Tax Type
Withholding Taxes
Description
Assessed tax, penalties, and interest for failure to withhold taxes from employee wages
Topic
Penalties and Interest
Records/Returns/Payments
Responsible Officer
Taxability of Persons and Transactions
Date Issued
08-13-2013
August 13, 2013
Re: § 58.1-1821 Application: Withholding Tax
Dear *****:
This will respond to your letter submitted on behalf of your client, ***** (the "Taxpayer"), in which you seek the correction of the withholding tax assessment issued for the taxable periods April 2006 through September 2010. I apologize for the delay in responding to your request.
FACTS
Under audit, the Taxpayer, a corporation, was assessed tax, penalties, and interest for failure to withhold taxes from employee wages during the taxable periods at issue. The Taxpayer appeals the assessments. It claims the Department did not consider evidence that should have resulted in a lower withholding rate being applied and certain amounts being classified as payments made to independent contractors rather than wages subject to withholding. The Taxpayer further argues that a former officer of the Taxpayer should be held liable for all assessed amounts, not the Taxpayer. Finally, the Taxpayer protests penalties assessed as a result of the audit.
DETERMINATION
Applicable Tax Rates
The Taxpayer contests the Department's application of withholding rates. The Taxpayer argues that payroll documents covering pay periods from September 2010 through May 2012 show employer withholding at a lower rate than assessed by the Department. The Taxpayer asserts that the Department failed to consider any personal exemptions, standard deductions, or credits which the employees were entitled to and which have the effect of lowering the withholding rates.
Virginia Code § 58.1-461 requires an employer to withhold from wages for each payroll period an amount that would approximate the employee's income tax liability for the year if similar amounts of wages were paid over similar pay periods after factoring in any applicable standard federal deduction, any personal exemptions, and out-of-state credits.
Because of a lack of Taxpayer records, the Department was required to reasonably approximate the Taxpayer's withholding liability. Pursuant to Virginia Code § 58.1-111, the Department has the authority to estimate the amount of taxes due, based on any available information, when a Taxpayer fails to file a valid state tax return.
The payroll documents provided show aggregate wages paid to employees subsequent to the periods assessed. The Taxpayer claims that it retained a number of the employees and the Virginia income tax withheld from these employees was significantly less than the withholding rate applied by the auditor. The Taxpayer, however, has been unable to provide any records verifying who may have been employed during the periods at issue. Without such records, it is impossible to verify the Taxpayer's claim.
Payments for Snow Removal
The Taxpayer asserts certain payments made to other businesses for subcontracted snow removal service should not have been considered wages for withholding tax purposes because they were paid to independent contractors, not employees. To support this claim, the Taxpayer has provided a number of invoices from subcontractors, only three of which fell within the audit period.
Virginia Code § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages...." The Code of Virginia does not define "independent contractor" for income tax withholding purposes. Nevertheless, Virginia determines whether an individual is an employee or independent contractor in accordance with the factors enumerated in Treas. Reg. § 31.3121(d)-1. See Title 23 of the Virginia Administrative Code (VAC) 10-140-10.
The records available indicate almost all of the snow removal payments were made to individuals, many of whom were also employees of the Taxpayer. Without more complete records, it is impossible to determine which of these individuals could be considered independent contractors. The three invoices, however, have been provided that indicate payments for snow removal made to subcontractors, not employees.
Officer's Liability
The Taxpayer asserts that the Department should proceed with collections against a former officer who was exclusively in control of the company's financial records. This officer was charged with evading withholding taxes by the Internal Revenue Service. Under Va. Code § 58.1-1813, when a corporation fails or is unable to pay its tax deficiencies, the Department is permitted in certain circumstances to assess the responsible corporate officer(s) for a penalty of the amount of tax evaded, or not paid, collected or accounted for and paid over.
Citing Public Document (P.D.) 90-154 (8/30/1990), the Taxpayer believes the Department may only proceed against the officer who was responsible for paying wages and withholding and remitting the necessary taxes. In P.D. 90-154, the officer argued that the Department must first have exhausted its remedies against the corporation before it could proceed against him under Va. Code § 58.1-1813. The Department concluded, however, that Va. Code § 58.1-1813 was an additional tool the Department could use to collect delinquent taxes owed by corporations. As such, the Department may proceed not only against a responsible officer, but also against the employer itself and other responsible officers until the original assessment against the employer is satisfied in full.
Virginia Code § 58.1-461 requires employers to withhold taxes from employee wages for each payroll period. Virginia Code § 58.1-460 defines "employer" as "the person...for whom an individual performs or performed any service as an employee...." Also, Va. Code §§ 58.1-474 and 58.1-484 clearly provide that employers are liable for withholding and paying taxes on the wages of their Virginia employees. That the Taxpayer, as an employer, paid wages to employees and failed to withhold the necessary taxes is not in dispute. Therefore, the Taxpayer would be liable for any sums required to be withheld and paid.
Fraud Penalty
The Taxpayer asserts that any penalty should be assessed only against the responsible officer and that, even if a penalty is assessed, it should be the penalty for failure to withhold under Va. Code § 58.1-475 rather than the civil fraud penalty under Va. Code § 58.1-308. Virginia Code § 58.1-475 provides that any employer who fails to properly withhold taxes shall be subject to a penalty equal to 6% of the amount that properly should have been withheld for each month that the failure to withhold continues, not exceeding 30% in the aggregate.
Penalties may be assessed on fraudulent understatements pursuant to Va. Code § 58.1-308 or for failure to pay tax pursuant to Va. Code § 58.1-1812. The latter statute directs the Department to impose a 100% penalty if a person fails to pay in full any proper tax and the failure to pay in full was fraudulent. As explained above, that the Taxpayer failed to pay in full proper withholding taxes is not in dispute. Thus, the remaining question is whether the failure to pay was fraudulent.
The Taxpayer's former officer responsible for collecting and paying over withholding taxes admitted as part of a federal case that he knowingly and willfully evaded the assessment of certain federal withholding taxes during the taxable periods in question by (1) failing to file necessary returns; (2) paying employees in currency; and (3) concealing the nature of the payments from the federal government. The evidence provided indicates the failure to pay Virginia withholding taxes resulted from similar activities. As such, the 100% fraud penalty was appropriately applied in this case.
Amnesty Penalty
Virginia Code § 58.1-1840.1 F 1 provides for a 20% penalty to be applied to any tax liability that was eligible for amnesty benefits under the 2009 Virginia Tax Amnesty Program that was not paid. This penalty may be imposed in addition to other penalties that may be assessed on nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under amnesty.
Pursuant to Va. Code § 58.1-1840.1 D 2 A, taxpayers that were "currently under investigation or prosecution for filing a fraudulent return or failing to file a return with the intent to evade tax" did not qualify for Virginia's amnesty program. Because it was never under investigation or prosecution by Virginia, the Taxpayer's underpayment of employee withholding for the eligible periods would be subject to the 20% penalty.
CONCLUSION
Based on the information provided, the Taxpayer has not shown a lower withholding rate should have been applied for the taxable periods April 2006 through September 2010. The Department, however, will remove payments on three snow removal invoices dated within the audit period from the computation of gross wages subject to withholding.
In addition, by statute, the Taxpayer, as the employer, is liable for failing to withhold Virginia income taxes from employee wages. The Department may, however, proceed against the responsible officer.
The fraud penalty applies in this case because the failure to withhold was fraudulent as admitted by the Taxpayer's officer in a related criminal case. Finally, because the Taxpayer was not under investigation by Virginia during the amnesty period for filing a fraudulent return or failing to file a return with the intent to evade tax, the Taxpayer was eligible for amnesty and the amnesty penalty applies.
The case will be returned to the audit staff to make adjustments consistent with this determination. After the auditor makes the appropriate adjustments, a revised report will be issued to the Taxpayer. An updated bill, with interest accrued to date, will be mailed to the Taxpayer once the audit adjustments are complete. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Attention: *****, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulation, 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 Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5264525958.M
Rulings of the Tax Commissioner