August 5, 2024
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the late filing penalty issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2021.
FACTS
The Taxpayer received a six-month extension to file her 2021 federal income tax return, to October 17, 2022 (October 15, 2022, was a Saturday). Her husband, a military service member, deployed to a combat zone on August 28, 2022. The Taxpayer filed her separate 2021 Virginia income tax return on June 5, 2023. The Department assessed a late filing penalty. The Department also assessed an addition to tax charge, commonly known as the estimated underpayment penalty. The Taxpayer requested that the penalties be abated, but the Department denied the request on the basis that the original due date for the return was prior to the date of the husband’s deployment. The Taxpayer contests the assessment of the penalties, contending that her return was timely filed.
DETERMINATION
Late Filing Penalty
Virginia Code § 58.1-341 A requires that taxpayers file individual income tax returns by May 1 of the year following the tax year for which the return is filed. Virginia Code § 58.1-344 provides a six-month filing extension of the due date for filing the income tax return. Taxpayers are allowed to elect to take a six-month extension to file their returns. In order to elect an extension, a taxpayer must (i) file the return within the extended period, and (ii) on or before the original due date for the filing of the return, pay the full amount properly estimated as the balance of the tax due for the taxable year. Pursuant to Virginia Code § 58.1-347, an individual who fails to file a return by the due date or extended due date of such return is subject to a penalty equal to 6% of the tax liability per month or fraction thereof during which such failure to file continues, not to exceed 30% in the aggregate.
In Virginia Tax Bulletin (VTB) 05-5 (4/26/2005), the Department announced that Virginia would provide filing extensions and other tax benefits to members of the Armed Forces serving in combat zones. Servicemembers would be permitted to file their individual income tax returns by the extended due date granted by the Internal Revenue Service (IRS) plus fifteen days or one year from the original due date of the return, whichever was later. See also Virginia Code §58.1-344 G 2 and Public Document (P.D.) 17-96 (6/9/2017). VTB 05-5 also provides that extensions would apply to spouses of military personnel.
Under Internal Revenue Code (IRC) § 7508, the deadline for filing a federal tax return is 180 days after the last day serving in a combat zone or continuous hospitalization plus the number of days left to take action with the IRS once a member enters a combat zone. This extension also applies to spouses of military members, with two inapplicable exceptions, regardless of whether the non-military spouse files a separate return.
The husband’s deployment to a combat zone began before the Taxpayer’s extended return due date and ended on April 1, 2023. The Taxpayer filed her 2021 Virginia return on June 5, 2023, well before the due date as extended by her spouse’s combat zone deployment. The fact that the Taxpayer had already filed for an automatic extension of time within which to file her 2021 federal income tax return did not affect the further extension of time to file based on her spouse’s combat zone deployment. Under IRC § 7508(a)(1)(A), the period of service plus the 180-day period after such period of service is treated as disregarded for purposes of determining whether a qualifying individual filed the income tax return on time.
As such, the Taxpayer’s 2021 Virginia income tax return was timely filed because it was received within 195 days (federal 180 days plus Virginia’s additional 15 days) of the husband’s return from deployment to a combat zone and the late filing penalty was assessed in error. The Taxpayer’s return indicated tax was due and the Taxpayer was already filing on extension prior to her spouse being deployed. Under these circumstances, other penalties may have applied.
Addition to Tax
Virginia Code § 58.1-492 provides for an addition to tax 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 the Virginia estimated tax liability will exceed withholding and tax credits by more than a $150 threshold. If any estimated tax installments are not sufficient to cover the income tax liability as reported on the annual tax return, a taxpayer may be assessed the estimated tax underpayment penalty unless one of the following exceptions is met:
1. 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.
2. 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.
For the purposes of applying these exceptions, the amount of the withholding credit allowed is deemed a payment of estimated tax. See Virginia Code § 58.1-492 D 2, P.D. 05-108 (7/8/2005), and P.D. 15-200 (10/19/2015). In this case, however, a review of the Taxpayer’s return indicates that she did not have enough income tax withheld to satisfy either of these exceptions.
In addition, a provision of VTB 05-5 suspends the obligation to estimated income tax installments during a deployment. The Taxpayer’s failure to make sufficient estimated payments during the 2021 taxable year, however, occurred prior to the spouse’s deployment. In conformity with these requirements, the Taxpayer’s return included the underpayment penalty and was paid when the return was filed.
Extension Penalty
Virginia Code § 58.1-341 A requires an individual to file an income tax return by May 1 of the year following the taxable year for which the return is filed. Under Virginia Code § 58.1-344, taxpayers are allowed to elect to take a six-month extension to file their returns. In order to elect an extension, a taxpayer must (i) file the return within the extended period, and (ii) on or before the original due date for the filing of the return, pay the full amount properly estimated as the balance of the tax due for the taxable year.
If the return is filed by the extended due date, but the amount of the tax paid by the original due day is underestimated by an amount in excess of 10%, a penalty is imposed equal to 2% per month for each month the tax remains unpaid during the extension period.
In this case, the Taxpayer filed the return before the extended due date, which included the extension granted as a result of her spouse’s deployment, but she did not pay the full amount of tax due by the original due date. While the accrual of penalties and interest would have been paused during the combat zone extension pursuant to VTB 05-5, an extension penalty would have accrued from the original due date to the date of the deployment. As discussed above, under IRC § 7508, the extension related to deployment to a combat zone is structured such that the time is disregarded for purposes of determining whether a taxpayer timely filed their individual income tax return. The time prior to that, however, must still be considered for purposes of determining what penalties, if any, properly applied. Because the return was due on May 2, 2022 (May 1, 2022, was a Sunday) and the spouse began his deployment on August 28, 2022, an extension penalty of 8% applied (four months at 2% per month).
Interest
Under Virginia Code § 58.1-344 B, if any amount of the balance of the tax due is underestimated, interest is assessed on such amount from the original due date for filing the income tax return to the date of payment. Although interest would not have accrued during the extension period related to the spouse’s deployment pursuant to VTB 05-5, it would have accrued from May 2, 2022, the original due date, until August 28, 2022.
CONCLUSION
In accordance with VTB 05-5, the Taxpayer was eligible for relief for filing extensions and other tax benefits granted to members of the Armed Forces and their spouses. The due date to file the Taxpayer’s 2021 Virginia individual income tax return was extended by her spouse’s service in a combat zone. Because the Taxpayer filed her return before the extended due date, it is considered to have been timely filed and the late filing penalty will be abated.
The extension provided under VTB 05-5, however, did not apply to the period prior to the servicemember’s deployment to the combat zone. As a result, the Taxpayer remained subject to an addition to tax charge, an extension penalty, and applicable interest, because insufficient tax was paid, either through withholdings or estimated payments, by the original due date of the return, which was prior to the servicemember’s deployment. These items were properly assessable to the extent they had accrued prior to the date of deployment. The accrual of additional penalties and interest, however, must cease once the deployment began, in accordance with federal rules that treat the deployment period, plus the additional time granted after the deployment period is over, as disregarded for purposes of determining whether the return and payments were timely filed.
The assessment, therefore, will be revised in accordance with this determination, and an updated bill will be issued if the amount of the assessment is greater than the payments the Taxpayer has already made towards it. If the amount of the assessment is less than such payments, a refund will be issued in due course.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents and tax bulletin cited are available at 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 ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4851.B