.1-347. Pursuant to Va. Code § 58.1-347, an individual who fails to file a return by the due date or extended due date of such return is subject to a penalty equal to 6% of the tax liability per month or fraction thereof during which such failure to file continues, not to exceed 30%, in the aggregate. In this case, because no tax was owed, the Taxpayer was not subject to the late filing penalty under Va. Code § 58.1-347. The issue of whether the limitations period under Va. Code § 58.1-499 D applies to overpayment credits as well as refunds is entirely separate and distinct from the late filing penalty. As such, the provisions of Va. Code § 58.1-347 have no bearing on the determination of this case.
Therefore, in accordance with the Department's longstanding policy of applying the statute of limitations on refunds to overpayment credits, I find that the Department properly denied the Taxpayer's request to apply his overpayment for the 2011 taxable year against his income tax liability for the 2012 taxable year. While I recognize the Taxpayer's continuing disagreement with the Department's policy, the Department's determination in P.D. 15-252 is upheld. This letter constitutes the Department's final determination on this matter.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,
Craig M. Burns
Tax Commissioner
AR/1-6251049571.M