Could taxpayers limit New Mexico interest after the IRS increased their capital gain when they waited for the Department to contact them instead of filing an amended state return within 90 days?

Plain-English summary

Victor H. and Bertha M. Chacon owed $598.93 of interest after an IRS capital-gain adjustment because they waited for New Mexico to contact them instead of filing the required amended state return. Interest ran from the original tax due date, even though the reporting mistake was inadvertent and the Department did not assess until 2004.

The Chacons filed their 2000 federal and state income-tax returns in 2001. In July 2002, the IRS told them they had underreported capital gain income.

When Victor Chacon paid the additional federal tax, he asked an IRS employee about state tax and was told that federal information was regularly shared with New Mexico and that the state would probably contact them.

The Chacons did not consult a tax professional or call the New Mexico Department. They waited.

In April 2004, the Department assessed $1,328.00 of additional personal income tax and $598.93 of interest. The Chacons paid the principal and protested the interest, asking that it be reduced to $250.00, the amount they said had accrued by the date of the IRS notice.

A federal change triggered an affirmative state duty

Section 7-1-13(C) required a taxpayer to file an amended New Mexico return within 90 days after an adjustment to the federal return.

The Chacons knew about the federal change in July 2002 but chose to wait for state contact. New Mexico's self-reporting system placed the duty to determine and report the state effect on them, not on the Department's information-matching process.

The IRS employee's general statement that New Mexico would probably contact them did not replace that statutory filing obligation.

Interest began with the original due date

Section 7-1-67(A) required interest from the day after tax was originally due until payment. The rule was mandatory and not dependent on fraud or bad intent.

The Chacons acted in good faith, but their error deprived New Mexico of $1,328 from April 15, 2001 until payment on April 16, 2004. Interest compensated the state for that period.

The decision therefore rejected their attempt to start or cap interest at the July 2002 IRS notice date.

The Department assessed within its deadline

Section 7-1-18(A) gave the Department three years from the end of the calendar year in which the tax was due to issue an assessment.

Federal-state information matching involved some delay, and the Department did not have resources to audit every taxpayer continuously. The April 2004 assessment fell within the statutory period and remained valid.

Result: protest DENIED. The full $598.93 of interest remained due.

What this means for you

Taxpayers receiving an IRS adjustment

Determine the New Mexico effect immediately and calendar the 90-day amended-return deadline described in this decision.

Taxpayers told that agencies share information

Information sharing does not transfer the filing duty to the government. Waiting for a matching notice can allow interest to continue.

Taxpayers who made an innocent error

Good faith may matter in other contexts, but mandatory interest still compensated the state for unpaid tax here.

Taxpayers disputing delayed notice

Check the statutory assessment period. A notice can be delayed yet timely, while interest continues from the original payment deadline.

Common questions

Q: What federal issue changed?
A: The IRS found underreported capital gain income on the 2000 return.

Q: How soon was an amended New Mexico return required?
A: Within 90 days after the federal adjustment.

Q: How much additional New Mexico tax was due?
A: $1,328.00.

Q: How much interest was assessed?
A: $598.93.

Q: Did the IRS employee's statement excuse the delay?
A: No. The taxpayers still had an affirmative state filing duty.

Citations and references

Statutes:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• 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, § 7-1-13(E) — interest during payment extensions
• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-18(A) — assessment limitations period
• NMSA 1978, § 7-1-67(A) — interest from original due date until payment

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• 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: Victor H. and Bertha M. Chacon
• Decision PDF: D&O 04-08

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
VICTOR H. AND BERTHA M. CHACON No. 04-08
TO THE INTEREST
ASSESSED UNDER LETTER ID L0970880000

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 28, 2004, before

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

was represented by Lewis J. Terr, Special Assistant Attorney General. Victor and Bertha Chacon

(“Taxpayers”) were represented by Victor Chacon. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 2001, the Taxpayers filed their federal and state personal income tax returns for

the 2000 tax year.

2. In July 2002, the Internal Revenue Service (“IRS”) notified the Taxpayers that

they had underreported their capital gain income on the 2000 return.

3. When Mr. Chacon went to the IRS office in Albuquerque to pay the additional

federal tax due, he asked about his liability for additional state tax. He was told that the IRS

regularly provides tax information to New Mexico and that “they’ll probably contact you.”

4. The Taxpayers did not consult with a tax professional or call the Department to

determine whether they were liable for additional state tax as a result of the IRS adjustment, but

decided to wait until they were contacted by the Department.

5. In April 2004, the Department assessed the Taxpayers for $1,328.00 of additional

income tax due as a result of the error on their 2000 federal return, plus interest of $598.93.

6. On April 16, 2004, the Taxpayers paid the $1,328.00 of tax principal.

7. On April 22, 2004, the Taxpayers filed a written protest to the assessment of

interest.

DISCUSSION

The issue to be decided is whether the Taxpayers are liable for the $598.93 of interest

assessed on their late payment of 2000 personal income tax. The Taxpayers believe they should

be excused from the payment of interest because their underreporting of tax for the 2000 tax year

was due to inadvertent error and was not the result of any intent to commit fraud. Alternatively, the

Taxpayers argue that the Department took too long to notify them of the additional tax due. They

ask the Department to reduce their liability to $250.00, which is the amount of interest that had

accrued as of July 22, 2002, the date the IRS notified the Taxpayers of their underpayment of

federal income tax.

NMSA 1978, § 7-1-17(C) provides that any assessment of tax by the Department is

presumed to be correct. NMSA 1978, § 7-1-3 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 issued to

the Taxpayers is presumed to be correct, and it is the Taxpayers’ burden to present evidence and

legal argument to show that they are entitled to an abatement.

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NMSA 1978, § 7-1-67 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, 105, 560 P.2d 167, 169 (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. 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.

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 IRS determined that the Taxpayers

made a mistake when they reported their 2000 capital gain income. Although the Taxpayers

acted in good faith and without any intent to defraud the government, the fact remains that the

State of New Mexico would have received an additional $1,328.00 tax payment if the Taxpayers

had completed their return correctly. As a result of the Taxpayers’ mistake, the state was

deprived of the use of this money for the three-year period between April 15, 2001, the original

due date of the Taxpayer’s return, and April 16, 2004, the date payment of the additional tax was

made. For this reason, interest was properly assessed pursuant to NMSA 1978, § 7-1-67(A).

The Taxpayers question why the Department took so long to notify them of their personal

income tax liability for the 2000 tax year. Mr. Chacon testified that he would have paid the

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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). When adjustments are made to a taxpayer’s federal tax return, NMSA 1978, § 7-1-13(C)

imposes an affirmative duty on the taxpayer to file an amended New Mexico return within ninety

days from the date of the adjustment.

There are insufficient government 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" 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. 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 issue an

assessment. The April 2004 assessment issued to the Taxpayers was well within the time limits

provided by the New Mexico Legislature.

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest to the assessment of interest issued

under Letter ID L0970880000, and jurisdiction lies over the parties and the subject matter of these

protests.

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2. The Taxpayers’ mistake in reporting their capital gain income resulted in the late

payment of $1,328.00 of their 2000 personal income to New Mexico, and interest was properly

assessed on this amount back to the original due date of April 15, 2001.

3. The Department’s assessment was issued within the statutory time period allowed

by NMSA 1978, § 7-1-18(A) and is a valid assessment.

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

DATED July 30, 2004.

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