Can a negligence penalty be abated when a taxpayer failed to pay gross receipts tax while exhausted from caring for a dying fiancé — and does interest still apply?

Plain-English summary

A home health-care worker who failed to pay gross receipts tax while overwhelmed by caring for her dying fiancé had her negligence penalty abated — but she still owed interest, which is mandatory no matter the reason for the delay. Protest GRANTED IN PART and DENIED IN PART.

In 1996, Julia Santos (now Julia Griswold) provided home health-care services as an independent contractor for Catholic Charities in Albuquerque. Outside of that work, she spent virtually every hour caring for her seriously ill fiancé, Louis Griswold, who needed 24-hour care; they married in 1997 and he died in March 2001. She did not know New Mexico gross receipts tax applied to her income, and although she gave her financial information to a CPA to prepare her income tax returns, she never asked about other taxes and the CPA did not mention gross receipts tax. In 1999 the Department matched IRS data, found she was unregistered and had paid no gross receipts tax, and in April 2000 assessed $1,104.85 — $667.08 tax, $66.72 penalty, and $371.05 interest — for 1996. She later paid the tax and continued to protest only the penalty and interest.

The Department's timing was not a valid excuse

Santos argued the Department took too long to notify her, letting the penalty reach its 10% maximum and interest pile up. The hearing officer explained that New Mexico is a self-reporting system: it is the taxpayer's duty to determine and report her own tax (Section 7-1-13(B); Tiffany Construction), and the Department cannot audit everyone continuously. Its IRS "tape match" naturally involves some delay, and Section 7-1-18(C) gives it seven years to assess tax for unfiled periods. The April 2000 assessment was well within that window, so the delay did not justify abatement.

Reliance on the accountant did not apply

Regulation 3.1.11.11(D) can excuse a penalty when the failure was caused by reasonable reliance on a professional's advice about the taxpayer's liability after full disclosure. That did not fit: Santos relied on her CPA only to prepare her income tax returns and never asked whether she owed any other tax. Her failure to pay gross receipts tax was not an informed decision based on the CPA's advice, so this ground gave her no relief.

The penalty was abated because of the caregiving hardship

Regulation 3.1.11.11(B) lists disability from injury or prolonged illness as a situation showing non-negligence. Santos's facts were not identical — she was caring for someone else, not disabled herself — but the hearing officer stressed that the regulation's eight scenarios are only examples. The real question is whether the failure to report or pay was negligent. Finding this "a close case," the hearing officer concluded that Santos's failure was primarily attributable to the physical and mental stress of providing round-the-clock care for her dying fiancé, rather than to negligent inattention to her tax obligations. On that basis, the negligence penalty was not warranted and was abated.

Interest is always mandatory

Interest was a different matter. Section 7-1-67 says interest "shall" be paid on tax not paid when due, from the day after the due date until payment. The word "shall" makes it mandatory with no exceptions (State v. Lujan), and questions of negligence are irrelevant, because interest is not a punishment — it compensates the state for the time value of money it should have had. Even taxpayers with a formal extension owe interest from the original due date (Section 7-1-13(E)). Since Santos had the use of the tax funds for years, interest was properly assessed and could not be abated.

Result: protest GRANTED IN PART and DENIED IN PART. The $66.72 penalty was abated; the interest was upheld.

What this means for you

Serious caregiving or illness can excuse a penalty — but you must show it caused the lapse

New Mexico's non-negligence examples (Regulation 3.1.11.11) are illustrative, not exhaustive. If a genuine hardship like prolonged illness — your own or, as here, an all-consuming caregiving burden — is the real reason you missed a tax obligation, the negligence penalty can be abated. The key is showing the hardship, not ordinary busyness, actually caused the failure.

Interest is not negotiable

Even when a penalty is forgiven, interest almost never is. It runs automatically from the original due date under Section 7-1-67 and compensates the state for the delay. Plan to pay it regardless of how sympathetic your circumstances are.

Relying on your accountant only helps if you actually asked

Handing your income-tax preparer your records does not cover gross receipts tax unless you ask about it. To use the reliance defense, you must disclose the facts and get advice about the specific tax; silence on a tax you never raised is not "reliance."

"The state should have caught it sooner" is not a defense

New Mexico taxes are self-reported, and the Department has seven years to assess unfiled periods. Waiting to be told what you owe does not stop penalty and interest from accruing — the duty to determine and report your tax is yours.

Common questions

Q: What was assessed, and what did she end up owing?
A: The Department assessed $667.08 gross receipts tax, $66.72 penalty, and $371.05 interest for 1996. She paid the tax; the penalty was abated; and she remained liable for the interest.

Q: Why was the penalty abated?
A: Under Regulation 3.1.11.11, the hearing officer found her failure to pay was primarily caused by the physical and mental stress of providing 24-hour care for her dying fiancé — a hardship akin to the regulation's prolonged-illness example — rather than by negligent inattention.

Q: Why did she still owe interest?
A: Section 7-1-67 makes interest mandatory whenever tax is paid late, regardless of negligence or the reason for the delay. It compensates the state for the time value of the unpaid tax, so hardship does not abate it.

Q: Didn't relying on her accountant excuse her?
A: No. She used the CPA only for income tax returns and never asked about gross receipts tax. The reliance defense in Regulation 3.1.11.11(D) requires advice about the specific liability after full disclosure, which did not happen.

Q: Wasn't the Department at fault for waiting until 2000?
A: No. New Mexico is a self-reporting system, and Section 7-1-18(C) allows seven years to assess unfiled periods. The 2000 assessment was timely, so the delay did not justify abating penalty or interest.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69(A) — negligence penalty (2% per month, up to 10%) for failing to report or pay tax when due
• NMSA 1978, § 7-1-67 — interest on late-paid tax is mandatory ("shall"), regardless of negligence
• NMSA 1978, § 7-1-13(B) — taxpayers must determine and report their own tax (self-reporting)
• NMSA 1978, § 7-1-13(E) — interest runs from the original due date even with an extension
• NMSA 1978, § 7-1-18(C) — the Department has seven years to assess tax for periods with no return filed
• NMSA 1978, § 7-1-17 — a Department assessment is presumed correct
• NMSA 1978, § 7-1-3 — "tax" includes related interest and civil penalty
• Regulation 3.1.11.10 NMAC — definition of taxpayer negligence
• Regulation 3.1.11.11 NMAC — illustrative situations showing non-negligence, including disability from prolonged illness (B) and reasonable reliance on professional advice after full disclosure (D)

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Julia M. Santos (Griswold)
• Decision PDF: D&O 02-04

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
JULIA M. SANTOS No. 02-04
ID NO. 02-404765-00-1
ASSESSMENT NO. 2514756

DECISION AND ORDER

A formal hearing on the above-referenced protest was held January 14, 2002, before

Margaret B. Alcock, Hearing Officer. Julia M. Santos (“Taxpayer”), now known as Julia M.

Griswold, represented herself. The Taxation and Revenue Department ("Department") was

represented by Monica M. Ontiveros, Special Assistant Attorney General. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During 1996, the Taxpayer provided home health care services as an independent

contractor for Catholic Charities in Albuquerque.

2. The Taxpayer was also caring for her fiancé, Louis Griswold, who became her

husband in 1997. Mr. Griswold was seriously ill and required 24-hour-a-day care. He subsequently

passed away in March 2001.

3. Throughout the period at issue, the Taxpayer spent virtually every hour she was not

working for Catholic Charities caring for Mr. Griswold, which left her both physically and mentally

exhausted.

4. The Taxpayer was not aware that New Mexico gross receipts tax was due on her

income from Catholic Charities.

5. At the end of 1996, the Taxpayer gave all her financial information to a certified

public accountant and asked him to prepare her state and federal income tax returns.

6. The Taxpayer did not ask the accountant who prepared her 1996 income tax returns

whether she owed any other type of tax on her business income, nor did the accountant volunteer any

information concerning the New Mexico gross receipts tax.

7. In 1999, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s 1996 federal income tax return. When

the Department investigated, it found the Taxpayer was not registered with the Department and had

never paid gross receipts tax on this income.

8. On April 9, 2000, the Department issued Assessment No. 2514756 to the Taxpayer in

the total amount of $1,104.85, representing $667.08 gross receipts tax, $66.72 penalty and $371.05

interest for the period January through December 1996.

9. On June 23, 2000, pursuant to an extension of time granted by the Department, the

Taxpayer filed a written protest to the Department’s assessment.

10. In August 2000, the Taxpayer paid the $667.08 of tax principal and withdrew her

protest to this portion of the assessment. The Taxpayer continues to protest the assessment of

penalty and interest.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for penalty and interest on her late

payment of gross receipts tax for reporting periods January through December 1996. The Taxpayer

believes the Department waited too long to notify her of her liability for gross receipts tax and that

the Department—not the Taxpayer—is responsible for the accrued penalty and interest. The

Taxpayer further argues that she should be excused from payment of penalty and interest because she

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relied on the advice of her accountant and because she was physically and mentally exhausted by the

need to provide 24-hour-a-day care for her fiancé.

Section 7-1-17 NMSA 1978 provides that any assessment of tax by the Department is

presumed to be correct. Section 7-1-3 NMSA 1978 defines tax to include not only the amount of tax

principal imposed but also, unless the context otherwise requires, “the amount of any interest or civil

penalty relating thereto." See also, El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the assessment of penalty

and interest paid by the Taxpayer is presumed to be correct, and it is the Taxpayer’s burden to

present evidence showing she is entitled to an abatement of these amounts.

Delay in Assessment. The Taxpayer questions why the Department took so long to notify

her of her gross receipts tax liability. By the time she received the Department’s assessment in April

2000, the penalty had reached its statutory maximum of 10 percent and substantial interest had

accrued. The Taxpayer testified that she would have paid the gross receipts tax if she had been

alerted sooner, and believes the Department is at fault for the accrual of penalty and interest.

The Taxpayer’s arguments are based on a misunderstanding of New Mexico’s self-reporting

tax system. It is the obligation of taxpayers, who have the most accurate and direct knowledge of their

activities, to determine their tax liabilities and accurately report those liabilities to the state. See,

Section 7-1-13(B) NMSA 1978; 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). There are insufficient

resources available for the Department to continually audit every citizen to determine whether he or she

has fully complied with the state’s tax laws. Although the Department performs periodic “tape

matches" that compare information reported to the IRS with information reported to New Mexico,

there is some delay before the federal tape match information is made available to the Department.

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Section 7-1-18(C) NMSA 1978 gives the Department seven years to assess taxes relating to any

period for which required returns were not filed. The April 2000 assessment issued to the Taxpayer

was well within the time limits provided by the New Mexico Legislature. For this reason, abatement

of penalty and interest is not warranted.

Negligence Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty.

Subsection A imposes a penalty of two percent per month, up to a maximum of ten percent, when a

taxpayer fails “due to negligence or disregard of rules and regulations” to report or pay taxes in a

timely manner. Taxpayer negligence for purposes of assessing penalty is defined in Regulation

3.1.11.10 NMAC as:

A. failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;

B. inaction by taxpayers where action is required;

C. inadvertence, indifference, thoughtlessness, carelessness, erroneous belief
or inattention.

Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent. The arguments raised by the Taxpayer focus on the following examples in the regulation:

B. the taxpayer, disabled because of injury or prolonged illness,
demonstrates the inability to prepare a return and make payment and was
unable to procure the services of another person to prepare a return because
of the injury or illness;

C. ...

D. the taxpayer proves that the failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax counsel or
accountant as to the taxpayer’s liability after full disclosure of all relevant
facts; failure to make a timely filing of a tax return, however, is not excused
by the taxpayer’s reliance on an agent;....

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Reliance on the Advice of an Accountant. The Taxpayer argues that she was not negligent

because her accountant failed to advise her that gross receipts tax was due on her 1996 business

income. Regulation 3.1.11.11(D) NMAC provides that a taxpayer will not be considered negligent if

the taxpayer’s failure to file returns or pay tax was caused by reasonable reliance on the advice of a

qualified professional “as to the taxpayer’s liability after full disclosure of all relevant facts....” While it

is true that the Taxpayer in this case relied on her accountant to prepare her 1996 income tax returns,

she never asked the accountant if there were any other taxes due in connection with the business

income reported on her federal return. Given these facts, the Taxpayer cannot claim that her failure to

report and pay gross receipts tax was an informed decision based on her accountant’s advice. The

Taxpayer neither requested nor received advice from her accountant concerning the gross receipts tax,

and there is no basis to excuse the Taxpayer from payment of penalty under Regulation 3.1.11.11(D)

NMAC.

Burden of Caring for Fiancé. During 1996, the Taxpayer was caring for her fiancé, Louis

Griswold, who became her husband in 1997. Mr. Griswold was seriously ill and required 24-hour-a-

day care. He subsequently passed away in March 2001. Throughout the period at issue, the

Taxpayer spent virtually every hour she was not working for Catholic Charities caring for Mr.

Griswold, which left her both physically and mentally exhausted. The issue is whether these

circumstances are sufficient to establish nonnegligence.

Regulation 3.1.11.11(B) NMAC provides that a taxpayer will not be considered negligent if

the taxpayer is disabled because of injury or prolonged illness and demonstrates an inability to either

prepare a return or procure the services of another person to do so. Although these facts are

somewhat different than those in this case, the eight scenarios set out in Regulation 3.1.11.11 NMAC

are only examples. The ultimate question is whether a taxpayer’s failure to report or pay tax was

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negligent, not whether the situation exactly mirrors the hypothetical facts described in the

Department’s regulations. While this is a close case, it appears that the Taxpayer’s failure to report

and pay gross receipts tax was primarily attributable to the physical and mental stress of caring for

her fiancé, rather than to a negligent inattention to her business and tax obligations. For this reason,

imposition of penalty is not warranted.

Interest. Section 7-1-67 NMSA 1978 governs the imposition of interest on late payments of

tax and provides, in pertinent part:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount from
the first day following the day on which the tax becomes due, without
regard to any extension of time or installment agreement, until it is
paid... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues; issues of negligence or nonnegligence

are simply not relevant. Even taxpayers who obtain a formal extension of time to pay tax are liable

for interest from the original due date of the tax to the date payment is made. See, Section 7-1-13(E)

NMSA 1978.

Here, the Taxpayer failed to pay gross receipts tax due to the state. Although this failure was

clearly not intentional, the fact remains that the Taxpayer—not the state—had use of those tax funds

during the six-year period at issue. Section 7-1-67 NMSA 1978 requires interest to be paid for any

period of time during which the state is denied the use of the funds to which it is legally entitled.

Accordingly, interest was properly assessed against the Taxpayers and there is no basis for abatement.

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CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2514756, and

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

2. The Taxpayer was not negligent in failing to report gross receipts tax during the period

at issue.

3. The Taxpayer was late in paying gross receipts taxes due to the state, and interest was

properly assessed pursuant to Section 7-1-67 NMSA 1978.

For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND DENIED IN

PART. The Department is ordered to abate the $66.72 of penalty assessed. The Taxpayer remains

liable for the payment of interest.

DATED January 15, 2002.

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