Could a first-year New Mexico resident stop interest after seven months because the IRS and Department took years to match his federal income with a state return that omitted out-of-state income?

Plain-English summary

Mark S. Welsh owed interest for the full period of his 1999 income-tax underpayment even though federal information arrived late and Department computer problems delayed the state match. Audit timing did not replace his duty to follow the first-year-resident instructions or fit a statutory exception to interest.

Welsh began 1999 in the Navy, stationed in Hawaii with Arizona residence. He left military service in February, moved to New Mexico with his wife in June, and formed the intent to become a New Mexico resident in October or November.

As a first-year resident, he should have reported all federal adjusted gross income on Form PIT-1 and used Form PIT-B to allocate income between New Mexico and other sources.

He did not read those instructions carefully. Believing out-of-state income should not appear on the New Mexico return, he rejected the form's calculated tax and recomputed it using only his wife's New Mexico earnings.

Federal matching took longer than expected

An IRS employee told Welsh that federal income information usually reached states by October or November of the filing year. For the 1999 returns, New Mexico did not receive the IRS data until October 2001.

Department computer problems then delayed the match until February 2003. The Department notified Welsh in July and assessed in August 2003.

The assessment initially included $478.00 of tax, $47.80 of penalty, and $239.09 of interest. A CPA later identified an additional deduction, and the Department reduced the principal to $417.00, which Welsh paid in September 2003.

The first-year-resident method still applied

The CPA explained that New Mexico taxed only the income allocated to the state but determined the applicable tax using federal adjusted gross income from all sources before applying the allocation.

Welsh acknowledged that he had negligently failed to read the instructions and withdrew his penalty protest. He also accepted interest for the first seven months after filing.

His remaining argument was that interest after October 2000 should be attributed to the IRS and Department because the agencies could have found the error sooner.

No statutory interest exception covered audit delay

Section 7-1-67 made interest mandatory from the day after tax was due until payment, subject to seven listed exceptions. Welsh did not show that any applied.

Section 7-1-18(A) gave the Department a statutory period to assess. The decision held the assessment timely and found no authority suspending interest simply because an audit could have begun earlier within that period.

The self-reporting rule in Section 7-1-13(B) put responsibility on Welsh to obtain the information needed to file correctly. He could not transfer the consequences of his reporting error to the Department.

The decision's discussion contains date inconsistencies: it refers to the 1999 tax as due April 15, 1999 and an assessment dated August 3, 2003, while the findings identify an August 20, 2003 assessment and describe a return filed for calendar year 1999. The holding itself is clear that the assessment was considered timely and interest continued until payment.

Result: protest DENIED. Interest remained due on the late-paid 1999 tax.

What this means for you

First-year New Mexico residents

Do not omit out-of-state income from the federal adjusted gross income line unless the form directs it. Use the allocation schedule to determine the New Mexico portion.

Taxpayers waiting for an information match

Agency access to federal data does not relieve the filer of self-reporting responsibility. Interest may continue while matching and audit processes run.

Taxpayers challenging audit delay

Identify a specific statutory interest-suspension provision. A general claim that the Department could have acted sooner failed here.

Taxpayers who discover an additional deduction

Supply the supporting evidence. Welsh's CPA obtained a reduction of principal from $478 to $417 even though the remaining interest issue was denied.

Common questions

Q: What was Welsh's filing mistake?
A: He omitted out-of-state income instead of reporting total federal adjusted gross income and allocating it on PIT-B.

Q: Why did the state match take so long?
A: Federal data arrived in October 2001, and Department computer problems delayed matching until February 2003.

Q: Was the tax principal reduced?
A: Yes. An additional deduction reduced it from $478 to $417.

Q: Did Welsh continue to dispute the penalty?
A: No. He acknowledged negligence and withdrew that issue.

Q: Did audit delay stop interest after October 2000?
A: No. The decision found no applicable statutory exception.

Citations and references

Statutes:

• NMSA 1978, § 7-1-13(B) — self-reporting tax obligations
• NMSA 1978, § 7-1-18(A) — assessment limitations period
• NMSA 1978, § 7-1-67 — interest on late-paid tax and statutory exceptions
• NMSA 1978, § 7-1-69 — negligence penalty

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: Mark S. Welsh
• Decision PDF: D&O 04-07

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
MARK S. WELSH No. 04-07
ASSESSMENT OF PERSONAL INCOME TAXES
ISSUED UNDER LETTER ID L0857690112

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 16, 2004, before

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

represented by Bruce J. Fort, Special Assistant Attorney General. Mark S. Welsh (“Taxpayer”)

represented himself. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On January 1, 1999, the Taxpayer was in the United States Navy and was stationed in

Hawaii. The Taxpayer’s state of residence was Arizona.

2. In February 1999, the Taxpayer left the military service.

3. In June 1999, the Taxpayer and his wife moved from Hawaii to New Mexico.

4. In October or November 1999, the Taxpayer formed the intent to become a New

Mexico resident. At that time, he obtained a New Mexico driver’s license and registered to vote in

New Mexico.

5. The Taxpayer and his wife filed timely federal and New Mexico personal income tax

returns for calendar year 1999.

6. As a first-year resident of New Mexico in 1999, the Taxpayer and was not familiar

with New Mexico's personal income tax laws.

7. The Taxpayer did not carefully read the Department’s packet of instructions for

completing New Mexico’s personal income tax return (Form PIT-1) and did not see the instructions

directing first-year residents to report all of their federal adjusted gross income on Form PIT-1 and

then use Form PIT-B to allocate and apportion that income between in-state and out-of-state sources.

8. Based on his erroneous belief that he did not have to report the income he earned

outside New Mexico on his New Mexico return, the Taxpayer concluded that the amount of state tax

he calculated based on the line instructions on the Form PIT-1 was wrong. The Taxpayer then

recalculated the tax based solely on the income his wife earned in New Mexico during 1999.

9. The Taxpayer did not consult with an accountant or other tax professional when

completing his New Mexico income tax return, nor did he consult with anyone from the Department

before changing the calculation of state tax on the PIT-1.

10. The Department has an information exchange agreement with the Internal Revenue

Service (IRS) that allows the Department to obtain information concerning the amount of federal

adjusted gross income New Mexico residents have reported on their federal income tax returns. This

information is in the form of a tape which is matched to taxpayers’ state returns to determine

whether New Mexico residents have accurately reported personal income tax due to New Mexico.

11. An IRS employee told the Taxpayer that the IRS usually provides requested tape

match information to the states by October or November of the year in which returns are filed. For

example, information concerning 1999 personal income tax returns, which are due April 15, 2000,

should be sent out by the end of calendar year 2000.

12. In this case, the Department did not receive the IRS tape match information for 1999

personal income tax returns until October of 2001.

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13. Because of problems with its computer system, the Department did not complete its

tape match for 1999 personal income tax returns until February 2003.

14. On July 10, 2003, the Department sent the Taxpayer an advisement letter notifying

him that the income reported on his New Mexico return did not match the income reported on his

federal return. The Department requested copies of the Taxpayer’s federal and state tax returns, and

the Taxpayer mailed copies of those returns to the Department on July 15, 2003.

15. On August 20, 2003, the Department assessed the Taxpayer for $478.00 of unpaid

personal income tax for the 1999 tax year, plus $47.80 of penalty and $239.09 of interest.

16. The Taxpayer still did not understand the basis for the Department’s assessment and

consulted with a certified public accountant, who explained that while the Taxpayer was only taxed

on income earned in New Mexico, the rate of tax applied to that income was determined based on

the Taxpayer’s federal adjusted gross income from all sources.

17. The Taxpayer’s CPA also determined that the Taxpayer was entitled to an additional

deduction not claimed on his original return. The Department subsequently agreed to allow the

deduction, which reduced the outstanding tax principal to $417.00.

18. On September 16, 2003, the Taxpayer mailed the Department a check for the

$417.00 of tax principal due for tax year 1999.

19. On September 17, 2003, the Taxpayer filed a written protest to the assessment of

penalty and interest on his underpayment of taxes for the 1999 tax year.

20. At the administrative hearing, the Taxpayer acknowledged that he had been negligent

in failing to read the Department’s personal income tax instructions and withdrew his protest to the

assessment of the 10 percent negligence penalty imposed under NMSA 1978, § 7-1-69.

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21. The Taxpayer also stated that he was not disputing his liability for interest accrued

during the first seven months following the filing of his erroneous 1999 tax return.

DISCUSSION

At issue is whether the Taxpayer is liable for the interest that accrued on his unpaid 1999

personal income taxes after October 2000. The Taxpayer concedes that he is liable for interest

accrued during the seven months between April 2000 and October 2000, but argues that he should

not be responsible for interest accrued after that date. The Taxpayer maintains that by October 2000,

the Department should have received the 1999 tape match information from the IRS, discovered the

error on the Taxpayer’s personal income tax return, and sent him notice of that error. The Taxpayer

contends that any interest that accrued after October 2000 is attributable to the negligence or

incompetence of the IRS and the Department, for which he should not be held responsible.

NMSA 1978, § 7-1-67 sets out the general rule governing the imposition of interest on late

payments of tax 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 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, 105, 560 P.2d 167, 169 (1977). The assessment of

interest is not designed to punish taxpayers, but to compensate the state for the time value of unpaid

revenues.

The only limitations on the accrual of interest are set out in § 7-1-67(A)(1) through (7). The

Taxpayer did not present any evidence or argument to show that he comes within one of these seven

exceptions. Instead, the Taxpayer argues that § 7-1-67 should not apply to him because the

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Department had the means to discover and notify him of his reporting error sooner than it did.

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 any underpayment of that tax. In this case, the Department had until

December 31, 2003 to assess the Taxpayer for 1999 personal income taxes, payment of which was

due on April 15, 1999. The assessment issued on August 3, 2003 was within this statutory time

frame. Under the facts of this case, there is no legal authority to support the Taxpayer’s argument

that the Legislature intended to suspend the accrual of interest simply because the Department

conceivably could have commenced its audit of the Taxpayer earlier in the three-year limitation

period allowed by statute.

As the Taxpayer acknowledged at the administrative hearing, his underpayment of 1999

personal income taxes was due to his negligence in failing to read the Department’s instructions and his

erroneous belief that only New Mexico income should be reported on his New Mexico return. 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. NMSA 1978, § 7-1-

13(B). See also, 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). In this case, it was the Taxpayer's

responsibility to obtain the information he needed to properly report and pay his New Mexico income

taxes. He cannot avoid the consequences of his reporting error, including the accrual of interest on his

unpaid taxes, by attempting to shift this responsibility to the Department.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the assessment of personal income taxes

issued under Letter ID L0857690112, and jurisdiction lies over the parties and the subject matter of this

protest.

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2. Pursuant to NMSA 1978, § 7-1-67, interest was properly assessed against the Taxpayer

on the late payment of his 1999 state income taxes.

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

DATED June 30, 2004.

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