Can an employee claim Virginia withholding credit when the employer's reported payment cannot be verified?

Subject

Under the statute, the employee bears the burden of proving that the employer deducted and withheld such tax.

Plain-English summary

An employee claimed Virginia income-tax withholding shown for one employer, but the Department could not verify that employer's withholding and remittance. Virginia denied the credit during review and asked the employee for additional proof.

Va. Code § 58.1-468 says that if an employer actually deducts Virginia tax from wages but fails to pay it to the Commonwealth, the employee is not liable for that withheld amount and may claim the credit. The employee, however, bears the burden of proving the deduction occurred.

Because the taxpayer had not supplied the requested verification, the Department gave him one final 30-day opportunity. If the documents substantiated the claim, a refund would be issued as warranted. If not, the already-paid assessment would remain correct and no further action would be required.

What this means for you

An employer's failure to remit does not automatically cost an employee the withholding credit, but a disputed Form W-2 entry may require payroll records, pay statements, or other evidence showing that Virginia tax was actually taken from wages.

Citations and references

• Va. Code §§ 58.1-461 et seq. and 58.1-468.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-22

Original ruling text

March 15, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayer filed a Virginia individual income tax return for the 2015 taxable year, claiming a credit for income tax withheld. Under review, the Department denied the credit as to income tax withheld by one of the Taxpayer's employers because the Department was unable to verify that the employer withheld and remitted the amount claimed. The Taxpayer appealed, contending he paid the tax when it was withheld from his wages.

DETERMINATION

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).

Under Virginia Code § 58.1-468, however, if an employer deducts and withholds Virginia income tax from an employee's compensation but fails to pay it to the Commonwealth, the employee is not held liable for such payment and is allowed to claim a credit for the amount that should have been paid over. Under the statute, the employee bears the burden of proving that the employer deducted and withheld such tax.

In this case, the Department's records indicated the Taxpayer's employer did not withhold the amount of income tax as reported on the Taxpayer's Form W-2 and claimed on his Virginia income tax return. The Department requested additional information from the Taxpayer to verify the amount of income tax the Taxpayer's employer withheld from his wages. To date, such information has not been provided.

The Taxpayer will be granted one final opportunity to provide the documentation requested. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161- 7203, Attention: *. Upon receipt, the documentation will be reviewed and the assessment adjusted as warranted. If the documentation is not received within the time allotted, the assessment will be considered to be correct as issued. Because the Taxpayer has paid the assessment, no further action would be required in that case. If the Taxpayer's documentation substantiates the amount claimed, however, a refund will be issued as warranted.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/860.M