If a company's bookkeeper forgets to file the monthly New Mexico CRS tax returns — or can't because of an accounting-software changeover — can the business get the late penalty and interest waived?

Plain-English summary

Sarcon Construction pays New Mexico gross receipts, compensating, and withholding taxes monthly through the combined reporting system (CRS). In late 1999 the company switched accounting software, which more than doubled the workload for its bookkeeper, "Kathy." In the crunch, the January and February 2000 CRS returns never got filed on time. Kathy caught the mistake in late March 2000 and filed both returns with a check for the tax. The Department then billed $5,075.51 in combined penalty and interest, and the company protested.

The Hearing Officer denied the protest.

On interest, the answer was mechanical: Section 7-1-67 says interest "shall" be paid on any tax not paid by its due date. "Shall" makes it mandatory, it has no exceptions, and it compensates the state for the time value of money it was owed — so interest was proper.

On the penalty, the company offered two versions of why the returns were late. The protest letter from its late vice-president said Kathy, under pressure, "simply forgot." The controller who testified later said instead that Kathy couldn't compute the correct amount until she finished reconciling the two accounting systems. The Hearing Officer found the contemporaneous letter more reliable — and either way, it was negligence. Under Regulation 3.1.11.10, negligence includes inaction where action is required and mere inadvertence, so forgetting to file plainly qualifies. And if the real problem was not knowing the exact amount, the company still had options: estimate the tax from bank deposits and invoices, notify the Department, or request an extension under Section 7-1-13. Doing none of those was negligent, so the penalty stood.

What this means for you

Businesses on monthly CRS filing

A software migration, a swamped bookkeeper, or a one-time crunch does not excuse a late CRS filing. If you can't nail the exact number by the due date, the safe move is to file and pay a good-faith estimate, or formally request an extension — silence plus a late filing reads as negligence.

Owners who rely on one in-house bookkeeper

The penalty attaches to the business, not the employee, even when the lapse is a single person's oversight and even after that person has left. Build in a backup check on filing deadlines so a missed month doesn't turn into a penalty you can't undo.

Accountants and controllers

Note the evidence point: a contemporaneous protest letter written when events were fresh outweighed later testimony from a controller who had no personal knowledge and never spoke to the bookkeeper. When you expect to contest a penalty, the reasonable-cause story needs to be documented at the time, by someone who actually knows the facts.

Common questions

Q: My bookkeeper forgot to file — is that reasonable cause to waive the penalty?
A: No. Forgetting to file is inadvertence, which the Department's regulation defines as negligence. The Section 7-1-69 penalty applies even when the failure was unintentional.

Q: What if the delay was because we genuinely couldn't compute the amount?
A: You are still expected to estimate from available records (bank deposits, invoices), notify the Department, or request an extension under Section 7-1-13. Not doing any of those is itself negligent.

Q: Can interest ever be waived for a good reason?
A: No. Interest under Section 7-1-67 is mandatory whenever tax is paid late. It is not a penalty; it compensates the state for the time it was without the money.

Q: Does this decision apply to my business?
A: Not automatically. A Decision and Order resolves one taxpayer's protest on its own facts and the law in effect at the time. It shows how New Mexico treats late-CRS penalties and interest, but your facts may differ.

Citations and references

Statutes and regulations:

• Section 7-1-3 NMSA 1978 — "tax" includes related interest and civil penalty
• Section 7-1-13 NMSA 1978 — extension of time to file and pay (see also Reg. 3.1.4.12 NMAC)
• Section 7-1-17 NMSA 1978 — assessment presumed correct
• Section 7-1-67 NMSA 1978 — mandatory interest on late-paid tax
• Section 7-1-69 NMSA 1978 — negligence penalty; Regulation 3.1.11.10 NMAC (definition of negligence)

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Dep't, 108 N.M. 795
• Arco Materials, Inc. v. Taxation & Revenue Dep't, 118 N.M. 12 (penalty applies to inadvertent error), rev'd on other grounds by Blaze Construction Co. v. Taxation & Revenue Dep't, 118 N.M. 647
• State v. Lujan, 90 N.M. 103 ("shall" is mandatory)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sarcon Construction Corp.
• Decision PDF: D&O 02-22

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
SARCON CONSTRUCTION CORPORATION No. 02-22
ID NO. 02-284743-00-0
ASSESSMENT NOS. 2516831 & 2516832

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 10, 2002, before

Margaret B. Alcock, Hearing Officer. Sarcon Construction Corporation (“Taxpayer”) was

represented by Alan Brown, who is a certified public accountant and the company’s controller. The

Taxation and Revenue Department ("Department") was represented by Javier Lopez, Special Assistant

Attorney General. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is engaged in business in New Mexico and is registered with the

Department for payment of gross receipts, compensating and withholding taxes, which are required

to be paid monthly under the Department’s combined reporting system (“CRS”).

2. In June 1997, the Taxpayer hired a bookkeeper named Kathy to handle its in-house

accounting and tax reporting. Kathy remained in this position during all periods relevant to this

protest.

3. During 1999, the Taxpayer decided to switch its accounting software to

accommodate growth in the Taxpayer’s business and to insure that its accounting system would be

Y2K compliant.

4. The transition to a new accounting system was not instantaneous and required Kathy

to maintain parallel books for the months of October, November, and December 1999, which more

than doubled her workload.

5. In January 2000, Kathy discovered inconsistencies in the 1999 year-end totals

calculated by each accounting program. This required a reconciliation of data between the two

systems and also impacted data entered into the Taxpayer’s accounting system for 2000.

6. The Taxpayer’s accountant needed accurate information to prepare the Taxpayer’s

1999 financial reports, which the Taxpayer’s surety company used to determine the Taxpayer’s

bonding capacity. Bonding capacity is critical to the Taxpayer’s business, and the Taxpayer’s

corporate officers put increased pressure on Kathy to complete the transition to the new accounting

system.

7. Because of the increased workload and her focus on the Taxpayer’s accounting

system, Kathy forgot to file CRS-1 returns with the Department for the January and February 2000

reporting periods.

8. In late March 2000, Kathy discovered her oversight and filed the Taxpayer’s CRS-1

returns for January and February 2000. A check in payment of the tax principal accompanied the

return.

9. On April 15, 2000, the Department issued Assessment Nos. 2516831 and 2516832 to

the Taxpayer, assessing combined penalty and interest of $5,075.51 on the Taxpayer’s late payment

of CRS taxes for the months of January and February 2000.

10. On May 17, 2000, the Taxpayer filed a written protest to the Department’s

assessments of penalty and interest, which was accepted as timely after the Department granted the

Taxpayer’s retroactive extension of time to file the protest.

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DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the interest and penalty assessed

on its late payment of CRS taxes for the January 2000 and February 2000 reporting periods. 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 assessments issued to the Taxpayer are

presumed to be correct, and it is the Taxpayer’s burden to present evidence and legal argument

showing that it is entitled to an abatement.

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

payments of tax and provides, in pertinent part:

A. If a tax imposed is not paid on or before the day on which it becomes due,
interest shall be paid to the state on that 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. In this case, the Taxpayer’s late

payment of CRS taxes denied the State the use of funds to which it was legally entitled. Pursuant to

Section 7-1-67 NMSA 1978, interest was properly assessed for the period between the statutory due

dates for those taxes and the date payment was received.

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

Subsection A imposes a penalty of two percent per month or any fraction of a month, up to a

maximum of ten percent, that a taxpayer fails “due to negligence or disregard of rules and

regulations” to pay taxes or file required tax reports 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.

New Mexico case law confirms that penalties may properly be assessed even when a taxpayer’s late

payment is based on inadvertent error or unintentional failure to pay the tax due. Arco Materials,

Inc. v. Taxation & Revenue Department, 118 N.M. 12, 16, 878 P.2d 330, 334 (Ct. App. 1994) rev'd

on other grounds by Blaze Construction Co. v. Taxation & Revenue Department, 118 N.M. 647, 884

P.2d 803 (1994); El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795,

797-798, 779 P.2d 982, 984-985 (Ct. App. 1989).

In this case, there was conflicting evidence concerning the reason for the Taxpayer’s late

payment of CRS taxes. On May 17, 2000, Will Pestalozzi, the Taxpayer’s vice-president, submitted

a letter protesting the Department’s assessments of penalty and interest. In setting out the grounds

for the protest, Mr. Pestalozzi described the problems encountered in the transition to the Taxpayer’s

new accounting system and explained the pressure that Kathy, the Taxpayer’s bookkeeper, was

under to implement the system in a timely manner. As stated in the May 17, 2000 letter: “Under

this additional pressure, starting in early January, Kathy neglected to pay the CRS-1 taxes, she

simply forgot.”

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Unfortunately, Mr. Pestalozzi passed away prior to the date of the hearing on the Taxpayer’s

protest and was not available to testify. Kathy had also left the company. The Taxpayer was

represented at the hearing by Alan Brown, who became the Taxpayer’s controller in April 2001. Mr.

Brown’s explanation for the Taxpayer’s late payment of CRS taxes was somewhat different than Mr.

Pestalozzi’s explanation. According to Mr. Brown, Kathy did not forget to file the Taxpayer’s

returns for January and February 2000, but was unable to file the returns because she could not

determine the correct amount of CRS taxes due to the State until she completed the reconciliation of

data between the two accounting programs. Mr. Brown acknowledged that he had never spoken to

Kathy and had no personal knowledge of the facts at issue. He said that his testimony was based on

his conversations with the Taxpayer’s president.

While I found Mr. Brown to be an honest and straightforward witness, I believe the

statements in Mr. Pestalozzi’s May 17, 2000 protest letter are more reliable than Mr. Brown’s

testimony, which is based on a third party’s current recollection of events that occurred more than

two years ago. Mr. Pestalozzi was the Taxpayer’s vice-president during the period at issue and he

was the person Kathy notified when she received the Department’s assessments. Mr. Pestalozzi

stated that he and Kathy “have discussed this issue at length.” Aside from Kathy herself, it appears

that he was in the best position to know why Kathy failed to file timely reports for January and

February 2000. According to Mr. Pestalozzi, “she simply forgot.” Forgetting to file tax returns

clearly comes within the definition of negligence set out in the Department’s regulations.

The negligence penalty would apply even under Mr. Brown’s version of events. If Kathy had

been unable to determine the Taxpayer’s CRS liability using the data in the Taxpayer’s accounting

system, she could have turned to other sources of information. Mr. Brown acknowledged that it

would have been possible to come up with a reasonable estimate of the taxes due using bank

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deposits, invoices, and other records of the Taxpayer. He also conceded that it would have been

prudent for the Taxpayer to notify the Department of the system problems and seek advice on how to

proceed. Finally, the Taxpayer could have applied to the Department for an extension of time to file

and pay its CRS taxes during the period that its computer system was inoperative. See, Section 7-1-

13 NMSA 1978 and Department Regulation 3.1.4.12 NMAC, which provides instructions and

specific examples to assist taxpayers in obtaining such extensions. Given the various alternatives

available, the Taxpayer’s failure to file timely CRS returns was negligent under either version of the

facts presented.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 2516831 and 2516832,

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

2. The Taxpayer was late in paying CRS taxes due to the state and interest was properly

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

3. The Taxpayer was negligent in failing to pay its CRS taxes in a timely manner and

penalty was properly assessed pursuant to Section 7-1-69 NMSA 1978.

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

DATED September 16, 2002.

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