Could Virginia recover a refund increase caused by itemized deductions overstated on the taxpayers' own return?

Subject

Incorrect itemized deductions made excess refund recoverable

Plain-English summary

Virginia upheld recovery of the part of a 2005 refund caused by overstated itemized deductions on the couple's return. The taxpayers had correctly stated the refund amount they expected, but the deduction figure entered on Form 760 caused the Department's processing to increase the overpayment.

IRS information later showed the deduction amount was wrong. The excess refund was therefore traceable to incorrect taxpayer-provided information, even if inadvertent, rather than a free-standing Department mistake.

Section 58.1-312(E) treated an erroneous refund as an underpayment on the refund date. The cited regulation allowed recovery within five years when a material taxpayer misstatement or error directly affected Virginia taxable income or liability. The assessment remained due.

What this means for you

• A correct requested-refund line does not cure an incorrect deduction that changes processing.
• Inadvertent taxpayer errors can support erroneous-refund recovery under the cited rule.
• Compare the filed deduction lines with federal records and state schedules.
• Refunds may be applied partly to local debt and partly paid to the taxpayer, but the excess can still be assessed back.

Common questions

Did the couple request the larger refund?

No. They had reported the expected refund correctly, but the deduction error caused Virginia to increase it.

What caused the excess?

An incorrect itemized-deduction amount on the state return.

Was the recovery assessment removed?

No.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-60

Original ruling text

May 7, 2010

Re: § 58.1-1821 Appeal: 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 2005 taxable year. I apologize for the delay in the Department's response.

FACTS

The Taxpayers filed a 2005 Virginia individual income tax return claiming a refund. The Department processed the return based on the information reported and increased the amount of the refund due the Taxpayers. A portion of this refund was applied to an existing debt with a Virginia locality, and the remainder was issued to the Taxpayers.

Based on information provided by the Internal Revenue Service (IRS), the Department discovered that the Taxpayers had overreported itemized deductions on their original 2005 Virginia return, and issued an assessment. The Taxpayers contend the itemized deductions were incorrectly adjusted, resulting in an erroneous assessment. They also claim that the amount of refund reported on the original return was correct.

DETERMINATION

Virginia Code § 58.1-312 E provides that an erroneous refund is considered an underpayment of tax on the date the refund is 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. The regulations also provides that the Department may make an assessment for recovery of the amount erroneously refunded within five years from the date of the refund if the issuance of the erroneous refund results from "a misrepresentation of a material fact by the taxpayer including inadvertent taxpayer errors, e.g. , the omission of information or the incorrect listing of information which has a direct bearing on the computation of Virginia taxable income or tax liability."

In this case, the Department processed the 2005 Virginia income tax return as completed by the Taxpayer. The refund was increased based on the itemized deductions reported by the Taxpayer on the original return. Based on the IRS information, the Taxpayers did, in fact, claim the correct amount of refund on their original 2005 return. However, reporting the incorrect amount of itemized deductions on Line 10 of Form 760 resulted in the Department's adjustment to their original return and an increased overpayment of tax, which was erroneously refunded to the Taxpayers.

Based on a review of the return filed by the Taxpayers and pursuant to the cited statute and regulation, the assessment for tax erroneously refunded to the Taxpayers is upheld and is now due and payable. Payment of the remaining balance due, as shown on the enclosed schedule, should be made to Virginia Department of Taxation, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter.

The Code of Virginia section and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions concerning this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3110136318.C