Does an allegedly incorrect W-2 or an employer's withholding failure eliminate an employee's Virginia income tax liability?

Subject

Nonfiler, Incorrect Federal W-2s, Subject to Pay Taxes

Plain-English summary

Virginia upheld a 2014 income tax assessment against an employee who said his employer issued incorrect W-2 forms and who paid only the amount he believed was due.

An employer's failure to withhold does not eliminate the employee's duty to report income and pay the tax. A taxpayer may submit federal Form 4852 as a substitute W-2, but filing that form alone does not prove Virginia tax was withheld or require the Department to accept the taxpayer's figures.

The IRS had already reviewed the taxpayer's 2014 liability, and Virginia does not look behind the IRS's final determination. Department records still showed a balance, and the taxpayer had not proved the assessment incorrect, so it remained due.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-461, 58.1-467, 58.1-474, and 58.1-484.
• P.D. 95-119 and P.D. 11-107.
• John M. and Alice D. Church v. Commissioner of Internal Revenue (2d Cir. 1987).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-182

Original ruling text

October 17, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal and offer to settle an individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2014.

FACTS

The Department received information from the Internal Revenue Service (IRS) that the Taxpayer may have income subject to Virginia income tax. Because no return was on file, the Department requested additional information. The Taxpayer did not respond within the allowed time and an assessment for tax, penalty and interest was issued for the 2014 taxable year. The Taxpayer has submitted a payment for the amount he believes is due and asserts that his employer issued incorrect federal W-2 forms.

DETERMINATION

Virginia Code § 58.1-301 provides that the terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia conforms to federal law in that it starts the computation of Virginia taxable income with the federal adjusted gross income (FAGI). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

Pursuant to Va. Code §§ 58.1-474 and 484, employers are personally and individually liable for withholding and paying taxes on the wages of their employees. However, if an employer fails to withhold tax, the Department will not collect the tax from the employer if the tax has been paid by the employee. See Va. Code § 58.1-467. In John M. and Alice D. Church v. Commissioner of the Internal Revenue Service , 810 F2d 1959, A.F.T.R.2d 87-469 ( 2nd Cir., 1987), the United States Court of Appeals held that “the failure of the employer to withhold taxes, as it should have, did not lessen the taxpayers' obligation to report and pay taxes on income that they in fact received.” Thus, while an employer may have been required to withhold Virginia income tax from an employee's compensation under Va. Code § 58.1-461 et seq. , the employee is responsible for reporting the income and paying the entire tax. See Public Document (P.D.) 95-119 (5/16/1995).

The Taxpayer contends that the employer issued an incorrect federal W-2 form. If the information on a W-2 form is incorrect, taxpayers are permitted to submit a substitute W-2 (Currently Form 4852) with the IRS to report or correct both federal and Virginia income tax withholding. The mere filing of a form, however, is insufficient proof that the employer deducted and withheld Virginia income tax but failed to remit such tax to the Department. In addition, because federal conformity is limited as described above, the Department is not required to accept the form, even if the IRS has not challenged the information contained therein. If the IRS undertakes a review of the substitute W-2 resulting in a change to the income and withholding reported, the Department would likewise adjust its records and the tax liability as appropriate.

In this case, however, the IRS has conducted a review of the Taxpayer's 2014 income tax liability. Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS's final determination. See P.D. 11-107 (6/14/2011). The Department adjusted the Taxpayer's 2014 Virginia income tax return based on federal information available from the IRS as permitted by statute. The Taxpayer asserts that an adequate payment was made to satisfy his Virginia income tax liability. According to the Department's records, however, a balance remains.

Because the Taxpayer had not shown that the assessment was incorrect, it is considered valid and remains due and payable. An updated bill will be issued shortly. Payment of the outstanding balance as shown on the bill should be remitted 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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1298.B