If a New Mexico taxpayer overclaims a tax credit because the return form didn't say 'see instructions' on that line, do they still owe the extra tax plus penalty and interest?

Plain-English summary

Robert Harris, a Farmington resident, filed his 1998 New Mexico personal income tax return and claimed a $1,331 credit for prescription drugs on Line 17. New Mexico law caps that credit at 3% of unreimbursed prescription costs, up to $300. Harris didn't know about the cap because he filled out the form without reading the instruction booklet — he figured he only had to check the instructions if a specific line told him to "see instructions," and Line 17 didn't. The Department assessed the $1,031 of extra tax, plus $103.10 penalty and $422.05 interest.

Harris protested the penalty and interest, arguing the Department was at fault for leaving "see instructions" off Line 17 and for waiting until 2002 to tell him. (He later tried to protest the whole assessment, but that was too late under the protest deadline in Section 7-1-24.)

The Hearing Officer denied the protest.

New Mexico runs a self-reporting tax system: it's the taxpayer's job to determine and pay the right amount, and that includes reading the Department's instructions — which say, in capital letters, "PLEASE READ THE INSTRUCTIONS COMPLETELY." There is no rule that a taxpayer only has to consult the instructions when a line says so. Because Harris's overclaim came from inattention and an erroneous belief about the credit, it was negligence under the Department's regulation, so the 10% penalty applied. Interest under Section 7-1-67 is mandatory ("shall") and simply compensates the state for money it was owed. And there was no "undue delay": Section 7-1-18(A) gives the Department three years to assess, and it acted within that window.

What this means for you

Individual taxpayers and retirees claiming credits

Tax credits usually have caps and eligibility rules that live in the instructions, not on the form line. If you claim a credit without checking the limit, an overclaim is treated as your negligence — you'll owe the tax you underpaid, plus penalty and interest, even if the claim was an honest mistake. Read the instructions for every credit and deduction.

People who think a form omission shifts the blame

The Department leaving "see instructions" off a particular line does not excuse an overclaim. The self-reporting duty is on you, and the instruction booklet's blanket direction to read it completely governs. "The form should have warned me" is not a defense to the tax, penalty, or interest.

Anyone hoping a late Department notice caps interest

Interest keeps running until you pay, and the Department has three years to assess under Section 7-1-18(A). A gap between filing and assessment — here, filing in 1999 and assessment in 2002 — is within the law and does not stop penalty or interest from accruing.

Common questions

Q: I overclaimed a credit because I didn't read the instructions — do I still owe penalty and interest?
A: Yes. Under New Mexico's self-reporting system you're required to read the instructions, so an overclaim from not reading them is negligence. The extra tax, the 10% penalty, and interest all apply.

Q: The form didn't say "see instructions" on that line — isn't that the Department's fault?
A: No. There is no legal rule that you only have to consult the instructions when a specific line directs you to. The booklet's instruction to read it completely controls.

Q: The Department waited years to tell me — can't it at least stop the interest?
A: No. The Department has three years to assess under Section 7-1-18(A), and interest runs until payment. Acting within that window is not undue delay.

Q: Does this decision apply to my situation?
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 overclaimed credits and the resulting penalty 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(B) NMSA 1978 — taxpayer's self-reporting duty
• Section 7-1-17 NMSA 1978 — assessment presumed correct
• Section 7-1-18(A) NMSA 1978 — three-year assessment window
• Section 7-1-24 NMSA 1978 — deadline to file a protest
• Section 7-1-67 NMSA 1978 — mandatory interest on late-paid tax
• Section 7-1-69(A) NMSA 1978 — 10% negligence penalty; Regulation 3.1.11.10 NMAC (negligence)

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Dep't, 108 N.M. 795 (presumption of correctness)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16 (duty to ascertain tax consequences)
• Arco Materials v. Taxation & Revenue Dep't, 118 N.M. 12 (duty to keep informed of tax-law changes), rev'd on other grounds by Blaze Construction, 118 N.M. 647
• State v. Lujan, 90 N.M. 103 ("shall" is mandatory)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Robert N. Harris
• Decision PDF: D&O 02-24

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
ROBERT N. HARRIS No. 02-24
ASSESSMENT NO. 413220

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 30, 2002, before

Margaret B. Alcock, Hearing Officer. Robert N. Harris (“Taxpayer”) represented himself. The

Taxation and Revenue Department ("Department") was represented by Peter Breen, 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 a resident of Farmington, New Mexico.

2. In April 1999, the Taxpayer completed and filed a 1998 New Mexico Personal

Income Tax return (“PIT-1”) with the Department.

3. The instruction packet for the PIT-1, which the Department mails to taxpayers each

year, contains the return itself and line-by-line instructions for completing the return. The third page

of the instruction packet sets out the Table of Contents and states, at the top of the page:

PLEASE READ THE INSTRUCTIONS COMPLETELY. There have
been several changes in the New Mexico income tax forms for 1998 to
accommodate statutory and processing changes.

4. Line 17 of the 1998 PIT-1 reads as follows: “Credit for prescription drugs (New

Mexico residents only).” The instructions for claiming the credit for prescription drugs are set out on

page 10 of the instruction packet and advise taxpayers that:
A tax credit equal to 3% of New Mexico resident consumers’ out-of-
pocket unreimbursed cost of prescription drugs purchased in New Mexico
is available. The maximum credit allowable is $300.

5. The Taxpayer filled out his 1998 PIT-1 without reading the instructions. He believed

that he was not required to consult the instructions unless the PIT-1 form specifically directed him to

do so. Line 17 of the 1998 PIT-1 did not specifically direct taxpayers to “see instructions.”

6. Because the Taxpayer did not read the instructions and did not know there was a

$300.00 limitation on the credit for prescription drug, the Taxpayer claimed a credit of $1,331.00 on

Line 17 of his 1998 PIT-1. With the credit, the Taxpayer’s return showed a tax due of $88.00.

7. The Department received the Taxpayer’s return on April 9, 1999 and processed the

return on June 25, 1999.

8. On January 7, 2002, the Department issued Assessment No. 413220 to the Taxpayer,

assessing him $1,031.00 of additional tax as a result of his claiming a prescriptoin drug credit that

exceeded the $300.00 allowed by New Mexico law. In addition to the tax principal, the Department

assessed the Taxpayer $103.10 of penalty and $422.05 of interest.

9. On January 18, 2002, the Taxpayer filed a written protest to a portion of the penalty

and interest assessed against him, asserting that the Department should have notified him of the

additional tax due as soon as it processed his return. The Taxpayer requested that:

Penalties and interest should be recalculated from 4/15/99 thru 6/25/99.
The 1/7/2002 assessment is unjust because Tax & Rev did not proceed in
a timely manner regarding subject assessment. Enclosed payment is
based on recalculation of tax due ($1031), penalty ($61.86), and interest
($38.67).

A check for $1,131.53 was enclosed with the Taxpayer’s protest.

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10. On September 14, 2002, the Taxpayer faxed and mailed a “revised formal protest” to

the Hearing Officer, stating that he now wished to protest the entire amount of the Department’s

assessment, including the tax, penalty and interest he had already paid.

11. On September 16, 2002, the Hearing Officer sent a letter to the parties explaining

that she did not have jurisdiction to consider Mr. Harris’s revised protest because it was not filed

within the time period provided in Section 7-1-24 NMSA 1978. For this reason, the administrative

hearing scheduled for September 30, 2002 would only address the Taxpayer’s liability for the penalty

and interest originally protested.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for payment of the penalty and

interest that accrued on the Taxpayer’s underpayment of 1998 personal income tax after June 25,

1999, the date the Department processed the Taxpayer’s return. The Taxpayer raises two arguments

in support of his protest: (1) penalty and interest are not due because the taxpayer properly

completed his return according to the information contained in the Department’s PIT-1 form; and (2)

the Department was required to notify the Taxpayer of the error on his return as soon as the return

was processed on June 25, 1999, and no interest or penalty should accrue after that date.

Section 7-1-17 NMSA 1978 provides that any assessment of taxes made 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." The Taxpayer argues that the statutory presumption of correctness is

contrary to the established rule that a person is presumed innocent until proven guilty. This rule

applies only in the context of criminal prosecutions and has no application to civil tax proceedings.

Accordingly, the assessment of penalty and interest at issue in this case is presumed to be correct,

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and it is the Taxpayer’s burden to present evidence and legal arguments to justify an abatement. El

Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct.

App. 1989).

The Taxpayer maintains that he filled out his 1998 PIT-1 correctly and was entitled to the

full amount he claimed as a credit for prescription drugs. The Taxpayer does not dispute that the

Department’s instructions clearly state that the credit is limited to a maximum of $300.00. It is his

position, however, that he was not required to consult the instructions unless the PIT-1 form

specifically directed him to do so. The Taxpayer points out that the PIT-1 for the 2001 tax year

includes the words “see instructions” on the line for claiming a deduction of medical care expenses.

He argues that the Department was negligent in failing to include “see instructions” on Line 17 of the

1998 PIT-1 and that this negligence relieves him of any liability resulting from the excess credit he

claimed on his return. Since no tax is due, the Taxpayer reasons, the assessment of penalty and

interest is also incorrect.

The Taxpayer’s argument is 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 liability for tax and pay that liability to the state. See, Section 7-1-13(B)

NMSA 1978; Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1556

(Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) (the law charges every individual

with the reasonable duty to ascertain the possible tax consequences of his action); Arco Materials, Inc.

v. Taxation & Revenue Department, 118 N.M. 12, 15, 878 P.2d 330, 333 (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) (a taxpayer has an affirmative duty to keep informed about changes in the tax law that

might affect its liability). In this case, the Taxpayer had an obligation to insure that his reporting of

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personal income tax was in accordance with New Mexico law. At a minimum, the Taxpayer was

required to read the instructions provided by the Department, which advise taxpayers (in capital letters)

to: “PLEASE READ THE INSTRUCTIONS COMPLETELY.” There is simply no legal authority

to support for the Taxpayer’s position that he was not required to consult the instructions unless

specifically directed to do so on each individual line of the PIT-1 form.

Because the Taxpayer was liable for the underpayment of income tax resulting from the

erroneous credit claimed on his 1998 PIT-1, penalty and interest were properly assessed. 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

underpayment of personal income tax 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 date of that tax and the date payment was received.

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

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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.

In this case, the Taxpayer’s underreporting of his 1998 income tax resulted from his inattention to

the Department’s PIT-1 instructions and his erroneous belief that he was entitled to a larger credit for

prescription drugs than New Mexico law allows. This qualifies as negligence for purposes of

Section 7-1-69(A) NMSA 1978, and penalty was properly imposed.

The Taxpayer’s final argument is that the accrual of penalty and interest is unjust because the

Department waited an unreasonable period of time to notify the Taxpayer of the error on his 1998 PIT-

1. In fact, there was no undue delay. Section 7-1-18(A) NMSA 1978 gives the Department three years

from the end of the calendar year in which a tax is due to issue an assessment. The Department’s

assessment was issued to the Taxpayer within the time allowed by law.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to a portion of the penalty and interest

assessed against him in Assessment No. 413220, and jurisdiction lies over the parties and the subject

matter of this protest.

2. The Taxpayer was liable for the underpayment of 1998 personal income tax that

resulted from his erroneous belief that he was entitled to a larger credit for prescription drugs than

New Mexico law allows.

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3. The Taxpayer is liable for payment of the penalty and interest assessed on his late

payment of 1998 personal income tax.

4. The Department’s January 2002 assessment was issued within the statutory time limits

set by the New Mexico Legislature.

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

DATED October 3, 2002.

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