Tax Type
Declaration of Estimated Income Tax by Individuals
Individual Income Tax
Description
Estimated payments and the calculation of refunds and tax due
Topic
Collection of Delinquent Tax
Payment and Refund
Date Issued
12-01-1986
December 1, 1986
Re: Virginia Code §58.1821 Application
Individual Income Tax
Dear *****************
This is in reply to your letters of March 12, 1986 and July 24, 1986, in which you make application for correction of the individual income tax assessments issued to your daughter, ************* for taxable years 1983 and 1985. I apologize for the delay in responding to your letters; however, because this matter involved the carryforward of overpayment credits for several years, it was necessary to thoroughly research our records and to gather copies of the pertinent returns.
FACTS
Your daughter's 1982 Virginia individual income tax return was originally timely filed claiming itemized deductions of *********. At the time she was a high school student with no earned income. on April 10, 1984 this return was amended to claim the minimum Virginia standard deduction of $1300. This amended 1982 return was filed at the same time that her 1983 income tax return was filed. You requested that the overpayment resulting from the amended 1982 return be credited to your daughter's estimated income tax for taxable year 1983. Because the department's processing system handles each year's returns independently, it was impossible to apply the requested 1982 overpayment to the 1983 estimated payments. On September 11, 1984 the amended 1982 overpayment of ******** including interest, was refunded to your daughter.
Because the 1982 overpayment was refunded rather than credited to your daughter's 1983 estimated income tax, the amount of estimated income tax claimed on her 1983 return was incorrect. Therefore, the amount of 1983 overpayment computed by the department was less than the amount shown on the return. The department credited the corrected amount of 1983 overpayment to 1984 estimated income tax. The amount of estimated income tax claimed on your daughter's 1984 return again did not agree with the department's records. Because of the de minimis amount of the discrepancy, the department did not adjust the amount of overpayment that you requested to have credited to her 1985 estimated income tax.
Prior to your daughter filing her 1985 return, the department audited her 1983 return. Based upon information obtained from the Internal Revenue Service, her 1983 federal adjusted gross income was increased; therefore, her Virginia income tax for 1983 was increased by***********. When notification of the adjustment was sent to your daughter, you requested that the additional tax due for taxable year 1983 be offset using her 1983 overpayment. It was explained to you at that time that the department was unable to do as you requested because the 1983 overpayment had been credited to her 1984 estimated income tax and that she would receive an assessment for the additional tax due for taxable year 1983.
Her 1985 return was filed claiming a credit for a 1983 overpayment and interest on that amount accrued for two years at 10%, a 1984 overpayment and interest on that amount for one year at 10% and credit for a payment submitted September 13, 1985. These amounts were entered, respectively, on the lines designated for Virginia income tax withheld, 1985 estimated income tax payments, payments made with an extension of time to file, out of state tax credit and tax credit for taxpayers age 62 and over. This altered use of the designated lines on the return caused the return to be processed erroneously. As a result, an assessment was issued for
It is the assessments for taxable years 1983 and 1985 that you are seeking to have corrected in your application.
DETERMINATION
Since you indicated in previous correspondence with the department that you do not contest the basis of the assessment for taxable year 1983, I will confine this determination, as it relates to taxable year 1983, to the issue of the use of estimated payments. You protest the fact that the department issued an assessment for the additional tax due for taxable year 1983, rather than satisfying the underpayment with your daughter's 1983 overpayment.
Virginia Code §§58.1-491 G. and 58.1-499 and their accompanying regulations (Regulations 630-2-491 and 630-2-499, copies enclosed) provide the only legal or administrative authority for crediting individual income tax overpayments.
Virginia Code §58.1-499 allows a taxpayer to elect to credit his individual income tax overpayment for a given taxable year ".. against the estimated' income tax for the ensuing year...." (emphasis added.) Virginia Code §58.1-491 G. and the accompanying regulations restrict the use of any payment of estimated income tax to the year to which it is designated. Therefore, when a taxpayer has an overpayment on his return and indicates that he wishes it to be credited to the ensuing years estimated income tax, he is in fact making a payment of estimated income tax. This is the only use which may be made of the overpayment.
Thus, there is quite clearly no legal or administrative authority for the use of a perpetual "contingency fund" which carries overpayments forward for more than one taxable year, and there are no legal provisions for the payment of interest on any overpayment which the taxpayer elects to have credited to his estimated liability for the following year.
Once your daughter indicated that she wanted her 1983 overpayment applied to her estimated income tax liability for taxable year 1984, she could not use this same overpayment to satisfy the assessment for taxable year 1983. These funds had been credited to taxable year 1984 and could not subsequently be applied to any tax assessed for any taxable year other than 1984. Accordingly, I find that the assessment issued for taxable year 1983 is proper; therefore, due and payable.
The assessment for taxable year 1985 was issued erroneously due to the confusion created by the altered use of the designated lines on the form. Had the return been completed properly and full credit claimed for the 1984 overpayment, your daughter would have received a refund rather than having to pay a tax due and receiving an assessment for additional tax. Therefore, the assessment for taxable year 1985 will be abated in full.
It was noted during the review of your daughter's returns that it appears that she erroneously claimed and was allowed the full amount of standard deduction. Because of its conformity to the Internal Revenue Code, Virginia follows the federal treatment of dependents claimed on another's return that have unearned income. If such a taxpayer elects not to, or is required not to itemize deductions for federal income tax purposes, then the Virginia standard deduction may be computed only with regard to earned income. The standard deduction is based only on the amount of "earned income", such as wages, salaries, professional fees, etc. The standard deduction allowable is 15 percent of earned income, not to exceed $2000. If 15 percent of earned income does not exceed $1300, the allowable amount is $1300 or the amount of earned income, whichever is less.
In each of the years 1982 through 1985 your daughter claimed and was allowed the full amount of standard deduction - $1300. Based upon the statements attached to the returns and in your application for correction, your daughter was a student with no earned income in each of those years, Accordingly, she is not entitled to the full amount of standard deduction. Since under Virginia Code §58.1-322 D. a taxpayer is required to make the same choice of either itemized deductions or the standard deduction for Virginia purposes as he does for federal purposes, we must assume based upon your daughter's returns, that she did not itemize deductions for federal purposes. Therefore, her returns will be adjusted to allow a standard deduction equal to $0. Because the three year statute of limitations for assessing additional tax imposed under Virginia Code §58.1-1812 has expired for taxable year 1982, no assessment can be issued for that year. The additional assessments for taxable years 1983, 1984 and 1985 will be forthcoming in the near future.
If you have any further questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner