Could a construction business avoid New Mexico gross receipts tax penalty and interest because the Department waited until 2002 to assess unfiled and underreported 1996-1997 periods and payment would cause hardship?

Plain-English summary

Magdalena Construction Co. owed penalty and interest on unreported and underreported 1996-1997 gross receipts even though the Department did not assess until December 2002. Missing returns and underreporting by more than 25% triggered longer statutory assessment periods, and financial hardship was not a legal basis for abatement.

The sole proprietorship operated a New Mexico construction business. It reported only $1,255 of gross receipts for the first four months of 1996, filed no CRS returns for May 1996 through July 1997, and then filed zero-receipt returns for August through December 1997.

Federal information later showed Schedule C business income of $16,935 for 1996 and $69,525 for 1997. The Department used the discrepancy to issue four assessments covering the two years.

The assessments included the following gross receipts tax amounts: $479.29 for each half of 1996 and $1,967.69 for each half of 1997, plus penalty and interest shown in the decision's assessment table.

The taxpayer challenged penalty and interest, arguing that the Department waited too long and that payment would create financial hardship.

The extended assessment periods applied

Section 7-1-18 generally supplied a three-year assessment period but extended it in specified circumstances.

Subsection C allowed seven years when a taxpayer failed to file a return. Subsection D allowed six years when tax liability was underreported by more than 25%.

Magdalena Construction failed to file returns for 19 of the 24 months and underreported by more than 25%. Its own conduct therefore placed the periods within both extended rules.

The decision also cited authority making assessment mandatory when unpaid tax over $10 remained within an applicable Section 7-1-18 period. Because the December 2002 assessments were timely, Department delay did not justify abatement.

Self-reporting put the first duty on the business

The business said it would have corrected the problem sooner if the Department had alerted it. The decision rejected that premise.

New Mexico's self-reporting system required the taxpayer to know its activities, determine the liability, and file accurately. Federal matching information was not immediately available, and the Department did not have to continuously audit every taxpayer.

Hardship could not change statutory charges

Regulation 3.1.6.14 NMAC prohibited compromise solely because a taxpayer could not pay. The hearing officer likewise lacked authority to change standards enacted by the Legislature.

Section 7-1-67(A) required interest from the day after tax was due until payment. Section 7-1-69(A) imposed penalty when late filing or payment resulted from negligence.

Failing to pay on time and failing to file 19 monthly returns supported both provisions. The penalty had reached its 10% statutory maximum by the time of assessment, but that did not make it abatable.

Result: protest DENIED. All assessed penalty and interest remained due.

What this means for you

Businesses with missing tax returns

An unfiled return can extend the Department's time to assess well beyond the ordinary period. Filing zero is also not a substitute for reporting actual receipts.

Taxpayers with substantial underreporting

Compare federal business-income figures with state transaction-tax filings. A discrepancy above the statutory percentage can trigger a longer assessment window.

Taxpayers facing financial hardship

Hardship may affect collection arrangements, but this decision held that it did not authorize compromise of the underlying statutory liability.

Businesses expecting an agency reminder

The self-reporting system placed responsibility on the taxpayer to file and pay without waiting for a federal information match or Department notice.

Common questions

Q: How many monthly returns were missing?
A: 19 of the 24 months at issue.

Q: What federal business income was reported?
A: $16,935 for 1996 and $69,525 for 1997.

Q: What extended periods applied?
A: Seven years for unfiled returns and six years for underreporting by more than 25%.

Q: Could financial hardship eliminate the charges?
A: No. The cited regulation barred compromise based on inability to pay.

Q: Was the Department's 2002 assessment timely?
A: Yes. The extended statutory periods covered the 1996 and 1997 liabilities.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-13(B) — self-reporting tax obligations
• NMSA 1978, § 7-1-17(A) — mandatory assessment of unpaid tax over $10
• NMSA 1978, § 7-1-18 — assessment limitation periods
• NMSA 1978, § 7-1-18(C) — seven-year period when a return is not filed
• NMSA 1978, § 7-1-18(D) — six-year period for underreporting over 25%
• NMSA 1978, § 7-1-67(A) — interest on late-paid tax
• NMSA 1978, § 7-1-69(A) — negligence penalty
• Regulation 3.1.6.14 NMAC — no compromise based on inability to pay

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• Taxation & Revenue Department v. Bien Mur Indian Market Center, Inc., 108 N.M. 228, 770 P.2d 873 (1989)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Magdalena Construction Co.
• Decision PDF: D&O 04-12

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
MAGDALENA CONSTRUCTION CO. No. 04-12
ID NO. 02-132968-00-0
ASSESSMENT NOS. 3970360-3970363

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 18, 2004, before

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

was represented by Jeffrey Loubet, Special Assistant Attorney General. Magdalena Construction

Co., a sole proprietorship, was represented by its owner, Marc D. Chavez (“Taxpayer”). Based

on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. From October 1989 through the end of 1999, the Taxpayer was engaged in the

construction business in New Mexico.

2. The Taxpayer registered his business with the Department for payment of gross

receipts, compensating, and withholding taxes, which the Taxpayer was required to pay monthly

under the Department’s combined reporting system (“CRS”).

3. The Taxpayer reported total gross receipts of $1,255 during the first four months

of 1996. The Taxpayer did not file any CRS returns for the months of May through December

1996.

4. The Taxpayer failed to file any reports for the months of January through July

1997 and filed returns reporting zero gross receipts for the months of August through December

1997.

5. In 2002, pursuant to an information-sharing agreement with the Internal Revenue

Service, the Department received information that the Taxpayer had reported business income of

$16,935 on Schedule C to his 1996 federal income tax return and business income of $69,525 on

Schedule C to his 1997 federal income tax return.

6. On December 9, 2002, based on the discrepancy between the business income

reported on the Taxpayer’s federal income tax returns and the business income reported on his

New Mexico gross receipts tax returns, the Department issued the following assessments:

Assessment Report Period GR Tax Penalty Interest

3970360 01/96-06/96 $ 479.29 $ 47.93 $ 459.63
3970361 07/96-12/96 $ 479.29 $ 47.93 $ 423.08
3970362 01/97-06/97 $1,967.69 $196.77 $1,592.53
3970363 07/97-12/97 $1,967.69 $196.77 $1,443.28

7. On February 11, 2003, the Taxpayer filed a written protest to the assessment of

penalty and interest, but the protest was rejected by the Department as untimely.

8. On March 5, 2003, the Taxpayer filed a request for a retroactive extension of time

to file his protest, which was granted by the Department.

DISCUSSION

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

assessed on his late payment of gross receipts tax for reporting periods January 1996 through

December 1997. The Taxpayer raises two arguments in support of his protest: (1) the

Department waited an unreasonable period of time to notify him of his tax liability; and (2)

payment of interest and penalty will create a financial hardship for the Taxpayer.

Delay in Assessment. The Taxpayer questions why the Department took so long to notify

him of his gross receipts tax liability. By the time he received the Department’s assessment in

2
December 2002, the penalty had reached its statutory maximum of 10 percent and substantial

interest had accrued. The Taxpayer testified that he would have taken steps to correct his

underreporting of gross receipts tax if he had been alerted sooner, and believes the Department is

at fault for the accrual of additional penalty and interest.

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 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). 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 sets out four different time periods within which the Department

may assess unpaid taxes. In most cases, the Department has three years from the end of the

calendar year in which payment of the tax was due to issue an assessment. In certain

circumstances, however, the assessment period is extended: Subsection (B) of § 7-1-18 gives the

Department ten years to issue an assessment when the taxpayer has filed a fraudulent return;

Subsection (C) gives the Department seven years to issue an assessment when the taxpayer has

failed to file a tax return; and Subsection (D) gives the Department six years to issue an

assessment when the taxpayer has underreported his tax liability by more than twenty-five

3
percent. In Taxation & Revenue Department v. Bien Mur Indian Market Center, Inc., 108 N.M.

228, 770 P.2d 873 (1989), the New Mexico Supreme Court held that the assessment periods set

out in § 7-1-18 are mandatory and must be adhered to by the Department. As the court

explained:

Section 7-1-17(A) makes assessment mandatory when a taxpayer owes more
than ten dollars in unpaid taxes; the various provisions of Section 7-1-18
simply limit the number of years following the filing of a return during which
the Department is authorized to exercise this mandate. If the Department may
make the assessment under one of the provisions in Section 7-1-18, Section 7-
1-17(A) mandates the Department shall do so.... (emphasis added)

Id. 108 N.M. at 231-232, 770 P.2d at 876-877.

During the period at issue in this case, the Taxpayer’s tax liability was underreported by

more than twenty-five percent. In addition, the Taxpayer failed to file tax returns for several

months. By his own actions, the Taxpayer made himself subject to the extended assessment

periods set out in NMSA 1978, § 7-1-18(C) and (D). That being the case, there is no basis for

the Taxpayer to complain that the Department waited too long to issue its assessment.

Financial Hardship. The Taxpayer asks that penalty and interest be waived because

payment of these amounts will create a financial hardship for him. Unfortunately, this is not

something the Department can consider. Department Regulation 3.1.6.14 NMAC specifically

states that the Secretary “may not compromise a taxpayer’s liability because of the taxpayer’s

inability to pay.” Nor does the hearing officer have authority to relieve a taxpayer of his statutory

liability for tax, penalty, or interest. In State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022,

961 P.2d 768, 774-775, the supreme court held that “the Legislature, not the administrative

agency, declares the policy and establishes primary standards to which the agency must conform”

4
and that an “administrative agency’s discretion may not justify altering, modifying or extending

the reach of a law created by the Legislature.”

The New Mexico Legislature has enacted very specific laws to govern the imposition of

interest and penalty on late tax payments. NMSA 1978, § 7-1-67(A) states that if a tax 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...until it is paid.” (emphasis added).

NMSA 1978, § 7-1-69(A) provides for the imposition of penalty “in the case of failure due to

negligence or disregard of rules and regulations...to pay when due the amount of tax required to

be paid...or to file by the date required a return....” In this case, the Taxpayer has acknowledged

that his gross receipts taxes were not paid on time. The evidence presented at the hearing also

shows that the Taxpayer was negligent in failing to make timely payments and failing to even file

a return for 19 of the 24 months at issue. Based on these facts, there is no legal basis for the

Department to abate the penalty and interest assessed against the Taxpayer.

CONCLUSIONS OF LAW

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

under Assessment Nos. 3970360-3970363, and jurisdiction lies over the parties and the subject

matter of this protest.

2. The Taxpayer’s payment of gross receipts taxes due for the period January 1996

through December 1997 was late, and interest was properly assessed pursuant to the provisions of

NMSA 1978, § 7-1-67.

3. The Taxpayer was negligent in failing to pay gross receipts tax due for the period at

issue, and penalty was properly assessed pursuant to the provisions of NMSA 1978, § 7-1-69.

5

4. Because the Department’s assessment was issued within the statutory time period

allowed by NMSA 1978, § 7-1-18, there is no undue delay justifying the abatement of penalty and

interest.

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

DATED August 19, 2004.

6