Could Virginia recover a refund created when federal refund offsets were credited to a taxpayer and later reversed?

Subject

Assessment was issued to recover the erroneous refund.

Plain-English summary

Virginia properly assessed an individual to recover refund checks created by federal Treasury Offset Program payments that were later reversed. The taxpayer had been assessed for unfiled 2003 and 2004 returns. After he filed the returns in 2008, Virginia abated those assessments.

Before the federal Treasury received notice of the abatements, it withheld eligible federal refunds and sent offset payments to Virginia. With no remaining assessments to receive the money, Virginia credited the payments to 2008 and refunded them to the taxpayer, who cashed the checks.

The federal Treasury later reversed the offset payments, and Virginia had to send the funds back. The earlier checks were therefore refunds to which the taxpayer was not entitled. Virginia issued its recovery assessment within the two-year period for erroneous refunds and added interest after the balance remained unpaid for 30 days.

What this means for you

• A refund caused by a temporary payment or credit can be recovered if the underlying payment is reversed.
• Cashing a refund check does not establish entitlement to the funds.
• Virginia generally has two years from an erroneous refund to assess its recovery.
• Additional interest can accrue when the recovery assessment is not paid promptly.

Common questions

Why did Virginia issue the refund checks?

Federal offsets arrived after the older assessments had been abated, so the payments were temporarily credited to the 2008 account and refunded.

Why did the taxpayer have to repay them?

The federal Treasury reversed the offsets and Virginia returned the money, leaving the taxpayer with refunds to which he was not entitled.

Was the recovery assessment upheld?

Yes, including the added interest.

Citations and references

• Va. Code §§ 58.1-312 and 58.1-1812(B).
• 23 VAC 10-110-90(B)(7)(b).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-164

Original ruling text

August 6, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal an individual income tax assessment issued to * (the "Taxpayer") for the 2008 taxable year. I apologize for the delay in responding to your letter.

FACTS

In 2006, the Department issued an assessment against the Taxpayer for failing to timely file a Virginia individual income tax return for the 2003 taxable year. A similar assessment was issued in 2007 for the 2004 taxable year. In October 2008, the Taxpayer filed the required returns, and the assessments were abated.

Prior to receiving the returns, the Department submitted the 2003 and 2004 income tax debts to the Treasury Offset Program (TOP) to offset federal income tax refunds. Before the Department could notify the United States Department of Treasury that the assessments had been satisfied, it withheld eligible federal tax refunds to offset the income tax liabilities. Because there were no assessments to which the TOP offset payments could be applied, they were applied to the 2008 taxable year and refunded to the Taxpayer.

When the United States Department of Treasury was notified that the assessments had been abated, it reversed the TOP offset payment and the Department remitted the funds back to the United States Treasury. In November 2009, an assessment was issued to the Taxpayer for the funds erroneously refunded to him. The assessment was not satisfied within 30 days, and the Department began collection procedures against the Taxpayer. The Taxpayer appeals the assessment.

DETERMINATION

Virginia Code § 58.1-312 provides that an erroneous refund is considered to be an underpayment of tax, which can be assessed by the Department within two years from the date the erroneous refund was made. Title 23 of the Virginia Administrative Code (VAC) 10-110-90 B 7 b defines the term "erroneous refund" as "the issuance of refund to which a taxpayer is not entitled."

In this case, the Department issued assessments when the Taxpayer failed to file appropriate individual income tax returns and submitted the assessments under TOP as permitted. Because of the timing of the filing of the Taxpayer's 2003 and 2004 returns, the TOP offset payments were erroneously issued to the Taxpayer, who cashed the checks.

Because the Department was required to submit the TOP offset payments back to the federal government, an assessment was issued to recover the erroneous refund. When payment of the assessment was not received within 30 days, additional interest was added, as provided under Va. Code § 58.1-1812 B.

Accordingly, the Virginia income tax assessment issued for the 2008 taxable year is correct. An updated bill will be forwarded to you. Payment of the outstanding balance should be remitted to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention *.

The Code of Virginia sections and regulations cited 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 about this determination, please contact * at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4198411148.D