Could a taxpayer recover interest and penalty on a 1999 New Mexico income-tax underpayment when her accountant used the wrong over-65 deduction table and she did not receive the original assessment?

Plain-English summary

Marilyn Stock was not entitled to recover $54.00 of interest and $14.45 of penalty caused by an incorrect over-65 deduction on her 1999 income-tax return. Her accountant used the deduction table for married joint filers even though Stock filed as a single taxpayer, and not receiving the Department's first assessment did not change when the charges began.

Stock reported federal adjusted gross income of $47,571. Her return claimed a $2,000 deduction for taxpayers age 65 and older.

Under Section 7-2-5.2(C) and the 1999 instructions described in the decision, the $2,000 deduction for a single filer was available only within a much lower income range, and no deduction was available when federal adjusted gross income exceeded $28,500.

The accountant mistakenly used the table for married individuals filing jointly. Stock did not review the return with the accountant or read the governing instructions and assumed it was correct.

The Department disallowed the deduction and assessed $144.50 of additional tax plus interest and penalty in July 2001. Stock had no record or recollection of receiving that assessment.

She learned of the liability from a February 2003 statement of account and paid the next day: $144.50 of tax, $54.00 of interest, and $14.45 of penalty. She then sought a $68.45 refund of the interest and penalty.

Interest began with the original due date

Section 7-1-67(A) required interest from the day after tax was due until payment. The statute was mandatory and did not make actual notice a condition.

The decision explained that Stock, rather than the state, had use of the unpaid $144.50 between April 2000 and February 2003. Interest compensated the state for that period rather than punishing the taxpayer.

Using the wrong table was negligence

Section 7-1-69(A) imposed a monthly penalty when tax was not timely paid because of negligence or disregard of rules and regulations. Regulation 3.1.11.10 NMAC included inadvertence, carelessness, erroneous belief, and inattention in its negligence definition.

The accountant's use of the wrong filing-status table, combined with Stock's failure to review the return or instructions, met that standard. Reliance on the accountant did not transfer the taxpayer's responsibility.

The penalty ran from the original due date and reached its 10% maximum in September 2000.

Missing the first assessment did not require a refund

The Department had through December 31, 2003 under Section 7-1-18(A) to assess the 1999 liability. Although Stock apparently did not receive the July 2001 assessment, she received actual notice in February 2003, still within that period.

The decision found no New Mexico law allowing interest or penalty abatement because actual notice came later within the statutory assessment window.

Result: protest DENIED. The $68.45 refund claim was denied.

What this means for you

Older taxpayers claiming age-based deductions

Confirm the correct table for filing status and income. Eligibility can phase out entirely above a stated income threshold.

Taxpayers using a preparer

Review the completed return and ask how major deductions were calculated. Accountant error did not excuse the penalty here.

Taxpayers who did not receive an assessment

Actual receipt may not control the accrual of interest and penalty. This decision measured both from the original tax due date.

Taxpayers learning of an old balance

Paying promptly can stop additional interest, but it does not necessarily eliminate charges already accrued while the principal remained unpaid.

Common questions

Q: What return error caused the underpayment?
A: The accountant used the married-joint over-65 deduction table for a single taxpayer.

Q: How much additional tax was due?
A: $144.50.

Q: What refund did Stock request?
A: $68.45, consisting of $54.00 in interest and $14.45 in penalty.

Q: Why was the penalty upheld?
A: The wrong-table mistake and failure to review the return met the cited negligence definition.

Q: When did the penalty reach its maximum?
A: September 2000, when it reached 10% of the unpaid tax.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-10 — assessment of tax liability over $10
• NMSA 1978, § 7-1-13 — self-reporting and payment obligations
• NMSA 1978, § 7-1-13(E) — interest during payment extensions
• NMSA 1978, § 7-1-18(A) — assessment limitations period
• NMSA 1978, § 7-1-67(A) — interest from original due date until payment
• NMSA 1978, § 7-1-69(A) — negligence penalty
• NMSA 1978, § 7-2-5.2(C) — over-65 deduction for single taxpayers
• Regulation 3.1.11.10 NMAC — taxpayer negligence

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)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Marilyn Stock
• Decision PDF: D&O 05-04

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
MARILYN STOCK No. 05-04
TO DENIAL OF CLAIM FOR REFUND OF
PENALTY AND INTEREST PAID ON 1999
PERSONAL INCOME TAX ASSESSMENT

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 9, 2005, before

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

was represented by Bruce J. Fort, Special Assistant Attorney General. Marilyn Stock

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

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a resident of Albuquerque, New Mexico.

2. In April 2000, the Taxpayer’s accountant prepared the Taxpayer’s 1999 New

Mexico Personal Income Tax return (“PIT-1”), which the Taxpayer signed and filed with the

Department.

3. On Line 5 of her 1999 Form PIT-1, the Taxpayer reported federal adjusted

gross income of $47,571.

4. On Line 6 of Form PIT-ADJ, Schedule of Additions and Deductions, the

Taxpayer claimed a $2,000 deduction for persons age 65 and older. This deduction was then

carried over to Line 9 of the Taxpayer’s PIT-1, resulting in a $2,000 decrease in her New

Mexico taxable income.

5. Pursuant to NMSA 1978, § 7-2-5.2(C) and the Department’s 1999 PIT

instruction packet, the deduction of $2,000 claimed by the Taxpayer in this case was only

available to single taxpayers whose federal adjusted gross income was between $25,500 and

$27,000. Single taxpayers whose federal adjusted gross income exceeded $28,500 were not

entitled to claim any deduction.

6. In determining the over-65 deduction claimed on the Taxpayer’s 1999 PIT

return, the Taxpayer’s accountant used the table in Subsection B of § 7-2-5.2, which applies to

married individuals filing jointly, rather than the table in Subsection C, which sets out the

deduction available to single individuals.

7. The Taxpayer did not catch the error because she did not go over her return

with her accountant or read the statute or the Department’s instructions pertaining to the over-

65 deduction. Instead, the Taxpayer simply assumed that her accountant had prepared the

return correctly.

8. Because the Taxpayer’s 1999 federal adjusted gross income exceeded the

income limit for single taxpayers claiming the over-65 deduction, the Department disallowed

the $2,000 deduction on Line 6 of the Taxpayer’s Form PIT-ADJ.

9. On July 6, 2001, the Department issued Assessment No. 4696425 to the

Taxpayer assessing her for $144.50 of additional 1999 personal income tax due as a result of

the disallowed deduction, plus interest and penalty.

10. The Taxpayer does not have any record or recollection of receiving the

assessment.

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11. In February 2003, the Taxpayer received a Statement of Account from the

Department showing the amount of the outstanding assessment.

12. After receiving the Statement of Account and becoming aware of the

assessment issued against her, the Taxpayer contacted the Department to determine the basis

for the liability.

13. The day after receiving the Statement of Account, the Taxpayer paid the

assessment in full, including $144.50 of tax principal, $54.00 of interest, and $14.45 of

penalty.

14. On March 13, 2003, the Taxpayer filed an Application for Tax Refund

requesting a refund of the $68.45 of interest and penalty paid on the assessment.

15. On March 27, 2003, the Department denied the Taxpayer’s refund claim.

16. On April 29, 2003, the Taxpayer filed a written protest to the denial of her

refund claim.

DISCUSSION

The issue to be decided is whether the Taxpayer was liable for payment of the $68.45

of interest and penalty that accrued on her underpayment of 1999 personal income tax

between April 2000, the original due date of the tax, and February 2003, when the additional

tax was paid. The Taxpayer maintains that interest and penalty should not be imposed because

she did not receive the Department’s original assessment and did not learn of her liability for

additional tax until February 2003. In effect, the Taxpayer argues that interest and penalty

should not begin to accrue until the date she received actual notice of her error in calculating

the amount of 1999 personal income taxes due to the state.

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Assessment of Interest. 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 provisions of the statute are

mandatory rather than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169

(1977). See also, NMSA 1978, § 12-2A-4(A) of the Uniform Statute and Rule Construction

Act (the words “shall” and “must” express a duty, obligation, requirement or condition

precedent). With limited exceptions that do not apply here, the New Mexico Legislature has

directed the Department to assess interest whenever taxes are not timely paid. 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, NMSA 1978, § 7-1-13(E).

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 underreported her 1999

taxable income. If the Taxpayer’s accountant had followed the Department’s instructions and

completed the Taxpayer’s return correctly, the State of New Mexico would have received an

additional $144.50 tax payment in April 2000. As a result of the error, the Taxpayer—rather

than the state—had the use of this money for the period between April 2000, the original due

date of the tax, and February 2003, the date when the additional tax was paid.

New Mexico has a self-reporting tax system. There are insufficient government

resources available for the Department to continually audit every taxpayer to determine whether

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he or she has fully complied with the state’s tax laws. For this reason, the law places the duty on

taxpayers to accurately determine and pay their taxes by the statutory due date. NMSA 1978, §

7-1-13; See also, 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 a taxpayer

fails to make timely payment of taxes due to the state, NMSA 1978, § 7-1-67(A) imposes

interest “from the first day following the day on which the tax becomes due...until it is paid.”

The language of the statute makes it clear that interest on an underpayment of tax begins to run

from the original due date of the tax—not the date the Department notifies the taxpayer of the

underpayment.

Assessment of Penalty. NMSA 1978, § 7-1-69(A) provides that when a taxpayer fails

to pay taxes due to the state as a result of negligence or disregard of rules and regulations, a

penalty “shall be added” to the amount of the underpayment, calculated as follows:

two percent per month or any fraction of a month from the date the tax
was due multiplied by the amount of tax due but not paid, not to exceed
ten percent of the tax due but not paid.

As with interest, the amount of penalty is calculated “from the date the tax was due,” not the

date that the taxpayer is notified of the underpayment.

The term “negligence” as used in § 7-1-69(A) is defined in Regulation 3.1.11.10

NMAC to include “inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or

inattention.” In this case, the Taxpayer acknowledges that her accountant made a mistake in

claiming a $2,000 deduction on the Taxpayer’s 1999 PIT return, resulting in an underpayment of

$144.50. This error was based on the accountant’s use of the wrong table when determining the

deduction. Looking at the applicable statute and instructions, it is apparent that the Taxpayer’s

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accountant inadvertently used the table pertaining to the deduction for married individuals

filing jointly, rather than the table pertaining to single individuals. The Taxpayer did not catch

this error because she did not go over her return with her accountant or read the statute or the

Department’s instructions explaining the over-65 deduction. Instead, the Taxpayer simply

assumed that her accountant had prepared the return correctly. This meets the definition of

negligence set out in Department regulations and in New Mexico case law. See, El Centro Villa

Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986

(Ct. App. 1989) (a taxpayer cannot abdicate responsibility for payment of taxes “merely by

appointing an accountant as its agent in tax matters”).

Summary: The Department is charged with enforcing the state’s tax laws, and NMSA

1978, § 7-1-10 requires the Department to assess any taxpayer who is liable for tax in excess of

$10.00. While individual taxpayers are required to file one PIT return each year, the

Department is charged with the administration of more than 40 different tax programs and

receives thousands of tax filings each month. For this reason, NMSA 1978, § 7-1-18(A) gives

the Department three years from the end of the calendar year in which a tax is originally due to

determine whether the tax has been paid and issue an assessment. In this case, the Department

had until December 31, 2003 to notify the Taxpayer of her liability for 1999 income tax, plus

any related penalty and interest. While it is certainly regrettable that the Taxpayer did not

receive the Department’s original assessment issued in July 2001, the Taxpayer did receive

actual notice of her liability within the time frame provided by the Legislature. There is

nothing in New Mexico tax law that authorizes an abatement of interest or penalty when a

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taxpayer receives notice of her failure to properly report and pay tax near the end—rather than

the beginning—of the three-year limitations period set out in § 7-1-18.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the denial of her claim for refund

of interest and penalty paid in connection with her underpayment of 1999 personal income tax,

and jurisdiction lies over the parties and the subject matter of this protest.

B. Pursuant to NMSA 1978, § 7-1-67(A), the Taxpayer was liable for payment of

the interest that accrued from the first day following the day on which her 1999 personal income

tax became due in April 2000 until the date the underreported tax was paid in February 2003.

C. Pursuant to NMSA 1978, § 7-1-69(A), the Taxpayer was negligent in under-

reporting her 1999 personal income tax, and penalty was properly assessed from the date the tax

was due in April 2000 until the penalty reached it maximum of 10 percent in September 2000.

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

DATED March 14, 2005.

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