March 22, 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 “Taxpayers”) for the taxable year ended December 31, 2018.
FACTS
The Taxpayers, a husband and wife, filed a Virginia resident income tax return for the 2018 taxable year in February 2020. Because the Taxpayers did not pay the tax shown as due with the return, the Department issued an assessment for the balance of unpaid tax, including penalties and interest. The Taxpayers appeal, contending the assessment should be abated because the income was already taxed in the United Kingdom. The Taxpayers also request that penalties and interest be waived on the assessment.
DETERMINATION
Assessment of Tax
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 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.
The husband does not dispute that he was a domiciliary resident of Virginia for the 2018 taxable year. As such, any income properly included in his FAGI would also have been included in his Virginia taxable income unless specifically exempted. There is currently no provision in the Code of Virginia that provides for an exemption for foreign income earned by a Virginia resident.
The husband paid tax to the United Kingdom on the income earned in the United Kingdom. He believes that Virginia should not tax that income because the United States – United Kingdom Income Tax Convention (the “Convention”) prevents double taxation.
Article 2 of the Convention states, in pertinent part, “The existing taxes to which this Convention shall apply are . . . in the case of the United States, the Federal income taxes imposed by the Internal Revenue Code . . . .” Pursuant to this article, the Convention applies only to certain taxes imposed at the federal level by the United States and the United Kingdom national governments. Taxes imposed by state and local governments, including Virginia, are unaffected by the Convention. See Public Document (P.D.) 96-228 (9/9/1996), P.D. 07-39 (4/20/2007), P.D. 13-232 (12/18/2013), P.D. 18-75 (5/2/2018), and P.D. 19-90 (08/15/2019).
Interest and Penalty Waiver
The Taxpayers request that the Department waive penalties and interest included with the assessment because the husband was unsure about the taxability of his income in Virginia and the COVID-19 pandemic contributed to the delay. Virginia Code § 58.1-105 grants the Department the authority to waive penalty in cases where reasonable cause is demonstrated. A Virginia domiciliary resident’s requirement to file a Virginia income tax return is clear, and the filing deadline for the 2018 taxable year occurred prior to the onset of the pandemic. Based on the circumstances presented, the Department does not find reasonable cause to waive the penalties.
In addition, the application of interest to tax underpayments is mandatory under Virginia Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.
CONCLUSION
Because the husband was a domiciliary resident of Virginia, he was required to include his entire FAGI when calculating his Virginia taxable income. Neither the Code of Virginia nor the Convention provide a basis for excluding his income earned in the United Kingdom from FAGI for Virginia income tax purposes. Further, there is no basis for abating the penalties or interest previously assessed. The assessment, accordingly, must be upheld.
The Taxpayers will receive an updated bill that 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 and possible collection actions.
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 *****.
The Code of Virginia sections and public documents 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/3991.X