Could a late 2003 Virginia overpayment claim offset a 2004 assessment after an IRS correction moved retirement income between years?

Subject

Expired 2003 refund claim could not offset the 2004 assessment

Plain-English summary

Virginia refused to apply the couple's late 2003 overpayment against their 2004 assessment. A retirement plan had originally reported an early distribution in 2003, then corrected it to 2004. The IRS adjustment moved the federal income accordingly.

The federal change became final on October 20, 2006. Virginia said the couple had until October 22, 2007 to file the amended 2003 Virginia return under the one-year federal-change rule, but they filed in April 2008.

Although the couple argued that the correct total tax had been paid across the two years, Virginia consistently denied offsets based on refund claims filed after the limitation period. The Commissioner found no power to waive the deadline, so the 2004 assessment remained due with interest.

What this means for you

• An IRS change can create a special one-year Virginia amended-return deadline.
• Related overpayments and underpayments in different years do not automatically net after a refund period expires.
• Filing the assessment-year amendment does not preserve a separate refund-year claim.
• Virginia's limitation period was mandatory rather than discretionary here.

Common questions

Why did the refund deadline run from the federal change?

Virginia allowed one year after final federal determination to amend for a related refund.

Could the 2003 overpayment simply be credited to 2004?

No. The refund claim for 2003 was untimely, and Virginia would not use it as an offset.

Citations and references

• Va. Code §§ 58.1-311, 58.1-312, and 58.1-1823.
• P.D. 90-20, 95-155, 96-137, 97-224, 00-140, and 06-37.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-89

Original ruling text

May 28, 2009

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, 2004.

FACTS

The Taxpayers, a husband and a wife, made an early withdrawal from the husband's retirement plan in early 2004. The plan erroneously issued a federal information return (1099-R) reporting the distribution in 2003. The Taxpayers reported the income on their 2003 federal and Virginia income tax returns.

The plan issued a corrected 1099-R and the Internal Revenue Service (IRS) issued an assessment for the 2004 taxable year. In October 2006, the Taxpayers amended their 2003 federal income tax return in order to offset the 2004 liability.

In January 2008, the Taxpayers filed an amended Virginia individual income tax return for the 2004 taxable year. The Department processed the return and issued an assessment.

In April 2008, the Taxpayers filed an amended 2003 Virginia individual income tax return, requesting that the overpayment be applied to the 2004 underpayment. The Department determined that the amended 2003 return was filed after the statute of limitations period expired and denied the Taxpayers' request. The Taxpayers acknowledge that they filed beyond the statute of limitations to request a refund, but appeal the denial of the credit of the 2003 overpayment against the 2004 assessment contending that they paid the appropriate amount of tax.

DETERMINATION

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), and P.D. 06-37 (4/5/2006).

Based on the information provided, the final determination for the change to the Taxpayers' 2003 federal taxable income occurred October 20, 2006. Based on the final determination date, the Taxpayers were required to file their amended 2003 Virginia income tax return on or before October 22, 2007. The Taxpayers did not file the amended 2003 return with the Department until April 2008, well beyond the statutorily required period.

While I empathize with your situation, I am bound by the clear requirements under the law. The Tax Commissioner is not empowered to waive the statute of limitations period in this situation. Accordingly, I must deny the Taxpayers' request for the abatement of the 2004 assessment. A revised bill, reflecting the payment that the Taxpayers have made, along with interest accrued to date, will be sent to the Taxpayers. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill.

The Code of Virginia sections 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,

Janie E. Bowen

Tax Commissioner

AR/1-2760753716.B