Virginia State Tax Options for Those With Back Taxes

Taxpayers that owe back taxes in the State of Virginia are often subject to aggressive collection efforts. What many taxpayers do not realize is that there are options available to them when they owe VA back taxes. Furthermore, these options help them resolve tax liabilities and avoid collection. Options to satisfy back taxes in Virginia include:

• Paying the full amount of taxes due plus accrued interest and penalties
• Entering into a payment plan
• Requesting a Waiver of Penalty
• Requesting an Offer in Compromise and getting it accepted

We discuss some options (not an exhaustive list), including their advantages and disadvantages, in more detail below.

Who is Responsible for Collecting Taxes in the State of Virginia?

The Virginia Department of Taxation is the entity responsible for collecting taxes in the state. In the 2018 fiscal year, the Department of Taxation received some $20 billion in taxes from Virginia taxpayers. The total revenues comprise a wide array of taxes. These include but are not limited to, individual and corporate income taxes, estate tax, watercraft sales and use tax, cigarettes, and tax on many commodities.

The Department of Taxation is also the entity that will attempt to collect past-due taxes. The Department’s initial collection efforts will consist of sending taxpayers a “Notice of Assessment.” A Notice of Assessment is nothing more than a tax bill. Taxpayers have 30 days from the receipt of the Notice to pay the full amount of the taxes due. If taxpayers fail to make payment within 30 days, the Department will begin to access penalties and interest on the unpaid balance. Moreover, the Department will likely commence a variety of collection actions.

Taxpayer Consequences for Failing to Pay VA Back Taxes

The Virginia Department of Taxation can be very aggressive in its pursuit of back taxes. If you fail to make a payment within 30 days of receiving a Notice of Assessment, the Department could take the following collection actions against you:

Assignment to a third-party collection agency

If your account becomes seriously delinquent, the VA Dept of Taxation will assign it to a collection agency, and then, you must work directly with the agency to resolve your account. If the IRS transfers your account to a collection agency, you can request to have your file sent back to the IRS. This is not the case in Virginia.

You cannot send your account back to the Dept of Taxation once it has been assigned to a third-party collector. If desired, you can request an offer in compromise from the state, but otherwise, you must work with the collection agency to set up a resolution. 

At the time of writing, VA uses the following companies to collect unpaid taxes: Access Receivables, Harris and Harris, LTD, and Kennedy Services. Each agency has its own collection process. For instance, Harris and Harris will only accept a payment plan if you make a 60% downpayment, and there are no exceptions. 

Issue a state tax lien

In VA, state tax liens stay in place for 20 years. They attach to all of your assets. What does that mean? That means if you sell an asset, the VA Department of Taxation has rights to the proceeds up to the amount of the tax lien. If you have a loan against the asset and you sell the asset, the lender gets paid first, and then, any remaining amounts go to the state. Tax liens attach to your current assets as well as to any assets that you get in the future. That includes gifts, inheritances, wages, etc. 

Garnish 100% of your wages

If you have unpaid taxes, Virginia Tax can garnish 100% of your wages. Normally, in this state, creditors can only take 25% of your wages. The state tax authorities don't have to follow this rule. They can take all of your wages. However, they cannot take federal exempt income such as SSI, unemployment, and worker's compensation. Once a wage garnishment is in place, it will stay in place until the tax debt is fully paid or you establish that the lien is causing severe hardship. You will not be able to set up a payment plan if the state is garnishing wages. That's why it's critical to act quickly if you owe back taxes. 

Seize wages, bank accounts, or property

In addition to garnishing your wages, the state can also seize your bank account, investment accounts, and other property. The state will notify you before moving forward with the seizure, but once the process is in action, it can be very difficult to stop. Virginia Tax can take up to 100% of the funds in your bank and certain investment accounts, up to the amount of your balance due. 

Seize tax refunds

Generally, when you owe back taxes, you cannot receive tax refunds. The states and the IRS work together on a refund offset program. This means that if you owe IRS taxes, the IRS can seize your state tax refund as well as your federal refund. Similarly, through the VA offset program, the state can seize your state and federal refunds as well. 

Assess penalties and interest on the outstanding taxes owed

Penalties and interest can significantly increase the amount due. For instance, the late filing penalty in Virginia is 6% per month, and it can get up to 30% of your tax bill. The late payment penalty is also 6% per month, and it can also get up to 30% of your bill. For example, if you owe $5,000, these penalties can be $1500 each, but luckily, you cannot incur both penalties in the same month. 

Revoke a professional or business license

If you don't pay your taxes, the state may also take away your business or professional licenses. This can make it impossible to work so that you can pay the tax. If you have unpaid motor carrier taxes, you can lose your driving license. This isn't a tax that most people pay. It's assessed on heavy highway vehicles. 

In addition to the items above, the state can also take other legal actions against you as permitted by state law. State revenue employees can come to your place of business to collect the unpaid taxes, but they generally won't come to your home unless you have a home business. 

Virginia State Statute of Collections for Taxes

The Department of Taxation’s ability to collect back taxes is limited somewhat by the Statute of Limitations. The Statute of Limitations is a period prescribed by law for a specific type of legal action.

According to Virginia Code § 58.1-104 and the Virginia Tax Administrative Code, the Department must assess past due taxes within 36 months from the date the taxpayer initially owed the tax. However, if the taxpayer fails to file his or her return, then the Statute of Limitations does not apply. In other words, if you have unfiled returns, the Department can assess and collect the taxes at any time in the future.

In terms of the time limit for the state to collect taxes assessed and due, there is a seven-year statute of limitations. The clock generally starts ticking the day that your return is due, but if you file late, it doesn't start until the day you file. However, it's critical to note that VA tax liens stay in place for 20 years. Effectively, this means that the state may be able to collect your back taxes through the lien after the seven-year statute expires, but it will not be able to garnish wages or take other actions after the seven-year period expires. 

.The taxpayer should understand when the Statute of Limitations comes into effect. It is always essential to determine when the department assessed taxes and to timely raise the defense if applicable.

Some Options If You Owe VA Back Taxes

Few things are as upsetting to taxpayers as receiving an unexpected Notice of Assessment from the Virginia Department of Taxation. Even when taxpayers are aware that they likely owe back taxes, they are often shocked at the amount listed on the bill. It can be the result of errors or omissions on the part of the taxpayer that led to the Department recalculating the tax liability. Or it could merely be the tacking on of substantial penalties and interest. Whatever the reason, very few taxpayers can write out a check for the full amount listed on the Notice of Assessment. Here are some options if you can't afford to pay your taxes or if you don't agree with the assessment.

Request an Informal Review

An inability to pay the amount due leads to many taxpayers ignoring the Notice, hoping that it will somehow go away. And yet, failing to take any action always results in the worst consequences for the taxpayer. As a preliminary matter, the taxpayer should determine whether the amount claimed on the Notice is accurate. If the taxpayer disagrees with the amount, he or she must first request an informal review. The taxpayer can ask for an informal review by calling the Department of Taxation. The tax representative will review the information with you over the phone to determine if a correction is warranted.

If the Department denies the initial informal review, then the taxpayer must request it in writing. The written correspondence must contain a detailed description of why you disagree with the bill and provide documentation to support your claims.

Request an Administrative Appeal

If your informal review is unsuccessful, you also have the right to file an administrative appeal. Taxpayers must file appeals within 90 days from the date that the Department assesses the taxes. If the tax appeal fails, you may also contact the Virginia Taxpayer Rights Advocate. The Taxpayer Rights Advocate attempts to help taxpayers resolve issues where the administrative process has been unsuccessful.

Fortunately, even if you are unable to obtain relief through the above channels, there are other options available to you short of paying the requested amount in full. The availability and usefulness of each remedy depend mainly on your personal and financial circumstances. If you are unsure which option is the best for you, reach out to a licensed tax professional by starting your search on our homepage.

Payment Plan

A VA tax payment plan allows you to repay the amount you owe in equal monthly installments. While each case is different, as a general matter, the Department of Taxation will allow payment plans of 12 to 24 months. Typically, the taxpayer will repay the full amount owed, plus interest and penalties that may continue to accrue during the term of the payment plan. Payment plans are, however, an excellent option to avoid paying a large lump sum payment and to potentially avoid further collection actions.

Payment plans can be set up online if you owe less than $25,000 in back taxes and penalties and meet several other requirements. Taxpayers that owe more than $25,000 can apply for a payment plan by calling the Department of Taxation.

Offer in Compromise (OIC)

Just like the IRS, the VA Department of Taxation also has an Offer in Compromise, An Offer in Compromise is a formal proposal to the Virginia Department of Taxation to pay off your VA back taxes for less than you owe. Consequently, both individuals and businesses can apply for an OIC if they satisfy the eligibility requirements. Specifically, there are three instances in which an individual or business may be eligible for an OIC:

• The taxpayer is not liable for the amount assessed (known as doubtful liability)
• The taxpayer is experiencing financial hardship and is unable to pay the amount owed (known as doubtful collectability)
• As a request for waiver of penalties over $2,000 where extenuating circumstances kept the taxpayer from filing on time

The taxpayer must complete the appropriate form depending on which type of OIC he or she is seeking. Moreover, when pursuing an OIC based on doubtful collectability, the taxpayer needs to complete a very detailed financial statement, as well as provide supporting documentation. When seeking a waiver of penalty or OIC based on doubtful liability, the taxpayer needs to provide a written explanation and documentation evidencing his or her extenuating circumstances.

Completed forms, supporting documentation, and payment, should the OIC propose an initial lump sum payment, must be mailed to the Department of Taxation. The Department will generally respond to the taxpayer within several months. The Tax Commissioner retains full discretion about whether to accept an OIC. Furthermore, the Department may also approve an Offer in Compromise with changes to the proposed terms.

Waiver of Penalty

Penalties tacked onto back taxes can be substantial and make getting out of taxes owed very difficult. The Department of Taxation will consider a “waiver of penalty” under specific circumstances. Usually, the taxpayer must have extenuating details for non-compliance. For example, a severe illness or a death of a close family member kept them from filing a tax return on time. Taxpayers must request waivers in writing and must set forth specific details and supporting documentation. For penalties exceeding $2,000, the taxpayer must file an OIC.

If you owe VA back taxes and are unsure of your rights or options, reach out to a licensed tax professional with experience in Virginia state tax issues, or start your search below.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.