Could taxpayers avoid Virginia's three-year refund deadline by carrying a late-claimed overpayment forward as a credit?

Subject

Statute of limitations

Plain-English summary

A married couple filed a 2011 Virginia return in January 2016 and asked to apply its reported overpayment against their 2012 tax. Virginia denied the credit as outside the refund limitations period, creating a 2012 balance due.

The couple said they originally filed in April 2012 and merely refiled when they learned Virginia had not received the return. A signed return dated April 2012 and their preparer's filing instructions did not prove actual filing, and the Department had no record of receipt.

Va. Code § 58.1-499 D generally required a refund application within three years after the return's statutory due date. Because the 2011 return was due May 1, 2012, the ruling said it had to be filed by May 1, 2015 to obtain the overpayment. Calling the amount a credit carried to another year did not avoid the refund deadline.

Virginia upheld the 2012 assessment.

Citations and references

• Va. Code §§ 58.1-499 A and D and 58.1-341 A.
• P.D. 09-88, P.D. 15-252, P.D. 16-82, P.D. 01-223, P.D. 06-136, P.D. 11-202, and P.D. 13-92.
• U.S. v. Kubrick, 444 U.S. 111 (1979), as cited in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-188

Original ruling text

September 19, 2016

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which the seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2012.

FACTS

The Taxpayers filed their 2011 Virginia individual income tax return in January 2016, reporting an overpayment of income tax and requesting that the overpayment be credited against their income tax liability for the 2012 taxable year. The Department denied the request because the return was filed beyond the refund period allowed by the statute of limitations. The denial of the request resulted in the Taxpayers owing additional tax for the 2012 taxable year, and an assessment was issued. The Taxpayers appeal, contending that their 2011 return was first filed in April 2012. The Taxpayers also argue that even if the return was not filed until January 2016, the statute of limitations on refunds is not applicable to overpayment credits.

DETERMINATION

Virginia Code § 58.1-499 A provides that in the case of any overpayment of any tax, whether by reason of excessive withholding, overestimating and overpaying estimated tax, or error on the part of the taxpayer, the Department shall order a refund of the overpayment. Virginia Code § 58.1-499 D specifies, however, in pertinent part that:

No refund under this section . . . shall be made . . . whether on discovery by the Department or on written application of the taxpayer, if such discovery is not made or such written application is not received within

three years from the last day prescribed by law for the timely filing of the return . . . [Emphasis added.]

Virginia Code § 58.1-341 A requires that a taxpayer file an individual income tax return by May 1 of the year following the tax year for which the return is filed. Based on Virginia statutes, the due date for the Taxpayers' 2011 individual income tax return was May 1, 2012. As such, the return was required to be filed by May 1, 2015, in order to receive a refund for the 2012 taxable year. The original 2011 Virginia income tax return was not filed until January 2016, after the statute of limitations had expired.

The Taxpayers contend that they filed their 2011 return in April 2012. The Taxpayers explain that they merely re-filed the 2011 return in January 2016 after learning that the Department had not received it. On appeal, the Taxpayers have submitted a copy of a signed 2011 return dated from April 2012. Included with the copy was a filing instruction sheet prepared by the Taxpayers' tax return preparer. Such documentation, however, is insufficient to prove that the Taxpayers did, in fact, file the return in April 2012. As stated above, the Department has no record that the return was filed.

Although the Taxpayers have not requested an actual refund, but have requested that an overpayment of tax for the 2011 taxable year be applied against their income tax liability for the 2012 taxable year, the laws regarding refunds apply. As stated above, Va. Code § 58.1-499 requires that an application for refund must be received within three years from the last day prescribed by law for the timely filing of the return. See Public Document (P.D.) 09-88 (5/28/2009).

The Taxpayers contend that even if the return was filed in January 2016, the reference to “refund” in Va. Code § 58.1-499 D means that the three year statute of limitations does not apply as long as a taxpayer requests that the overpayment be credited on the following year's return. The Department expressly rejected this argument in P.D. 15-252 (12/28/2015) and upheld and expanded on its position in P.D. 16-82 (5/16/2016).

The Department has consistently applied the statute of limitations on refunds to overpayment credits at least since the publication of P.D. 01-223 (12/21/2001). See, e.g. , P.D. 06-136 (10/30/2006), P.D. 09-88 (5/28/2009), P.D. 11-202 (12/13/2001) and P.D. 13-92 (6/10/2013). As explained in P.D. 15-252 and P.D. 16-82, the Taxpayers' interpretation of Va. Code § 58.1-499 could nullify the statute of limitations on refunds in some circumstances. For example, a taxpayer who had not filed returns for many years but who had made sufficient estimated payments or had sufficient income tax withheld could file such returns to claim refunds. Instead of claiming refunds for years outside the statute of limitations, however, he could claim overpayment credits and carry over such credits into the first taxable year in which he was still eligible to receive a refund.

As stated in those determinations, to require the Department to review taxable years long since past would present exactly the kinds of administrative challenges that statute of limitations are designed to address. Statutes of limitations serve to protect businesses, individuals and governments from situations “in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or otherwise.” See U.S. v. Kubrick , 444 U.S. 111, 117, 100 S.Ct. 352, 317 (1979).

Therefore, in accordance with Virginia law and the Department's longstanding policy, the assessment is upheld. An updated bill will be issued shortly, which will include the accrual of additional interest. The Taxpayers should remit payment of the outstanding balance within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections and public documents 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/1-6296752549.M