Back Taxes and Unfiled Returns in Virginia

If you owe taxes in Virginia, you need to make arrangements to pay them as quickly as possible. Right now, the state is sending out garnishment letters that instruct employers to withhold 100% of their employee’s wages for unpaid taxes. Unfortunately, this is completely legal.

The Virginia Department of Taxation can be extremely aggressive about collecting unpaid taxes, but there are options. 

To get help right now, contact us at the W Law Group today. We can help you deal with unpaid state taxes. We have extensive experience negotiating tax settlements and guiding clients to the best solutions for their tax issues. 

What to Do If You Owe Back Taxes in Virginia

If you don’t pay your tax bill for 30 days, the state will start the collection process. If you can’t afford to pay your tax bill in full, that’s okay. The state has many different options. However, you need to be proactive about setting up an arrangement. In many cases, you cannot access the following programs if the state has already started the collection process. 

Here are several steps that you can explore if you owe back taxes in the Commonwealth of Virginia:

Set up monthly payments

Virginia Tax will let you make monthly payments on your tax debt if you owe less than $25,000. The state’s website doesn’t specify how long you can take to pay off the debt, but it urges taxpayers to select the shortest possible payment terms. Individual taxpayers must make a 10% downpayment, while businesses must pay 20%. 

You cannot set up a payment plan if the Department of Taxation has taken any of the following actions:

• Padlocked your business for unpaid taxes.
• Revoked your business license.
• Issued a criminal warrant for tax evasion. 
• Issued a tax lien to an employer or bank.
• Assigned your account to a third-party tax agency. 

Additionally, you also cannot set up a payment plan on your state taxes if you are in the middle of a bankruptcy case. 

Request to settle for less than you owe.

Qualifying taxpayers can settle their bills for less than they owe through Virginia’s Offer in Compromise program. To qualify, you must not be able to afford the full payment, or there must be a legitimate doubt that you really owe the tax. There is a distinct application process for each of these reasons. 

If you have incurred over $2,000 in penalties, you can also apply for an offer in compromise to get the penalties waived. To qualify, you must have not paid the tax due to exceptional circumstances. 

Establish that a tax lien would create undue financial hardship.

If a tax lien would create financial hardship, you can ask the department to adjust the terms of the lien. Depending on the situation, this may prevent the department from moving forward with certain collection actions, and it may even convince them to remove the lien from certain assets. To apply, you must submit a financial statement. Virginia Tax reviews hardship applications on a case-by-case basis. 

Ask the department to waive penalties. 

If you file or pay late, the department will add penalties to your account, and these can increase your balance significantly. You can request a penalty waiver to reduce your balance. 

The department will almost always remove penalties if you paid or filed late due to the following reasons:

• Death of a close family member.
• Death of your tax preparer.
• Natural disaster.
• Loss of financial records due to fire or natural disasters. 

There are several other situations where the department will waive penalties. For instance, if you try to pay online and there’s an issue with processing, you can usually get fees removed if you pay within 10 days. 

If the IRS waives penalties for the same tax period, you should let the VA tax department know. This doesn’t guarantee that you’ll get a penalty waiver, but it can help. 

Unfortunately, you can almost never get interest removed from your account. The department will generally only remove interest if it is related to an incorrect tax assessment. 

Appeal the tax liability. 

If you believe that the tax was incorrectly assessed, you have the right to appeal. However, you must do so within 90 days of the assessment. You can start with an informal appeal and then appeal to the Tax Commisser if you disagree. Alternatively, you can appeal directly to the Tax Commissioner. 

Make sure to be very detailed when you make your appeal. If the department needs to request more information, you won’t get extra time on the 90 days. To protect yourself, you may want to get help from a tax professional. 

What happens if you don’t pay taxes in Virginia?

They say, “Virginia is for lovers” but the state is not so loving when you owe back taxes. Virginia Tax starts the collection process when your taxes are 30 days late. If you don’t pay voluntarily, here are the actions the department can take to collect your delinquent taxes. 

Add penalties to your account

If you owe tax and file your return six or more months after the due date, the department will assess a 30% late-filing penalty on your account. For instance, if you owe $10,000, this will increase your bill to $13,000. The penalty is 6% per month, but it doesn’t apply until you’re six months late, and by this point, it has reached the maximum amount of 30%.

There is also a late payment penalty of 6% per month. The department adds this penalty when you file a return within six months of the due date but you don’t pay the tax right away. This penalty doesn’t apply in any months where you already incurred a late filing penalty. It also can get to a maximum of 30% of your tax liability. 

You can minimize the late filing penalty by requesting an extension and filing within six months of the original due date. However, if you take this route, you must pay at least 90% of the tax liability by the original due date. If you don’t, you’ll incur an extension penalty of 2% per month on the unpaid tax. 

Issue a state tax lien

If the state issues a tax lien, it will attach to all of your real and personal property, and it will stay in effect for 20 years. If you sell an asset while a lien is in place, the state has the right to the proceeds from the sale (up to the amount of the tax debt, penalties, interest, and lien filing fees). Most lenders will not work with you when you have state tax liens against your assets. 

A lien makes it very difficult to organize your financial life, and it lays the groundwork for the department to move forward with asset levies, wage garnishments, and other collection actions. 

Garnish 100% of your wages

That is right — the state can send a notice to your employer and have them garnish your wages. Your employer is legally obligated to follow through with these instructions, and they will garnish your wages until the tax bill is paid in full. 

This is one of the most severe wage garnishments in the country. Most states only garnish a portion of your wages for unpaid taxes, and the IRS leaves a small living allowance when they garnish wages. Note that it’s only Virginia Tax that can do this. If you owe debts to another creditor, they can usually only take 25% of your wages. 

Seize the funds in your bank account. 

The department can use a bank lien to seize the funds in your bank accounts. It can also use an institution lien to seize the funds in certain types of investment accounts. If this happens, the institution will put a hold on your account. Then, it will send your money up to the amount of your balance due to the VA Department of Taxation. 

Come to your business without warning.

Employees from Virginia Tax can come to your place of business to try to collect the unpaid tax. They usually come during business hours, and legally, they should identify themselves with an official state ID. Typically, they will not come to your home unless you run a home-based business. 

Transfer your account to a third-party collection agency.

Virginia Tax can transfer your unpaid tax account to a third-party collection agency. As of 2023, the state works with the following agencies:

• Access Receivables
• Harris and Harris, LTD. 
• Kennedy Services

If you get contacted by an agency, make sure to verify that they truly work for the state before providing any information. 

FAQs About Virginia Tax Issues

Still, have questions? You are definitely not the only one. State tax issues can be incredibly complex. Here are answers to some frequently asked questions. 

Can Virginia take all of my income for unpaid taxes?

The state can garnish 100% of your wages, but it cannot take Social Security (SS) and Supplemental Security Income (SS), Veteran’s benefits, unemployment payments, worker’s comp, child support payments, or other federally protected income sources. 

What if my Virginia tax bill is due to my spouse?

Virginia does not offer innocent spouse relief. If you file a joint return with your spouse, you are jointly liable for the tax bill. Unfortunately, even if you have a divorce decree saying that you are not responsible, the state can still go after you for the unpaid taxes. The logic here is that the contract is between you and your ex. It is not between you and the state. 

However, if you have a federal tax liability that is due to your spouse, you may qualify for IRS innocent spouse relief. This program has strict rules, and you can usually only qualify if your spouse hid the fact that they didn’t report income or cheated on the tax return. 

What if you have a complaint about Virginia Tax?

If you have a complaint about how the department is handling your situation, you can reach out the VA Taxpayer Rights Advocate by mail or over fax. Provide a detailed description of your issue and note how you have tried to resolve it. 

This service is not for people who have complaints about taxation in general. It is for taxpayers who have been unable to resolve their issues through the usual channels or taxpayers whose rights have been abused. 

What if my business didn’t file Virginia taxes?

The state offers a voluntary disclosure program to businesses that were unaware of their filing requirement. Generally, this applies to out-of-state businesses that didn’t know they had nexus in Virginia. This program allows you to file your delinquent returns without paying penalties. 

You can’t qualify if you received bills about the tax or audit notices. You also don’t qualify if you already registered for that type of state tax account in Virginia. 

What happens if you commit tax evasion in Virginia?

The civil penalty for tax evasion in Virginia is 100% of the tax due. This applies if you file a false return or refuse to file in an attempt to evade. Criminal tax fraud penalties include a fine of up to $2,500 and/or up to one year in prison. 

What is the statute of limitations on tax collection in Virginia?

The state has seven years from assessment to collect unpaid taxes through levies, court proceedings, or other actions allowed under state law. The seven-year statute of limitations on tax collection can be extended with the written agreement of the taxpayer. 

If you file bankruptcy, are out of state for more than six months continuously, or enter an installment agreement, the statute of limitations pauses, and the time gets added onto the end. 

However, if you’re thinking about trying to wait out the Department of Taxation, keep in mind that tax liens stay in place for 20 years. In other words, even if the seven-year collection statute expires, the lien will still be in place, and the state can collect your taxes through that mechanism. 

Get Help With Virginia Tax Issues

Virginia can be one of the worst states to get behind on your taxes. The penalties are severe, and the state is known for garnishing 100% of wages. Don’t wait. Get help now. To find the best option for your situation, contact us at the W Tax Group today. 

We’ll start with a free consultation to talk about your Virginia taxes, and we can also help if you’re behind with the IRS or dealing with back taxes in West Virginia. At the W Tax Group, we are dedicated to helping our clients find the best resolution for their unique situations.