March 2, 2021
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayer”) for the taxable year ended December 31, 2015.
FACTS
The Taxpayer filed part-year Virginia and ***** (State A) resident income tax returns for the 2015 taxable year. In August 2019, the Taxpayer was notified by State A of a proposed assessment. The Taxpayer paid the assessment and filed an amended Virginia return in November 2019 to claim a refund due. The Department denied the refund on the basis that the statute of limitations had expired. The Taxpayer appealed, contending she was permitted to file an amended Virginia return within one year of the change to her State A tax liability.
DETERMINATION
Generally, Virginia Code § 58.1-1823 allows a taxpayer to file an amended return within three years from the last day prescribed by law for the timely filing of the return. In this case, the Taxpayer did not file the amended return until November 2019, after the general statute of limitations had expired in May 2019 to claim a refund on a 2015 amended return. Virginia Code § 58.1-1823, however, also includes a number of exceptions to the general rule when specific circumstances are present. Under Virginia Code § 58.1-1823 A (v), a taxpayer has one year from the final determination of a change made by any other state to file an amended return to request a refund, provided that the refund does not exceed the amount of the decrease in Virginia tax attributable to such change.
The proviso that the refund may not exceed the amount of the decrease in Virginia tax attributable to such change implies that for Virginia Code § 58.1-1823 A (v) to apply, there must actually be a decrease in Virginia tax attributable to the other state’s change. The Department has applied this provision, for example, when taxpayers have first filed as residents of Virginia but other states later assess them as residents of those states. See, e.g., Public Document (P.D.) 12-104 (6/19/2012) and P.D. 20-34 (3/6/2020). The Department has also applied this provision when another state has denied credit for income tax paid to Virginia in cases where reciprocity applied and the taxpayer could claim a credit on her Virginia return for credit paid to the other state. See P.D. 15-226 (12/8/2015) and P.D. 17-1 (1/12/2017).
In this case, State A notified the Taxpayer of certain errors that had been made in the computation of her State A income tax. It appears that the Taxpayer had computed her State A tax in such a way that did not apply the correct rate. As a result of this notice, the Taxpayer states that she filed an amended return with State A and paid the additional tax due. The fact that her State A tax liability had been incorrectly computed, however, had no bearing on her Virginia tax liability. The correction she made on her amended Virginia return was to increase the amount of taxable income attributable to her period of State A residence. The only change to her income attributable to her period of State A residency, however, since the filing of her original Virginia return was an increase in dividends and capital gains as corrected by the Internal Revenue Service (IRS) in May 2017. This increase would not have affected her Virginia income tax liability because the resulting increase in federal adjusted gross income (FAGI) on her Virginia return would have been offset by the increase in income attributable to her period of State A residency.
In this case, the Taxpayer under reported the amount of income attributable to her period of State A residency on her original Virginia return. The amount reported was less than the amount reported on her original State A return. The correction the Taxpayer tried to make on her amended Virginia return was a significant change to amount originally reported and considerably more than the IRS adjustment.
The proposed assessment indicating the computational errors on her State A return had nothing to do with that original error in reporting her income attributable to State A on the original Virginia return. Therefore, Virginia Code § 58.1-1823 A (v) did not apply, and the Taxpayer would had to have filed an amended 2015 Virginia return within 3 years of the original May 2016 due date to correct that error and claim a refund within the statute of limitations. Because the amended return was not filed until November 2019, it was not timely filed. Therefore, the Taxpayer’s request for refund must be denied.
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/3489.M