Can a taxpayer get a Virginia income tax refund by amending her return more than three years later, based on a correction made to her other state's return?

Subject

Administration : Refunds - Statute of Limitations, changes on other states returns.

Plain-English summary

A taxpayer filed part-year 2015 resident returns in both Virginia and another state ("State A"). In August 2019, State A told her it had found an error in how she computed her State A tax -- she had not applied the correct tax rate. She paid the additional State A tax and, in November 2019, filed an amended Virginia return seeking a refund. Virginia denied the refund because the general three-year statute of limitations to amend a 2015 return had already expired in May 2019.

The Taxpayer appealed, arguing that Va. Code § 58.1-1823 A (v) gave her one year from State A's final determination to file an amended Virginia return. The Tax Commissioner disagreed and upheld the denial. That one-year exception only applies when another state's change actually produces a decrease in Virginia tax -- and here it didn't. State A's correction was purely a rate-computation fix to State A tax; it had nothing to do with how much State A-source income the Taxpayer reported to Virginia. The real problem was that her original Virginia return had under-reported her State A-source income (by more than the routine 2017 IRS adjustment to her dividends and capital gains would explain). Because that under-reporting error was unrelated to State A's 2019 rate correction, the one-year exception did not apply, and her only avenue was the general three-year window, which had already closed. The refund request was denied as untimely.

What this means for you

Taxpayers who move between states or get notices from another state

An assessment, correction, or adjustment from another state doesn't automatically reopen your Virginia return past the normal three-year deadline. The one-year exception in Va. Code § 58.1-1823 A (v) only helps if the other state's change would actually lower your Virginia tax -- for example, if another state later asserts residency and taxes income Virginia also taxed, or if reciprocity/credit issues are involved. A same-state rate correction that doesn't touch the income amount you reported to Virginia won't qualify.

Accountants and tax professionals tracking multi-state amended returns

When advising on late Virginia refund claims tied to another state's action, check whether the other state's change actually reduces the client's Virginia tax liability -- not just whether some change occurred. Also separate out any unrelated errors (like under-reported income on the original Virginia return) from the specific change the other state made; only the latter can trigger the one-year window, and only to the extent of the resulting Virginia tax decrease.

Anyone with an income-reporting error on an original Virginia return

If your original Virginia return already understated income from another state, correcting that error is subject to the general three-year statute of limitations from the original due date -- not extended just because you separately amend the other state's return years later for an unrelated reason.

Common questions

Q: Why didn't the one-year exception in Va. Code § 58.1-1823 A (v) save this refund claim?
A: Because that exception requires the other state's change to actually produce a decrease in Virginia tax. State A's correction only fixed the tax rate applied to State A's own tax computation -- it didn't change the amount of State A-source income relevant to the Taxpayer's Virginia return, so there was no Virginia tax decrease attributable to it.

Q: When does the one-year exception typically apply?
A: The Department cited examples where a taxpayer first filed as a Virginia resident but another state later assessed the person as a resident of that state (P.D. 12-104 and P.D. 20-34), and where another state denied a credit for tax paid to Virginia in a reciprocity situation, allowing a Virginia credit claim (P.D. 15-226 and P.D. 17-1). In each, the other state's change directly affected the Virginia tax computation.

Q: What was the actual source of the Taxpayer's Virginia refund claim?
A: The Taxpayer had under-reported the income attributable to her State A residency period on her original 2015 Virginia return -- by an amount greater than the IRS's May 2017 adjustment to her dividends and capital gains. That under-reporting was the real basis for her amended return, and it was unrelated to State A's 2019 rate-computation correction.

Q: What was the deadline she missed?
A: Under the general rule in Va. Code § 58.1-1823, a taxpayer must file an amended return within three years of the last day prescribed for timely filing. For a 2015 return due in May 2016, that window closed in May 2019. She did not file her amended return until November 2019.

Q: Could the Taxpayer have done anything differently to preserve a refund?
A: Based on the facts here, no -- the underlying error in reporting State A-source income on her original Virginia return needed to be corrected within the general three-year window, and the later, unrelated State A rate correction did not reopen that window.

Citations and references

Statutes:

• Va. Code § 58.1-1821 (application for correction or refund)
• Va. Code § 58.1-1823 (amended returns; general three-year statute of limitations)
• Va. Code § 58.1-1823 A (v) (one-year exception for changes made by another state, limited to the resulting decrease in Virginia tax)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-29

Original ruling text

March 2, 2021

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek a refund of individual income tax paid by * (the “Taxpayer”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayer filed part-year Virginia and * (State A) resident income tax returns for the 2015 taxable year. In August 2019, the Taxpayer was notified by State A of a proposed assessment. The Taxpayer paid the assessment and filed an amended Virginia return in November 2019 to claim a refund due. The Department denied the refund on the basis that the statute of limitations had expired. The Taxpayer appealed, contending she was permitted to file an amended Virginia return within one year of the change to her State A tax liability.

DETERMINATION

Generally, Virginia Code § 58.1-1823 allows a taxpayer to file an amended return within three years from the last day prescribed by law for the timely filing of the return. In this case, the Taxpayer did not file the amended return until November 2019, after the general statute of limitations had expired in May 2019 to claim a refund on a 2015 amended return. Virginia Code § 58.1-1823, however, also includes a number of exceptions to the general rule when specific circumstances are present. Under Virginia Code § 58.1-1823 A (v), a taxpayer has one year from the final determination of a change made by any other state to file an amended return to request a refund, provided that the refund does not exceed the amount of the decrease in Virginia tax attributable to such change.

The proviso that the refund may not exceed the amount of the decrease in Virginia tax attributable to such change implies that for Virginia Code § 58.1-1823 A (v) to apply, there must actually be a decrease in Virginia tax attributable to the other state’s change. The Department has applied this provision, for example, when taxpayers have first filed as residents of Virginia but other states later assess them as residents of those states. See, e.g. , Public Document (P.D.) 12-104 (6/19/2012) and P.D. 20-34 (3/6/2020). The Department has also applied this provision when another state has denied credit for income tax paid to Virginia in cases where reciprocity applied and the taxpayer could claim a credit on her Virginia return for credit paid to the other state. See P.D. 15-226 (12/8/2015) and P.D. 17-1 (1/12/2017).

In this case, State A notified the Taxpayer of certain errors that had been made in the computation of her State A income tax. It appears that the Taxpayer had computed her State A tax in such a way that did not apply the correct rate. As a result of this notice, the Taxpayer states that she filed an amended return with State A and paid the additional tax due. The fact that her State A tax liability had been incorrectly computed, however, had no bearing on her Virginia tax liability. The correction she made on her amended Virginia return was to increase the amount of taxable income attributable to her period of State A residence. The only change to her income attributable to her period of State A residency, however, since the filing of her original Virginia return was an increase in dividends and capital gains as corrected by the Internal Revenue Service (IRS) in May 2017. This increase would not have affected her Virginia income tax liability because the resulting increase in federal adjusted gross income (FAGI) on her Virginia return would have been offset by the increase in income attributable to her period of State A residency.

In this case, the Taxpayer under reported the amount of income attributable to her period of State A residency on her original Virginia return. The amount reported was less than the amount reported on her original State A return. The correction the Taxpayer tried to make on her amended Virginia return was a significant change to amount originally reported and considerably more than the IRS adjustment.

The proposed assessment indicating the computational errors on her State A return had nothing to do with that original error in reporting her income attributable to State A on the original Virginia return. Therefore, Virginia Code § 58.1-1823 A (v) did not apply, and the Taxpayer would had to have filed an amended 2015 Virginia return within 3 years of the original May 2016 due date to correct that error and claim a refund within the statute of limitations. Because the amended return was not filed until November 2019, it was not timely filed. Therefore, the Taxpayer’s request for refund must be denied.

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/3489.M

Related Documents

12-104

15-226

17-1

20-34