If we hide sales records during an audit and only pay when the state catches the rest, can New Mexico add a 50% fraud penalty?

Plain-English summary

A contractor that hid most of its New Mexico sales records during a tax audit — and, according to a former employee, altered its computer data and kept staff away from the auditor — owed the 50 percent civil "fraud" penalty for a willful intent to evade gross receipts tax. Protest DENIED.

Quality Exteriors, Inc. was a Lubbock, Texas corporation (formerly Caffey Construction, Inc.) that installed home siding, windows, soffits, and fascia. Most of its business came from Texas telemarketers, but salesmen traveled into New Mexico to solicit orders, and in 1996 the company registered with the Department to pay gross receipts, compensating, and withholding taxes under New Mexico's Combined Reporting System.

The Department's Roswell office noticed about 20 building permits issued to the company's vice-president and opened an audit. During the 1998 field audit at the company's Texas offices, the only people the auditor dealt with were the president (Ron Karvas) and vice-president (Mike Beasley) — the company's two shareholders. Karvas handed over files one batch at a time from a single drawer, gave the auditor the permitted jobs plus 20 unpermitted ones, and, when asked whether that was everything, said there were no more documents. The company paid the roughly $50,000 the auditor estimated.

A year later a former employee contacted the Department's Inspector General with schedules showing the real numbers: New Mexico receipts of about $446,000 in 1996 (the company had reported $63,000) and about $630,000 in 1997 (reported $130,000). All told, roughly $1 million of New Mexico receipts had gone unreported — an underreporting of 80 to 85 percent. The employee described how the company altered its computer records to recode New Mexico sales as Texas sales, segregated the small set of documents to be shown to the auditor, and told other employees to stay home so the auditor could not talk to them. Using the whistleblower's schedules and more than 100 New Mexico contracts, the Department reran the audit and, on August 4, 1999, issued a $149,618.90 assessment: $83,408.70 in gross receipts tax, $42,213.72 penalty, and $23,996.48 interest. The only issue the company protested was the 50 percent penalty.

Why a fraud penalty is proven differently

Most assessments come with a statutory presumption that they are correct, so the taxpayer normally bears the burden of showing they are wrong. A fraud assessment is different. Section 7-1-78 puts the burden of proof on the Department or the state whenever the issue is whether a person acted with fraud or corruption, and New Mexico law requires civil fraud to be proven by clear and convincing evidence (First National Bank in Albuquerque v. Abraham). So the Department, not the taxpayer, had to carry the heavier burden here.

Why the Department met its burden

The hearing officer found clear and convincing evidence of willful intent to evade:

• The company knew it owed the tax. It had registered in 1996 and filed returns reporting some New Mexico receipts, yet left 80 to 85 percent of them unreported and never explained why.
• It intentionally withheld records. The company admitted it did not give the auditor all of its New Mexico documents, defending only that "the auditor did not request such documents." That did not hold up: the audit notice and the auditor's letter both asked for sales invoices and contracts on New Mexico projects, and Karvas's own act of producing 20 unpermitted jobs showed he knew the audit was not limited to permitted work.
• The whistleblower's account. The former employee described altered computer records, deliberately segregated documents, and instructions to keep other employees away from the auditor. Hearsay is admissible in administrative hearings (Bransford), and because the company failed to appear, that testimony went in without objection (Tyrpak v. Lee).

The hearing officer added that even if the company had fully cooperated, its apparent belief that it did not owe tax on receipts the audit failed to uncover would still misread New Mexico's self-reporting system: a taxpayer that knows it has unreported receipts has a continuing duty to correct the reporting and pay, and "tax compliance is not a game" in which a taxpayer may withhold payment until the Department catches it (Section 7-1-13; Tiffany Construction).

Result: protest DENIED — the 50 percent civil fraud penalty stood.

What this means for you

The 50% penalty is for willful evasion, not ordinary mistakes

New Mexico's everyday negligence penalty under Section 7-1-69(A) tops out at 10 percent. The 50 percent penalty under Section 7-1-69(C) is reserved for a willful intent to evade or defeat the tax — conduct like hiding records or falsifying data, not honest errors or a good-faith dispute about what is taxable.

Concealing records during an audit is the classic fraud fact pattern

Giving an auditor only a curated slice of your records, recoding in-state sales as out-of-state, or keeping employees away from the auditor are exactly the kinds of acts that prove willful evasion. The safest course in an audit is full production of the records requested.

The state carries the burden in a fraud case — but that is not a shield if you don't show up

Because fraud must be proven by clear and convincing evidence, the Department has real work to do. But failing to appear at your hearing lets the Department's evidence — including hearsay from a former employee — come in unchallenged. If you protest a penalty, defend the protest.

Paying only what the auditor finds does not erase the rest

New Mexico is a self-reporting system. Once you know you have unreported receipts, you have a continuing obligation to file amended returns and pay — you cannot wait to see whether the Department discovers them.

Common questions

Q: What is the difference between the 10% and 50% New Mexico tax penalties?
A: The 10 percent penalty under Section 7-1-69(A) is for negligence — failing to use ordinary business care. The 50 percent penalty under Section 7-1-69(C) applies only when the failure to pay was based on a willful intent to evade or defeat the tax, such as hiding or falsifying records.

Q: Doesn't the state have to prove fraud, not the taxpayer?
A: Yes. For a fraud penalty, Section 7-1-78 puts the burden on the Department, and it must prove willful intent by clear and convincing evidence. The usual presumption that an assessment is correct does not apply to a fraud assessment.

Q: Can a hearing officer rely on what a former employee said?
A: Hearsay is admissible in New Mexico administrative hearings, and here the company waived any objection by not appearing. The former employee's account of altered records and hidden documents was part of the clear and convincing evidence.

Q: We paid what the auditor originally assessed. Why did we still owe on the rest?
A: Because you knew about the unreported receipts and had a continuing duty to report and pay them. Under New Mexico's self-reporting system you cannot withhold payment until the Department finds the shortfall on its own.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69(C) — 50% civil penalty when the failure to pay tax is based on a willful intent to evade or defeat the tax
• NMSA 1978, § 7-1-78 — the burden of proof is on the director or the state on any issue of fraud or corruption
• NMSA 1978, § 7-1-17(C) — an assessment is presumed correct (the hearing officer noted this presumption does not apply to a fraud assessment)
• NMSA 1978, § 7-1-13 and § 7-1-13(A) — New Mexico's self-reporting system; taxes are due, and remain due, until paid
• Regulation 3 NMAC 1.4.10.1 — the words "and after" in Section 7-1-13(A) mean taxes remain due until paid

Cases cited:

• First National Bank in Albuquerque v. Abraham, 97 N.M. 288, 693 P.2d 575 (1982) — civil fraud must be established by clear and convincing evidence
• Bransford v. State Taxation and Revenue Department, 1998-NMCA-077, 125 N.M. 285, 960 P.2d 827 — hearsay is admissible in administrative proceedings if the decision is supported by some admissible evidence
• Tyrpak v. Lee, 108 N.M. 153, 768 P.2d 352 (1989) — a party that fails to appear and object in a timely manner waives objections to evidence
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — taxpayers must determine and accurately report their own tax liabilities

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Quality Exteriors, Inc.
• Decision PDF: D&O 00-28

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
QUALITY EXTERIORS, INC. No. 00-28
ID NO. 02-322159-00-3
ASSESSMENT NO. 2405744

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 21, 2000, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Javier Lopez, Special Assistant Attorney General. Quality Exteriors, Inc. (“Tax-

payer”) failed to appear for the hearing. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a corporation based in Lubbock, Texas.

2. The Taxpayer is engaged in the business of installing home siding, windows, soffits

and fascia. Most the Taxpayer’s business is generated by telemarketers located in Texas, although

the Taxpayer has a few salesmen who travel into New Mexico to solicit orders.

3. In 1996, the Taxpayer registered with the Department for payment of gross receipts,

compensating and withholding taxes, which are reported under New Mexico's Combined Reporting

System (CRS).

4. At that time, the Taxpayer operated under the name “Caffey Construction, Inc.” and

had two shareholders: Danny Caffey and Ron Karvas.

5. In 1997, Ron Karvas and Mike Beasley bought out Danny Caffey’s interest in Caffey

Construction, Inc. and changed the name of the company to “Quality Exteriors, Inc.”

6. Sometime during 1997, the Department’s Roswell office performed a routine

comparison of building permits issued in the southeastern region of New Mexico with the builders’

gross receipts tax reporting.

7. The Department found approximately 20 building permits issued to Mike Beasley,

the Taxpayer’s vice-president.

8. Based on a discrepancy between the building permits and the gross receipts reported

on the Taxpayer’s CRS-1 returns, Danny Pogan was assigned to conduct an audit of the Taxpayer.

9. On January 2, 1998, the Department sent the Taxpayer an audit notice that included

the following statements: “You will be requested to make your records and books of account

available for examination. Generally, the types of records to be examined include: payroll, sales

invoices, purchase invoices, books of original entry, general and subsidiary ledgers, financial

statements and state and federal income tax returns.”

10. Upon receiving the notice, the Taxpayer called Danny Pogan to ask how it had been

selected for audit. Mr. Pogan told the Taxpayer it was selected based on a discrepancy between

receipts shown on building permits and receipts shown on the Taxpayer’s CRS-1 returns. Mr. Pogan

stated he also would be looking at the Taxpayer’s reporting of compensating, withholding and

corporation income taxes.

11. The Taxpayer asked Mr. Pogan for a list of the building permits he had found and a

letter indicating what other books and records he would be reviewing during the field audit.

12. On February 11, 1998, Mr. Pogan provided the Taxpayer with the list of building

permits and sent the Taxpayer a letter setting out “some of the records and books” he would need to

examine, including: “Sales invoices and/or sales contracts on construction projects performed in

New Mexico.”

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13. The audit field work was conducted at the Taxpayer’s offices in Lubbock, Texas, on

March 25, 26 and 27, 1998.

14. When Mr. Pogan arrived at the Taxpayer’s offices, he was met by its president, Ron

Karvas, and its vice president, Mike Beasley.

15. Mr. Karvas and Mr. Beasley were the only employees with whom Mr. Pogan worked

during the audit. During most field audits, Mr. Pogan works with a taxpayer’s bookkeeper,

accountant or tax manager, and it was very unusual for the president and vice president of the

company to be his only audit contacts.

16. At the commencement of the audit, Mr. Pogan was told there were no general

ledgers, sales journals or other summary records available, and so he had to rely on sales documents

contained in individual customer files.

17. Mr. Pogan was not given free access to the Taxpayer’s records. Instead, he was

given files to review by Mr. Karvas, who stated that all records relating to New Mexico sales were

kept in the middle drawer of a filing cabinet in his office. When Mr. Pogan finished with one batch

of files, he went to Mr. Karvas’s office and Mr. Karvas took another batch from the file drawer and

gave it to Mr. Pogan.

18. Mr. Karvas gave Mr. Pogan files for all of the jobs covered by the building permits

previously located by the Department, plus 20 additional files for New Mexico jobs not covered by

building permits.

19. After reviewing the files provided, Mr. Pogan asked Mr. Karvas: “Is this all you have

for me? Is this all New Mexico sales?” Mr. Karvas told Mr. Pogan there were no more documents

for him to review.

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20. On the last day of the audit, Mr. Pogan went over his findings with Mr. Karvas and

gave him an estimate of the amount of taxes due. At Mr. Karvas’s direction, the company’s

bookkeeper made out a check for that amount and gave it to Mr. Pogan before he left the office.

21. During Mr. Pogan’s initial audit interview, Mr. Karvas said he had consulted with the

Taxpayer’s attorneys, Modrall, Sperling, Roehl, Harris & Sisk, P.A., concerning the audit and they

told him to provide as many invoices as he could. Mr. Karvas told Mr. Pogan the attorneys were also

looking into the possibility of changing the Taxpayer’s corporate structure to create a separate New

Mexico corporation.

22. In May 1998, the Taxpayer’s attorneys directed the Department to change the

Taxpayer’s registration from “Quality Exteriors, Inc.” to “Quality Exteriors of New Mexico, Inc.”

23. In March 1999, one year after Mr. Pogan completed his audit of the Taxpayer, a

former employee of the Taxpayer contacted the Department’s Inspector General.

24. The employee told the Inspector General the Taxpayer had withheld information

from Mr. Pogan during the 1998 audit and provided the Inspector General with two summary

schedules of the Taxpayer’s New Mexico receipts: Sales by Customer Detail and Income by

Customer Summary.

25. The Inspector General assigned the matter to his audit manager, Rick Salazar, who

compared the Taxpayer’s CRS-1 returns to the schedules provided by the Taxpayer’s former

employee. Mr. Salazar found the following discrepancies: in 1996, the Taxpayer reported New

Mexico receipts of $63,000, compared to New Mexico receipts of $446,000 shown on the schedules;

in 1997, the Taxpayer reported New Mexico receipts of $130,000, compared to New Mexico receipts

of $630,000 shown on the schedules. Mr. Salazar then reviewed the Department’s 1998 audit and

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found that tax on an additional $50,000 of receipts had been assessed to the Taxpayer, leaving a

balance of unreported receipts in the range of $1 million.

26. On March 17, 1999, Mr. Salazar contacted the Taxpayer’s former employee to obtain

additional information. The employee stated that during his employment with the Taxpayer, he

became concerned that the Taxpayer was withholding information from the Department. The

employee described the Taxpayer’s actions as follows:

(a) When the Taxpayer received the Department’s notice of audit, the Taxpayer

contacted its attorneys and the attorneys coached the Taxpayer on how to handle the audit.

(b) First, the Taxpayer altered its computer records to reflect the majority of New

Mexico sales as Texas sales.

(c) The Taxpayer then identified the paper records that would be given to the

auditor. These records were limited to jobs for which the Department already had building permits,

plus a small number of the New Mexico jobs performed without permits. The documents to be given

to the auditor were segregated in a file cabinet in Mr. Karvas’s office.

(d) In order to keep the auditor from having access to information from anyone

other than Mr. Karvas and Mr. Beasley, the Taxpayer directed its employees to stay home or stay

away from the office during the time the auditor was in the office.

27. The employee also told Mr. Salazar that it was the Taxpayer’s practice not to obtain

building permits for its construction jobs unless questions were raised by a local building inspector

or a customer. Accordingly, the Department’s comparison of the Taxpayer’s building permits to its

gross receipts tax returns did not reveal the full extent of the Taxpayer’s underreporting.

28. Mr. Salazar asked the employee whether he could provide customer contracts or

invoices to verify the schedules of New Mexico receipts the employee had previously provided to the

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Inspector General. The employee said that he could and sent Mr. Salazar copies of more than 100

New Mexico contracts that tied to the earlier schedules.

29. After speaking with the employee, Mr. Salazar called Danny Pogan to see whether

the auditor could verify the information provided by the employee. Mr. Pogan confirmed the

following facts: Mr. Karvas consulted with his attorneys after receiving the notice of audit; the

records Mr. Pogan was given to review were limited to the jobs for which the Department had

building permits, plus 20 additional jobs performed without permits; all of the records Mr. Pogan

was given during the audit were segregated in a single drawer in Mr. Karvas’s file cabinet; Mr.

Karvas and Mr. Beasley were Mr. Pogan’s only contacts during the audit; Mr. Pogan did not see any

other employees at the Taxpayer’s place of business, with the exception of a few telemarketers

working in another part of the building and the bookkeeper, who arrived at the office only after the

field work had been completed.

30. Mr. Pogan subsequently reviewed the documents provided by the Taxpayer’s

employee and found that they included contracts Mr. Pogan had already seen, as well as a substantial

number of contracts Mr. Pogan had not been given during the audit.

31. Using the original audit work papers and the schedules and contracts provided by the

Taxpayer’s employee, Mr. Pogan completed a new audit of the Taxpayer for the period January 1996

through December 1998.

32. On August 4, 1999, the Department issued Assessment No. 2405744 to the Taxpayer

in the total amount of $149,618.90, representing $83,408.70 gross receipts tax, $42,213.72 penalty,

and $23,996.48 interest. The penalty portion of the assessment was assessed pursuant to Section 7-

1-69(C) NMSA 1978, which imposes a 50 percent civil penalty when the failure to pay tax is based

on a willful intent to evade or defeat payment of the tax.

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33. On November 2, 1999, pursuant to an extension of time granted by the Department, the

Modrall law firm filed a protest on behalf of the Taxpayer. The sole issue raised in the protest was the

Taxpayer’s liability for the 50 percent civil penalty.

34. On April 12, 2000, a notice scheduling a hearing on the protest for August 10, 2000

was mailed to Curtis Schwartz, an attorney with the Modrall firm. At the request of Timothy Van

Valen, one of the firm’s other attorneys, the hearing was rescheduled for September 21, 2000. A

copy of the new scheduling order was mailed to Mr. Van Valen at the Modrall firm’s Albuquerque

office on April 19, 2000. A second copy of the scheduling order was mailed to Curtis Schwartz at

the Modrall firm’s Santa Fe office.

35. On June 8, 2000, Mr. Van Valen filed a Notice of Withdrawal of Representation. No

one entered an appearance for the Taxpayer subsequent to the Modrall firm’s withdrawal.

36. On September 11, 2000, the Department filed a prehearing statement as required by

the scheduling order. The certificate of service indicates a copy of the Department’s prehearing

statement was mailed to the Taxpayer at the address provided in the Notice of Withdrawal of

Representation. The Taxpayer failed to file its own prehearing statement or respond to the

prehearing statement filed by the Department.

37. The Taxpayer failed to appear at the September 21, 2000 hearing on its protest.

DISCUSSION

The sole issue to be decided is whether the Taxpayer is liable for the 50 percent civil penalty,

commonly referred to as a “fraud penalty”, authorized by Section 7-1-69(C) NMSA 1978 for willful

intent to evade or defeat payment of any tax. Although Section 7-1-17(C) NMSA 1978 creates a

statutory presumption that any assessment of tax by the Department is correct, the presumption does not

apply to fraud assessments. Section 7-1-78 NMSA 1978 provides that in any proceeding involving the

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issue of whether a person has been guilty of fraud or corruption, “the burden of proof in respect of such

issue shall be upon the director or the state.” Section 7-1-78 does not specify the standard or degree

of proof required. The common law rule in New Mexico is that proof of fraud in a civil action must

be established by clear and convincing evidence. First National Bank in Albuquerque v. Abraham,

97 N.M. 288, 292, 693 P.2d 575, 579 (1982). The Department has met its burden of proof in this

case.

First, there is clear evidence the Taxpayer understood its legal obligation to pay tax on

receipts from jobs performed in New Mexico. In 1996, the Taxpayer registered with the Department

for payment of gross receipts tax and began filing CRS-1 returns reporting at least some portion of its

New Mexico receipts. The Taxpayer failed, however, to report almost $1 million of it New Mexico

income, representing an underreporting of 80 to 85 percent. The Taxpayer has not denied its liability

for tax on those receipts, nor has the Taxpayer made any attempt to explain the cause of such

substantial underreporting.

Second, there is evidence that during the Department’s 1998 audit, the Taxpayer

intentionally withheld records pertaining to the Taxpayer’s receipts from construction jobs

performed in New Mexico. The Taxpayer has admitted that not all documents were provided to the

auditor. On page 3 of its protest to the 50 percent fraud penalty the Taxpayer states:

This penalty is evidently based upon the auditor’s observation in the audit
narrative that “[r]eceipts from construction projects, in which the taxpayer
did not obtain building permits, were not provided to the auditor” during the
initial audit. Audit Narrative, pg. DN2. While on its face factually correct,
the reason is that the auditor did not request such documents during the initial
audit.... The auditor was provided everything he asked to review during the
initial audit. (Emphasis added)

The Taxpayer makes no claim that its failure to produce all documents relating to its New Mexico

receipts was an oversight or due to any lack of knowledge concerning such records. Nor would such

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claims be credible when the only persons with whom the auditor dealt were the president and vice

president (and the sole shareholders) of the company. The only defense given for the Taxpayer’s

decision to withhold pertinent records is its statement that “the auditor did not request such

documents.” This statement is not supported by the evidence.

On January 2, 1998, the Department sent the Taxpayer an audit notice stating:

You will be requested to make your records and books of account available
for examination. Generally, the types of records to be examined include:
payroll, sales invoices, purchase invoices, books of original entry, general
and subsidiary ledgers, financial statements and state and federal income tax
returns.

Upon receiving the notice, the Taxpayer called Danny Pogan and discovered that it had been selected

for audit based on a comparison of building permits to receipts reported on the Taxpayer’s CRS-1

returns. The Taxpayer asked Mr. Pogan for a list of the building permits. The Taxpayer also asked

him to identify what other books and records he would be reviewing during the field audit. On

February 12, 1998, Mr. Pogan responded with a letter setting out “some of the records and books” he

would need to examine, including: “Sales invoices and/or sales contracts on construction projects

performed in New Mexico.”

There is no question that the Taxpayer’s New Mexico sales contracts fall within the category

of documents identified in the audit notice and Mr. Pogan’s February 1998 letter. There is nothing in

either of these documents indicating an intent to limit the Department’s audit to jobs for which

building permits had been issued. Although the building permits were the original impetus for the

audit, Mr. Pogan testified that he asked Mr. Karvas to provide all customer files relating to New

Mexico sales. The fact that Mr. Karvas gave Mr. Pogan files for 20 unpermitted jobs, in addition to

the 21 jobs for which permits had been issued, negates any contention that Mr. Karvas believed the

audit was limited to New Mexico jobs performed under building permits. The only conclusion to be

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drawn from the evidence is that the Taxpayer purposely withheld the majority of its New Mexico

contracts in order to evade the payment of gross receipts tax.

Further evidence of the Taxpayer’s intent to evade payment of tax is found in the information

received from the Taxpayer’s former employee. According to the employee, the Taxpayer made

careful plans designed to prevent the auditor from discovering the true extent of the Taxpayer’s

underreporting. These plans included altering computer records, withholding documents, and

insuring that other employees of the Taxpayer were not available to speak with the auditor.

Although this testimony is hearsay, hearsay is admissible in administrative proceedings. An

administrative hearing officer may consider evidence that would be inadmissible in a court of law, as

long as the hearing officer’s decision is supported by some evidence that would be admissible under

the rules of evidence. Bransford v. State Taxation and Revenue Department, 1998 NMCA-077 ¶18,

125 N.M. 285, 290, 960 P.2d 827, 832. I also note that since the Taxpayer failed to appear to defend

its protest, Mr. Salazar’s testimony concerning his conversation with the Taxpayer’s employee was

entered in the record without objection. In Tyrpak v. Lee, 108 N.M. 153, 154-155, 768 P.2d 352,

353-354 (1989), the New Mexico Supreme Court held that the district court was entitled to rely on

exhibits for which no foundation was laid when the defendant failed to appear and make a timely

objection:

Tyrpak argues the three typewritten pages itemizing the amounts claimed by
Lee were not competent evidence. We believe, however, even if the
consideration of these exhibits without sworn foundational testimony was
error, Tyrpak waived any such error by failing to appear and object in a
timely manner. Incompetency and inadmissibility may be waived by failure
to object, in which case the evidence may be considered if relevant.

In this case, the statements made by the Taxpayer’s employee, together with Mr. Pogan’s testimony

and the Taxpayer’s admission that it did not give Mr. Pogan all of the documents relating to its New

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Mexico receipts, provides clear and convincing evidence of the Taxpayer’s willful intent to evade

payment of gross receipts tax due to New Mexico.

Finally, even assuming the Taxpayer’s contention that it fully cooperated with the auditor

were true, the Taxpayer’s apparent belief that it was not required to pay tax on unreported receipts

the Department’s audit failed to uncover reveals a serious misunderstanding of New Mexico law.

New Mexico has a self-reporting tax system. It is the obligation of taxpayers, who have the most direct

knowledge of their business activities, to determine their tax liabilities and accurately report those

liabilities to the state. See, Section 7-1-13 NMSA 1978; Tiffany Construction Co. v. Bureau of

Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d

1348 (1977). Section 7-1-13(A) provides that “[t]axpayers are liable for tax at the time of and after the

transaction or incident giving rise to the tax until payment is made. Taxes are due on and after the date

on which the payment is required until payment is made.” As noted in Regulation 3 NMAC 1.4.10.1,

the words “and after” as used in Section 7-1-13(A) mean that taxes remain due until paid.

A taxpayer that knows it has unreported taxes due to the state has a continuing obligation to

correct the reporting error. Tax compliance is not a game, and taxpayers are not entitled to withhold

payment of tax until the Department “catches” them. In this case, the Taxpayer knew it had unreported

receipts from New Mexico jobs performed without building permits, but failed to either bring the

pertinent contracts to the auditor’s attention or file amended returns to pay the tax due. In pursuing this

course of action, the Taxpayer was clearly acting with willful intent to evade or defeat the payment of

tax, and is subject to the 50 percent penalty provided in Section 7-1-69(C).

CONCLUSIONS OF LAW

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1. The Taxpayer filed a timely, written protest to Assessment No. 2405744, and

jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer’s failure to pay the gross receipts tax reflected in Assessment No.

2405744 was based on a willful intent to evade or defeat the payment of tax, and the Taxpayer is

subject to the 50 percent penalty provided in Section 7-1-69(C) NMSA 1978.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED October 2, 2000.

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