My tax preparation software subtracted my FULL unemployment benefits on my Virginia return, even though part of that amount was already excluded from my federal income under the American Rescue Plan Act -- can I blame the software and get the extra tax abated?

Plain-English summary

A married couple filed a joint 2020 Virginia resident return using tax preparation software. Under the federal American Rescue Plan Act (ARPA), they properly excluded $10,200 of their 2020 unemployment benefits from federal adjusted gross income (FAGI) -- a valid federal exclusion Congress created specifically for that tax year. The problem came on the Virginia side: their software then subtracted their ENTIRE unemployment benefit amount again on the Virginia return, rather than only the portion still remaining in FAGI after the federal exclusion. The Department caught the discrepancy on review, disallowed the excess portion of the subtraction, and issued an assessment. The couple appealed, not disputing that too much had been subtracted, but arguing the Department should waive the resulting tax because they had relied on the software to get it right.

Virginia's subtraction statute for unemployment benefits is written narrowly: it allows a subtraction only for benefits "taxable pursuant to [IRC] § 85" -- in other words, only for the portion that was actually included in FAGI. Any amount already excluded from FAGI (like the ARPA's $10,200) was never "taxable" federally in the first place, so it doesn't qualify for a Virginia subtraction either. Subtracting the full amount received, when part of it had already been excluded, meant the couple got the benefit of that $10,200 twice -- once through the federal exclusion, and again through an oversized Virginia subtraction.

On the software argument, the Department explained that its approval of a tax preparation software product only confirms the software meets the Department's processing and formatting requirements for submitted returns -- it is not a guarantee that the software's math is always correct, and the Department has said so in a prior published ruling. Because the governing statute is clear and gives the Department no discretion to allow a subtraction beyond what the law permits, the assessment was upheld regardless of how the error occurred. The Department did note the couple's stated financial hardship and pointed them to two possible paths forward: an offer in compromise based on doubtful collectibility (requiring specific financial-hardship forms), or a standard payment agreement with the Department's Collections Unit.

What this means for you

Anyone using tax preparation software to file a Virginia return

Software approval by the Department is not a guarantee of computational accuracy -- it only confirms the software's output meets the Department's processing requirements. You remain responsible for the accuracy of your return, and a software error is not, by itself, a basis for the Department to waive resulting tax.

Anyone who excluded part of their unemployment benefits from federal income (ARPA or otherwise) and claimed a Virginia subtraction

Double-check that your Virginia subtraction only covers the portion of unemployment benefits that actually remained in your federal adjusted gross income. Virginia's subtraction statute is limited to amounts that were taxable federally -- subtracting benefits that were already excluded from FAGI is a double benefit the statute doesn't allow, regardless of what your software calculated.

Taxpayers facing a hardship in paying an upheld assessment

Ask about your options. This couple was pointed toward an offer in compromise based on doubtful collectibility (which requires specific financial disclosure forms and, potentially, a fee or fee waiver request) or a standard payment agreement with the Department's Collections Unit -- worth raising if a correct assessment still creates real financial hardship.

Common questions

Q: My tax software subtracted more than it should have on my Virginia return -- can I get the resulting tax abated because I relied on the software?
A: No. The Department's approval of tax preparation software confirms only that it meets processing/formatting requirements, not that its calculations are correct, and the Department has no discretion to allow a subtraction the statute doesn't permit -- regardless of why the error happened.

Q: If I excluded part of my unemployment benefits from federal income, can I still subtract the full amount received on my Virginia return?
A: No. Virginia's subtraction only covers unemployment benefits actually included in your federal adjusted gross income. Any portion already excluded federally (like the ARPA's $10,200 exclusion) isn't eligible for an additional Virginia subtraction -- claiming both is a double benefit.

Q: What if paying an assessment like this creates a real financial hardship?
A: You can pursue an offer in compromise based on doubtful collectibility (using the Department's Individual Offer in Compromise and Financial Statement forms, with a fee or fee-waiver request) or request a standard payment agreement with the Department's Collections Unit.

Citations and references

• Va. Code § 58.1-301 (Virginia's fixed conformity to IRC terminology; VATI begins with FAGI)
• Va. Code § 58.1-322.02 (Virginia subtractions from FAGI are allowed only to the extent the income was actually included in FAGI)
• Va. Code § 58.1-322.02 17 (subtraction for unemployment benefits taxable under IRC § 85)
• IRC § 85(c) (2020 ARPA exclusion of up to $10,200 of unemployment benefits from federal gross income)
• P.D. 13-50 (4/24/2013) (Department's approval of tax preparation software confirms processing conformity only, not computational accuracy)

Subject

Administration: Reliance on Tax Preparer - Tax Preparation Software Subtractions: Unemployment Benefits - Double Benefit Not Allowed

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-85

Original ruling text

April 28, 2022

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2020.

FACTS

The Taxpayers, a husband and wife, filed a joint resident individual income tax return for the 2020 taxable year, claiming a subtraction for unemployment benefit income. Under review, the Department disallowed a portion of the subtraction and issued an assessment. The Taxpayers appeal, contending that they used tax preparation software to prepare their return and that the Department should abate the assessment because they relied on the software to complete their Virginia return properly.

DETERMINATION

Unemployment Benefit Subtraction

Virginia Code § 58.1-301 provides, with certain exceptions, that 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VATI) with federal adjusted gross income (FAGI). Income properly 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 Chapter 3 of Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-322.02 provides for the subtraction from FAGI of certain listed income for purposes of determining VATI. All of the described subtractions, however, are allowable only to the extent the income was included in FAGI. See Virginia Code § 58.1-322.02.

Virginia Code § 58.1-322.02 17 provides for a subtraction from FAGI of unemployment benefits taxable pursuant to § 85 of the IRC. Pursuant to IRC § 85(c), certain taxpayers were eligible to exclude from FAGI up to $10,200 of unemployment benefits received in the 2020 taxable year. The Taxpayers properly excluded from FAGI $10,200 of their unemployment benefits received that year. When computing their VATI, however, they subtracted the total amount of unemployment benefits received, rather than subtracting only the amount of benefits that were included in their FAGI.

Tax Preparation Software

The Taxpayers do not dispute that they subtracted more than was allowable, rather they contend they should not be penalized for the error caused by their tax preparation software. The Department recognizes that tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department, however, is not meant to imply computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department’s processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software. See Public Document (P.D.) 13-50 (4/24/2013).

CONCLUSION

The provisions of Virginia Code § 58.1-322.02 17 are clear and do not provide the Department with any discretion to allow the Taxpayers to deduct unemployment benefits that were not included in FAGI. Accordingly, although I empathize with your situation, the reviewer’s adjustment was correct and I cannot grant your request for an abatement of the resulting tax.

The Taxpayers will received an updated bill, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.

The Taxpayers indicated that the assessment will create a financial hardship. If the assessment creates a financial hardship, the Taxpayers may pursue an offer in compromise based on doubtful collectibility. To begin that process, the Taxpayers should complete the enclosed Individual Offer in Compromise: Doubtful Collectibility form and Financial Statement for Individuals, and include the required fee or fee waiver request. The completed forms and statement will allow the Department to review and analyze the Taxpayers’ financial situation. Upon completion of that review, a response will be issued to the Taxpayers. The Taxpayers also have the option to request a payment agreement with the Department’s Collections Unit. The Collections Unit may be contacted at (804) 367-8045.

The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. 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

AR4069.X

Related Documents

13-50