Tax Type
Individual Income Tax
Description
Underpayment of estimated income tax
Topic
Collection of Delinquent Tax
Penalties and Interest
Date Issued
05-01-2002
May 1, 2002
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you contest the assessment of the addition to tax for the underpayment of estimated income tax issued to ************ (the "Taxpayer") for the taxable year ended December 31, 1998.
FACTS
The Taxpayer filed a unified return on behalf of its nonresident partners. Under the terms of the agreement that allow the Taxpayer to file the unified return, a unified declaration must be filed and payment made for estimated income tax. For the 1998 taxable year, the Taxpayer was assessed an addition to tax for the underpayment of estimated tax, commonly known as the estimated underpayment penalty. The Taxpayer claims that this penalty "falls outside of the spirit" of the unified return regulations because no penalty provision is set forth in the agreement. Therefore, the Taxpayer requests that the assessed penalty be abated.
DETERMINATION
A unified return is an administrative convenience that allows nonresident partners to pay their respective Virginia tax at the entity level. The need for filing a separate Virginia return for each partner is also eliminated. It is a privilege extended by the department to taxpayers, at the taxpayer's election. The convenience to the nonresident partners usually outweighs any benefits that may be lost. Certain conditions are imposed in exchange for such convenience.
Title 23 of the Virginia Administrative Code (VAC) 10-130-20 provides that the Tax Commissioner in his sole discretion may grant permission for nonresident shareholders of a partnership to file a single unified return if good cause can be shown and the parties agree on the terms. Among the terms the Taxpayer agreed to is the term that a similar unified return will be filed and payment made for the declaration of estimated tax. Because this condition contained in all unified return agreements does not provide any additional provisions regarding the administration of estimated taxes, the provisions in the Code of Virginia regarding the administration of estimated taxes for individuals must be looked to for guidance.
Code of Virginia § 58.1-492 provides for a penalty in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year. For individuals and fiduciaries, payments of estimated tax are required to be filed on or before May 1 of each year if Virginia estimated tax liability will exceed withholding and tax credits by more than a $150 threshold, and may be amended at a later date to reflect any increase or decrease anticipated in the year's tax liability. If the estimated tax payments are not sufficient to cover the income tax liability reported on the annual tax return, a taxpayer may be assessed the estimated underpayment penalty unless one of the following estimated underpayment exceptions are met:
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- 1. The total payments of estimated tax equals or exceeds the tax liability on the return for the preceding taxable year.
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- 2. The total payments of estimated tax equal or exceed the tax computed, at the rates applicable to the taxable year, on the basis of the facts shown on the return for, and the law applicable to, the preceding taxable year.
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- 3. The total payments of estimated tax equal or exceed 90% of the tax computed, at the rates applicable to the taxable year, on the basis of the actual taxable income for the months in the taxable year ending before the month in which the installment is required to be paid. The total payments of estimated tax equal or exceed 90% of the tax on the annualized taxable income for the taxable year.
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- 4. Individuals working as farmers, fishermen and merchant seamen (for taxable years beginning on and after January 1, 2001) are granted a special exception. Under this occupational exception, individuals are only required to make one payment of 66 2/3% of the current year's tax on January 15 of the succeeding calendar year.
Based on the information provided with your return, the Taxpayer's underpayment of estimated income tax does not meet one of the exceptions. Accordingly, your request to have the penalty abated is denied.
Copies of the Code of Virginia and VAC sections cited are available online in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.state.va.us. If you have any questions, you may contact ***** in the department's Office of Policy and Administration, Policy Development, at *****
Sincerely,
Danny M. Payne
Tax Commissioner
PD/32161G
Rulings of the Tax Commissioner