The Department assessed me for a year I didn't file, saying I owe tax -- but I think overpayments from earlier years should have been credited to that year instead of refunded to me. Do I still owe the assessment?

Plain-English summary

This ruling addresses two separate, common issues in one case: how the IRS information-sharing program catches Virginia non-filers, and why an overpayment that's already been refunded can't also be recycled as a credit against a later year's tax.

The IRS tipped off the Department that a taxpayer may have owed a 2018 Virginia return; a records check confirmed none had been filed. Under Va. Code § 58.1-111, when a Virginia resident fails to file, the Department can estimate the tax due from whatever information it has -- here, drawing on data the IRS is authorized to share under IRC § 6103(d) -- and issue an assessment on that basis. The taxpayer appealed, but not by disputing his residency or income; instead, he argued that the 2018 liability was really an artifact of how the Department had handled overpayments from his 2013-2015 returns, which he'd filed almost three years late along with estimated payments.

The Department explained what actually happened: because the returns were filed late and the estimated payments came in at various times, its accounting system could only apply PART of those overpayments forward as credits to later years -- the rest was refunded by check, and the taxpayer cashed those checks. The Department has a settled rule (P.D. 16-82) that a refund and an overpayment credit are functionally equivalent -- they're the same benefit delivered two different ways. Since the Department had already delivered that benefit once (as a cashed refund check), crediting the same overpayment again toward 2018 would hand the taxpayer the same money twice. So no further credit was available to reduce the 2018 assessment.

On the underlying assessment itself, the Department noted the taxpayer didn't dispute being a Virginia resident, and Virginia assessments are presumed correct (Va. Code § 58.1-205) unless the taxpayer shows otherwise. But since the current assessment was built entirely from IRS data rather than an actual Virginia return, the Department gave the taxpayer 30 days to file a real 2018 Virginia resident return so the assessment could be corrected to reflect his true liability -- with the current IRS-based estimate standing if he didn't.

What this means for you

Anyone who filed late returns with overpayments and can't fully account for where that money went

Check whether the Department already refunded (rather than credited) some or all of a prior-year overpayment. If you cashed a refund check for it, that money can't also be applied as a credit against a different year -- a refund and a credit are treated as the same benefit, and claiming both would be a double benefit the Department won't allow.

Anyone flagged by the IRS as a Virginia non-filer

The IRS is authorized to share your federal filing information with Virginia (IRC § 6103(d)), and the Department can use that data alone to estimate and assess your Virginia liability if you haven't filed. That estimate is presumed correct, but you generally get a real opportunity to file an actual return and have the assessment corrected to your true numbers before the IRS-based estimate becomes final.

Anyone appealing a nonfiler assessment based only on IRS data

Filing the actual, complete return for the year in question -- not just disputing the estimate -- is usually the most direct way to get an assessment corrected. The Department typically gives a real filing window (often 30 days) before treating the IRS-based estimate as final.

Common questions

Q: The Department refunded my prior-year overpayment by check instead of crediting it forward -- can I still ask for it to be applied as a credit against a different year's liability?
A: No, not if you already cashed the refund check. A refund and an overpayment credit are treated as the same benefit; applying it again as a credit would be a double benefit.

Q: How did the Department know I owed a return I never filed?
A: The IRS is authorized under IRC § 6103(d) to share federal filing information with state tax agencies. If the IRS's data shows income that should have generated a Virginia filing, the Department can use that information alone to estimate and assess your Virginia liability.

Q: Can I fix an assessment that was based only on IRS data rather than my actual numbers?
A: Generally yes -- file the real, complete return for that year within the window the Department gives you (commonly 30 days), and the assessment will be reviewed and adjusted to reflect your actual liability rather than the IRS-based estimate.

Citations and references

• Va. Code § 58.1-341 (Virginia residents required to file a federal return must also file a Virginia return, absent an exemption)
• Va. Code § 58.1-111 (Department may estimate tax due and assess based on information in its possession when no return is filed)
• IRC § 6103(d) (authorizes IRS to share taxpayer information with state tax agencies)
• P.D. 14-33 (3/7/2014) (Department's use of IRS information to determine a nonfiler's liability)
• P.D. 16-82 (9/16/2016) (a refund and an overpayment credit are functionally equivalent; both cannot be given for the same overpayment)
• Va. Code § 58.1-205 (Department assessments are prima facie correct; burden of proof is on the taxpayer)

Subject

Administration : Returns - Filing Requirements; Overpayments - Credits to Estimated Payments

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-60

Original ruling text

April 5, 2022

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, 2018.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia income tax return for the 2018 taxable year. A review of the Department’s records showed that the he had not filed a return. The Department requested additional information from the Taxpayer in order to determine if his income was taxable in Virginia. Based on the information provided, the Department concluded that the Taxpayer was liable for Virginia income tax for the 2018 taxable year and issued an assessment. The Taxpayer appealed, contending that the liability resulted from overpayments from prior taxable years being refunded rather than credited to subsequent taxable years.

DETERMINATION

Overpayment Credits

Under Virginia Code § 58.1-341 a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Virginia Code § 58.1-321. The Taxpayers filed their 2013 through 2015 returns almost three years after the statutory due date. As a result of the lateness of the returns and timing of estimated payments made by the Taxpayers, the Department’s accounting system only credited a portion of the overpayments to subsequent years and issued refund checks for the balance of the overpayments along with refund interest. These refund checks were cashed by the Taxpayers.

The Department considers a refund and overpayment credit as being functionally equivalent. See Public Document (P.D.) 16-82 (9/16/2016). Because the Department has already issued refunds, crediting the Taxpayers’ accounts for the full amount of the overpayments would result in the Taxpayers receiving a double benefit. As a result, no overpayment credit from the previous taxable year is available to reduce the 2018 liability.

Nonfiler Assessment

In this case, the assessment was issued to the Taxpayer because a 2018 Virginia return has not been filed. 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. When a resident does not file a proper Virginia return, Internal Revenue Code (IRC) § 6103(d) authorizes the Department to obtain information from the IRS that will help in determining the resident’s tax liability. See P.D. 14-33 (3/7/2014).

The Department’s records indicate that the Taxpayer had taxable income reported to the IRS for the 2018 taxable year. As a Virginia resident, any income he received that year that was taxable for federal income tax purposes would also have been generally subject to Virginia income tax. When a Virginia resident fails to file an income tax prescribed by law, Virginia Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to the taxpayer.

In addition, Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the 2018 assessment will be considered correct unless the Taxpayer provides information demonstrating whether and to what extent it is not.

While the Taxpayer does not dispute that he was a Virginia resident, he may be able to demonstrate that the Department’s computation of his income tax liability is imprecise. Accordingly, in order for the Department to have the best information that represents the Taxpayer’s Virginia income tax liability for the 2018 taxable year, the Taxpayer should file a 2018 Virginia resident individual income tax return. The return 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 return will be reviewed and the assessment will be adjusted, as appropriate. If the return is not received within the allotted time, the assessment will be considered correct.

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/3973.B

Related Documents

14-33

16-82