How did Virginia correct overlapping estimated-tax and late-filing penalties on a December 2014 return for 2013?

Subject

Duplicate estimated-tax addition removed; late-filing penalty corrected

Plain-English summary

Virginia corrected which penalty appeared on the bill, but kept the proper late-filing charge. The taxpayers had insufficient withholding during 2013 and paid an estimated-tax addition when they eventually filed.

Because the return arrived on December 26, 2014 rather than by the May 1 due date, the 30% late-filing penalty was proper. The Department had mistakenly reduced part of that late penalty while leaving a duplicate estimated-tax addition on the bill.

Result: Virginia would remove the duplicate underpayment amount, restore the correct late-filing penalty, and adjust mandatory interest accordingly.

What this means for you

• Reconcile penalties to payments already made with the return.
• Paying the balance does not erase a late-filing penalty.
• Interest changes when the underlying tax or penalty is corrected.
• Review whether the bill uses the correct penalty category and amount.

Common questions

Q: Were all penalties removed?

A: No. The duplicate estimated-tax addition was corrected, but the late-filing penalty remained.

Q: Could interest be waived independently?

A: No. The ruling said interest was mandatory, though it would be recomputed after the penalty correction.

Citations and references

• Va. Code §§ 58.1-492, 58.1-347, and 58.1-1812(A).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-189

Original ruling text

September 30, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you appeal the penalties and interest included in the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2013.

FACTS

The Taxpayers, a husband and wife, filed their 2013 Virginia income tax return in December 2014 and remitted the balance of the tax due and the underpayment penalty. The Department audited the return and made several adjustments, resulting in the assessment additional tax, penalty and interest. Based on information submitted by the Taxpayers, the adjustments were reversed and the additional tax liability was abated. A revised assessment was issued that included an addition to tax for the underpayment of estimated tax, commonly known as the estimated underpayment penalty, a late filing penalty, and interest. The Taxpayers appeal the assessment, contending that all of their tax liability was paid when they filed their return.

DETERMINATION

Addition to Tax

Virginia Code § 58.1-492 provides for an addition to tax in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year.

For individuals and fiduciaries, payments of estimated tax are required to be filed on or before May 1 of each year if Virginia estimated tax liability will exceed withholding and tax credits by more than a $150 threshold, and may be amended at a later date to reflect any increase or decrease anticipated in the year's tax liability. If any estimated tax installments are not sufficient to cover the income tax liability as reported on the annual tax return, a taxpayer may be assessed the estimated tax underpayment penalty unless one of the exceptions enumerated in Va. Code § 58.1-492 is met. See Public Document (P.D.) 03-40 (4/1/2003). In this case, the Taxpayers' liability exceeded the threshold and they underpaid withholding tax towards the liability. As such, an underpayment penalty was assessed. However, a review of the Department's records indicates that the Taxpayers paid the estimated tax underpayment penalty when they filed their return.

Late Filing Penalty

Pursuant to Va. Code § 58.1-347, an individual who fails to file a return by the due date or extended due date of such return is subject to a penalty equal to 6% of the tax liability per month or fraction thereof during which such failure to file continues, not to exceed 30%, in the aggregate.

The Taxpayers were required to file their 2013 return by May 1, 2014; however, they did not file their return until December 26, 2014. Accordingly, the 30% penalty was properly assessed on taxes due for 2013 taxable year. A review of the adjusted assessment shows that a portion of the late file penalty was incorrectly abated as the underpayment penalty.

Interest

Virginia Code § 58.1-1812 A requires the assessment of interest on the outstanding tax and penalty. The application of interest to tax underpayments is mandatory and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty for noncompliance, but represents a fee for the use of money that was properly due the Commonwealth. The Virginia statute is clear with respect to the assessment of interest.

The interest assessed against the Taxpayers was derived from the late filing and the estimated tax underpayment penalties. However, the interest will be adjusted to reflect the abatement of the estimated tax underpayment penalty.

CONCLUSION

The department appropriately applied the late filing penalty. The underpayment penalty for the failure to pay estimated taxes assessed when the return was filed should not have been assessed. Instead of abating underpayment penalty, however, the Department reduced the late filing penalty. Thus, the current bill erroneously includes the underpayment penalty and understates the late filing penalty. Accordingly, the assessment will be adjusted to reflect the correct penalty amounts and interest will be adjusted accordingly. An updated bill will be issued reflecting the Department's adjustments. The Taxpayers should remit payment for the outstanding balance as shown on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest.

The Code of Virginia sections and public document 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/1-6018187257.B