May 23, 2017
Re: § 58.1-1821 Application: Withholding Tax
Dear *****:
This will reply to your letter submitted on behalf of your client, ***** (the “Taxpayer”), in which you seek correction of the withholding tax assessments issued to the Taxpayer for the taxable periods January 2013 through December 2015. I apologize for the delay in responding to your appeal.
FACTS
Under audit the Taxpayer was assessed tax, penalties, and interest for failure to withhold from employee wages during the taxable periods at issue. The Taxpayer appeals the audit contending the tax should have been withheld at a lower rate.
ANAYLYS
Withholding Requirement
Virginia Code § 58.1-461 requires that every employer who pays wages to employees must withhold Virginia income tax from such employees' wages. Virginia Code § 58.1-460 defines “wages” for Virginia purposes as wages as defined in Internal Revenue Code (IRC) §§ 3401(a), 3402 and 3405. 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”.
Exemption Certificates
The Taxpayer asserts its part time employees only wanted minimal withholding from their compensation. Under Va. Code § 58.1-470, every employee is required to furnish a signed withholding exemption certificate (currently Form VA-4), relating to the withholding exemptions claimed to his employer at the time employment commences. In addition, Va. Code § 58.1-461 permits an employer to make an allowance for withholding purposes for only a standard deduction or an out-of-state tax credit.
During the audit, the Taxpayer indicated that all withholding certificates were destroyed. In Public Document (P.D.) 02-107 (6/28/2002), the Department held that in the absence of a completed Form VA-4 for any employee, the auditor may adjust the employee's withholding to allow one exemption. During the course of the audit, however, no credit was granted.
Virginia Code § 58.1-467 also provides that if an employer fails to withhold tax, but the employee pays the tax on his wages, the employer will be liable only for penalty and interest on the tax that he failed to withhold. A review of the Department's records shows that each employee filed his Virginia income tax return and paid his Virginia liability prior to the Department's audit. In several instances, the employees were not required to file a Virginia income tax return because their income did not exceed the filing requirement prescribed under Va. Code § 58.1-321.
Penalty
The Department assessed a 100% fraud penalty in the audit. According to the audit report, the Taxpayer retained no documentation to support withholding no Virginia income tax for the employees. In addition, the auditor found the Taxpayer had knowledge of the filing requirement because withholding taxes were remitted in 2015.
Virginia Code § 58.1-475 provides that any employer who fails to properly withhold taxes shall be subject to a penalty equal to six percent of the amount that properly should have been withheld for each month that the failure to withhold continues, not exceeding thirty percent in the aggregate. Va. Code § 58.1-308 provides that if the failure to pay tax is false or fraudulent with the intent to evade that tax, a penalty of 100% with interest shall be added together with interest on the tax.
The Taxpayer asserts that this was a first time business operation and it did not fully understand all of the withholding requirements. The evidence does not support intent by the Taxpayer to evade the tax. Rather, there was a lack of documentation to support the employee exemptions. As previously noted, all of the employees filed Virginia income tax returns and reported their Virginia source income.
Although the Department does not find fraud, the Taxpayer nevertheless failed to withhold or under withheld income tax for the periods at issue. 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. In addition, the application of interest to tax underpayments is mandatory under Va. Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted.
CONCLUSION
Based on the information provided, the assessed tax for each tax year was paid by the Taxpayer's employees and should not be assessed to the Taxpayer. Because the assessment was based on actual taxpayer records, and all employees reported their Virginia income tax liability, the Taxpayer will not be held liable for the withholding tax for the taxable periods January 2013 through December 2015.
The Taxpayer is hereby put on notice that it is responsible for properly deducting withholding from wages earned by employees and timely remitting such withholding to the Department. Failure to maintain proper withholding records in the future may result in an assessment of fraud penalties.
As provided under Va. Code § 58.1-475 the Taxpayer will remain liable for all late penalties and interest for failure to pay withholding tax. The assessment will be returned to the auditor to be adjusted in accordance with this determination.
The Code of Virginia and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and 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
AR/736.D