How were penalty and interest treated when the IRS changed a taxpayer's 1999 filing status from head of household to single and he did not amend his New Mexico return within 90 days?

Plain-English summary

John B. Rodriguez received penalty relief but still owed $182.29 of interest after the IRS changed his 1999 filing status from head of household to single. The federal adjustment required a New Mexico amendment within 90 days, and interest ran from the original tax due date rather than the later assessment date.

Rodriguez filed both federal and New Mexico returns as head of household. The IRS determined that he did not qualify and changed the status to single.

After receiving that notice, Rodriguez visited the Department. An employee called the IRS and tried to have the filing status changed back, but the IRS maintained its determination.

Section 7-1-13(C) then required Rodriguez to amend his New Mexico return within 90 days to report state tax on the same basis. He did not do so.

In October 2003, the Department assessed $346.00 of additional tax, $34.60 of penalty, and $182.29 of interest. Rodriguez promptly paid the principal and protested the charges.

Interest ran from April 2000

Rodriguez argued that interest should cover only the period between the October 22 assessment and his October 28 payment.

Section 7-1-67(A) instead required interest from the day after tax was originally due until payment. The decision treated that rule as mandatory, with no exception for a good-faith filing-status mistake.

New Mexico would have received the additional $346 in April 2000 if the original return had used the correct status. Interest compensated the state for the time that amount remained unpaid through October 2003.

Waiting for Department notice did not shift responsibility

The decision rejected Rodriguez's complaint that the Department took too long to assess. New Mexico's self-reporting system required taxpayers to determine and report their own liabilities and prohibited simply waiting for the government to identify an error.

Section 7-1-18(A) gave the Department through December 31, 2003 to assess the 1999 deficiency. The October assessment was timely.

The Department stipulated to penalty relief

At the hearing, the Department agreed to abate the $34.60 penalty under the main assessment.

It also agreed to abate all penalty and interest assessed under a second June 2003 letter. The decision adopted those stipulations.

Only the $182.29 interest under the October 2003 assessment remained payable.

Result: protest GRANTED IN PART and DENIED IN PART. Penalties and second-assessment interest abated; $182.29 of interest upheld.

What this means for you

Taxpayers receiving a federal filing-status change

Calculate the New Mexico effect and file the state amendment within the 90-day period described in this decision.

Taxpayers disputing interest

The assessment date is not necessarily the interest start date. Here, interest began with the original payment deadline.

Taxpayers who made a good-faith mistake

Good faith did not eliminate mandatory interest, although the Department separately stipulated to penalty relief.

Taxpayers with multiple assessment letters

Track each letter and component separately. Rodriguez won complete charge relief under one letter and penalty relief under another, but still owed a specific interest amount.

Common questions

Q: What filing status did the IRS require?
A: Single instead of head of household.

Q: How much additional tax resulted?
A: $346.00.

Q: Was the $34.60 penalty upheld?
A: No. The Department stipulated to abate it.

Q: What interest remained due?
A: $182.29 under the October 2003 assessment.

Q: What happened to the second assessment's charges?
A: All penalty and interest under that letter were abated by stipulation.

Citations and references

Statutes:

• NMSA 1978, § 7-1-13(B) — self-reporting tax obligations
• NMSA 1978, § 7-1-13(C) — amended New Mexico return after federal adjustment
• NMSA 1978, § 7-1-18(A) — assessment limitations period
• NMSA 1978, § 7-1-67(A) — interest from original due date until payment

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)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: John B. Rodriguez
• Decision PDF: D&O 04-06

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
JOHN B. RODRIGUEZ No. 04-06
TO THE ASSESSMENT OF PENALTY AND
INTEREST ISSUED UNDER LETTER
ID NOS. L0082847744 AND L0533663744

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on May 5, 2004, before

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

was represented by Bridget A. Jacober, Special Assistant Attorney General. John B. Rodriguez

(“Taxpayer”) represented himself. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer filed his 1999 federal and state personal income tax returns based

on the filing status “head of household.”

2. The Internal Revenue Service subsequently determined that the Taxpayer did not

qualify as a head of household and changed his filing status to “single.”

3. After receiving notice of the change in his filing status, the Taxpayer went to the

Department’s office in Santa Fe and spoke to Anthony Montoya.

4. Mr. Montoya called the IRS and attempted to have the Taxpayer’s filing status

changed back to head of household, but the IRS refused and held by its determination that the

Taxpayer was required to file his income tax returns as a single person.

5. Once the IRS determined that the Taxpayer had made a mistake when he filed as

head of household and changed his filing status to single, the Taxpayer had ninety days to amend

his New Mexico income tax returns to report his state income tax on the same basis. See, NMSA

1978, § 7-1-13(C).

6. The Taxpayer failed to correct his New Mexico income tax return within the 90

days required by statute and on October 22, 2003, the Department issued an assessment to the

Taxpayer under Letter ID No. L0082847744 for an additional $346.00 of 1999 income tax due as

a result of the change in his filing status, plus $34.60 of penalty and $182.29 of interest.

7. On October 28, 2003, the Taxpayer paid the $346.00 of tax principal due and filed

a written protest to the assessment of penalty and interest.

8. At the administrative hearing, the Department stipulated that it would abate the

$34.60 of penalty assessed, and the only matter remaining in dispute is the $182.29 of interest.

9. Based on evidence presented at the hearing, the Department also stipulated that it

would abate all of the penalty and interest assessed to the Taxpayer under Letter ID No.

L0533663744, which was issued to the Taxpayer on June 19, 2003 and protested on July 15, 2003.

DISCUSSION

The Taxpayer objects to the $182.29 of interest assessed against him under Letter ID No.

L0082847744, arguing that interest should be limited to the four-day period between October 22,

2003, the date the Department issued its assessment, and October 28, 2003, the date he paid the

principal of the assessment. The Taxpayer maintains that charging him interest back to the original

due date of his return is illegal, but has not provided any legal authority to support his position. The

Department relies on NMSA 1978, § 7-1-67, to support its position that the Taxpayer’s liability for

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interest began to accrue on April 15, 2000, the day on which payment of the additional $346.00 of

tax was due to the state. Section 7-1-67(A) states as follows:

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....

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 Internal Revenue Service determined

that the Taxpayer made a mistake when he filed as head of household instead of as single.

Although the Taxpayer acted in good faith and had no intent to defraud the federal government or

the State of New Mexico, the fact remains that the state would have received an additional

$346.00 tax payment on April 15, 2000 if the Taxpayer had completed his return correctly. As a

result of the Taxpayer’s mistake, the state was deprived of the use of this money for the period

April 15, 2000, the original due date of the Taxpayer’s return, through October 28, 2003, the date

payment of the additional tax was made. For this reason, interest was properly assessed pursuant

to NMSA 1978, § 7-1-67.

The Taxpayer questions why the Department took so long to notify him of his personal

income tax liability for the 1999 tax year. By the time he received the Department’s assessment

in October 2003, the penalty had reached its statutory maximum of 10 percent and substantial

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interest had accrued. The Taxpayer testified that he would have paid the additional tax if he had

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

This 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 tax liabilities and accurately report those liabilities to the state. See, NMSA 1978, §

7-1-13(B); 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). Taxpayers are not entitled to sit

back and wait for the government to notify them of their errors before penalty and interest begin to

accrue.

There are insufficient resources available for the Department to continually audit every

citizen to determine whether he or she has fully complied with state tax laws. Although the

Department performs periodic "tape matches" to compare information reported to the IRS with

information reported to New Mexico, there is some delay before the federal information is made

available to the Department. NMSA 1978, § 7-1-18(A) gives the Department three years from

the end of the calendar year in which a tax is due to assess taxpayers for any deficiency. This

means that the Department had until December 31, 2003 to notify the Taxpayer of his liability for

additional 1999 income tax, which was due in April 2000. The October 2003 assessment issued

to the Taxpayer was within the legal time limits provided by the New Mexico Legislature.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely, written protests to the assessments of penalty and interest

issued under Letter ID Nos. L0082847744 and L0533663744, and jurisdiction lies over the parties

and the subject matter of these protests.

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2. The Taxpayer’s mistake in claiming the filing status “head of household” rather than

“single” resulted in a late payment of $346.00 of his 1999 personal income to the state, and interest

was properly assessed on this amount back to the original due date of April 15, 2000.

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

IN PART:

A. The Taxpayer is ordered to pay the $182.29 of interest assessed against him on

October 22, 2003 under Letter ID L0082847744.

B. In accordance with the stipulations the Department made at the administrative

hearing, the Department is ordered to abate the penalty and interest assessed against the Taxpayer

under Letter ID No. L0533663744, and the penalty assessed against the Taxpayer under Letter ID

No. L0082847744.

DATED May 11, 2004.

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