Could a taxpayer avoid interest and penalty after cashing a 1997 refund that a later amended return tried to apply to his unpaid 1998 New Mexico income tax?

Plain-English summary

Errol Chaisson owed interest and a negligence penalty on unpaid 1998 New Mexico income tax after he and his wife cashed a 1997 refund that a later amended return had tried to carry forward. Their filing extension did not extend the time to pay, and reliance on their accountant did not excuse the late payment.

The Chaissons filed two amended 1997 returns only days apart. The first requested a $5,179 cash refund. The second reported a $5,315 refund and directed the Department to apply it to 1998.

Their 1998 return then counted the expected $5,315 carryforward as a payment. But the Department processed the first amended return and sent the $5,179 check. On their accountant's advice, the Chaissons deposited it in November 1999 without checking it against the returns.

The Department notified them in March 2000 that it had no record of the claimed payment. By May 2000, their accountant had explained that they owed the New Mexico tax. They did not finish paying the principal until September 2003.

Interest was mandatory

Section 7-1-67 required interest when tax was not paid by its due date. The 1998 tax was due April 15, 1999, and Section 7-1-13(E) provided that an extension to file did not stop interest.

Under the offset law applicable during the period, an overpayment from one reporting period was not available against another period until the taxpayer requested and received a refund. The decision said the Chaissons were premature in treating the anticipated 1997 refund as a 1998 estimated payment.

Their attempted carryforward was then nullified when they cashed the refund check. Because they retained money legally due to the state from April 1999 until September 2003, interest remained due for that period.

Conflicting returns were the taxpayers' responsibility

The first amended return requested cash; the second, filed three days later, requested a carryforward. The accountant's cover letter for the second return did not alert the Department to the conflicting first request.

The Department correctly issued the cash refund in response to the first amended return. Once the check was issued, it could not also apply that money to 1998. The decision placed responsibility for accurate self-reporting and verification on the taxpayers.

Accountant reliance did not defeat the penalty

Section 7-1-69 imposed a penalty for failure to pay caused by negligence or disregard of rules and regulations. Regulation 3.1.11.10 NMAC defined negligence to include inaction, carelessness, erroneous belief, and inattention.

Failing to compare the refund check with the amended returns met that definition. The decision also held that the taxpayers could not delegate their tax-payment responsibility to an accountant.

The continued delay after the Department's March 2000 notice was an additional basis for negligence. Financial reversals and later unemployment did not excuse the late payment or justify abating the penalty.

The February 2002 assessment totaled $8,164.79: $5,142.00 of tax principal, $514.20 of penalty, and $2,508.59 of interest.

Result: protest DENIED.

What this means for you

Taxpayers filing multiple amended returns

Make later instructions explicitly identify and resolve any conflicting earlier filing. Closely timed amended returns can otherwise produce inconsistent refund treatment.

Taxpayers carrying an overpayment forward

Verify that the Department actually applied the amount before reporting it as a payment for another year. Cashing a refund check is inconsistent with treating the same money as a carryforward.

Taxpayers with filing extensions

An extension to file did not extend the deadline to pay in this decision. Interest accrued from the original payment due date.

Taxpayers using an accountant

Professional help does not eliminate the taxpayer's duty to review returns, payments, and refund checks or to act promptly after receiving an underpayment notice.

Common questions

Q: Why did the Department send a cash refund?
A: The first amended 1997 return specifically requested a cash refund, and the Department processed that request.

Q: Did the second amended return automatically pay the 1998 tax?
A: No. Its attempted carryforward was ineffective once the taxpayers cashed the refund issued under the first amended return.

Q: Did the extension to file stop interest?
A: No. The cited statute said that an extension did not prevent interest from accruing.

Q: Could reliance on the accountant excuse the penalty?
A: No. The decision held that responsibility for paying taxes could not be delegated to a third party.

Q: What did the assessment include?
A: $5,142.00 of tax principal, $514.20 of penalty, and $2,508.59 of interest, totaling $8,164.79.

Citations and references

Statutes and regulation:

• 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(E) — filing extension does not stop interest
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-67 — interest on late-paid tax
• NMSA 1978, § 7-1-69 — negligence penalty
• Regulation 3.1.11.10 NMAC — taxpayer negligence

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)
• Amoco Production Company v. New Mexico Taxation and Revenue Department, 118 N.M. 72, 878 P.2d 1021 (Ct. App. 1994)
• 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: Errol Chaisson
• Decision PDF: D&O 05-12

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
ERROL CHAISSON 05-12
TO ASSESSMENT NO. 433341

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 8, 2005, before

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

was represented by Jeffrey W. Loubet, Special Assistant Attorney General. Errol Chaisson

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In October 1998, Errol Chaisson filed a joint 1997 New Mexico income tax return

with this wife, Daria Chaisson, reporting a net tax liability for the 1997 tax year in the amount of

$21,651.

2. On August 27, 1999, the Chaissons filed an amended 1997 New Mexico income

tax return. As result of adjustments made on the amended return, the Chaissons reported a

refund due for the 1997 tax year in the amount of $5,179 and requested that this amount be

refunded directly to them.

3. On September 1, 1999, the Chaissons filed a second amended 1997 income tax

return, this time showing a refund due for the 1997 tax year in the amount of $5,315 and

requesting that this amount be applied to tax year 1998.

4. The second amended return was accompanied by a cover letter from James

Hanson, the Chaissons’ California accountant, stating: “The above referenced taxpayer is filing

an amended return for 1997. Please note that the taxpayer requests the overpayment of 1997 tax

to be applied to 1998.” The accountant’s letter did not mention the first amended return filed

three days earlier or alert the Department to the fact that the first amended return directed the

taxpayers’ refund to be made in cash, rather than applied against the next year’s liability.

5. Sometime between September 7, 1999 and October 8, 1999, the Chaissons filed

their original 1998 New Mexico income tax return, showing a tax liability of $12,537 and

payments of $7,395 (income withholding) and $5,315 (with a notation that this payment was

from their 1997 amended return), resulting in a refund due of $173.

6. On October 8, 1999, the Department sent the Chaissons a letter stating: “Our staff

is reviewing your tax refund claim for the 1998 tax year and will require a copy of all W-2 forms

applicable to the return.”

7. On October 12, 1999, the Chaissons mailed copies of their 1998 W-2 forms to the

Department.

8. In November 1999, the Chaissons received a check from the State of New Mexico

in payment of the $5,179 refund requested on their first amended 1997 income tax return filed on

August 27, 1999.

9. Upon receipt of the state’s check, Daria Chaisson faxed a copy to Kathy Johnson,

who was an associate of James Hanson, the California accountant who filed the Chaissons’

amended 1997 returns.

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10. Ms. Johnson told Ms. Chaisson to go ahead and cash the $5,179 refund check

from the State of New Mexico, which was deposited into the Chaissons’ account in November

1999.

11. Ms. Chaisson relied on her accountant to insure that the Chaissons’ tax matters

were handled properly, and Ms. Chaisson did not review her income tax returns to determine

whether the refund check received from New Mexico correctly reflected the refund requested in

the Chaissons’ original and amended 1997 returns.

12. Ms. Johnson was distracted with personal matters and she, too, failed to check the

Chaissons’ 1997 New Mexico income tax returns to insure that the refund check had been issued

in the correct amount. In any event, Ms. Johnson did not have a copy of the second amended

return filed by James Hanson and was not aware that the Chaissons’ second amended return

asked that their 1997 refund be applied to their 1998 tax liability.

13. On March 20, 2000, the Department notified the Chaissons that it had no record

of the $5,315 reported as an estimated payment on their 1998 New Mexico income tax return and

asked them to send verification of this payment.

14. Daria Chaisson referred the Department’s notice to Kathy Johnson.

15. Ms. Johnson subsequently discovered that the estimated payment reported on the

Chaisson’s 1998 return was based on their second amended 1997 return, but that $5,179 of this

payment had been refunded to the Chaissons in November 1999 in response to the request made

in their first amended 1997 return.

16. On May 20, 2000, Ms. Johnson faxed an explanation to Ms. Chaisson which

concluded: “End result you owe the NM tax.” (Emphasis in original).

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17. Ms. Johnson spoke to Theresa Martinez, an employee of the Department, and

asked that interest and penalty be waived on the underpayment resulting from the Chaissons’

deposit of their $5,179 cash refund for the 1997 tax year.

18. Ms. Martinez and Ms. Johnson subsequently traded telephone calls without

making a connection. At some point, each party gave up attempting to reach the other, and there

was no further communication between the parties until February 2002.

19. Between March 2000, when they were first notified that additional tax was due,

and February 2002, the Chaissons did not make any payments on the principal of their 1998 tax

liability.

20. On February 12, 2002, Ms. Johnson had a telephone conversation with Theresa

Martinez and then sent an e-mail to Daria Chaisson confirming that the Chaissons owed $5,179

in 1998 income taxes. Ms. Johnson said that she would “try to get your penalties and interest

revoked.”

21. On February 19, 2002, the Department mailed Assessment No. 433341 to Errol

Chaisson in the total amount of $8,164.79, representing a $5,142.00 underpayment of tax

principal due for the 1998 tax year, plus penalty of $514.20 and interest of $2,508.59.

22. On February 23, 2002, Ms. Johnson told Ms. Chaisson that she had not yet

received a response from Theresa Martinez and was going to send her a letter.

23. On February 25, 2002, Ms. Johnson wrote a letter to Ms. Martinez asking that the

assessed penalties and interest be waived because the Chaissons “did not know they owed this

debt.” Ms. Johnson’s letter also stated that the Chaissons had been unemployed since November

2001 and would like to pay their tax liability in installments.

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24. In September 2003, the Chaissons made their final payment on the tax principal

assessed for the 1998 tax year.

DISCUSSION

The issue to be decided is whether Errol Chaisson is liable for penalty and interest on his

underpayment of 1998 income tax. The Chaissons believe that penalty and interest should be

waived because the Department failed to apply their 1997 refund as an estimated payment against

their 1998 tax liability. The Department maintains that the problem resulted from the conflicting

instructions given on the Chaissons’ amended 1997 income tax returns and that the Chaissons

knew—or should have known—that their refund had not been applied to their 1998 liability at the

time they cashed the Department’s refund check in November 1999.

NMSA 1978, § 7-1-17 provides that any assessment of taxes made 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 presumption of

correctness applies to the assessment of interest in this case, and it is the taxpayer’s burden to

present evidence and legal arguments to justify an abatement.

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).

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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). 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.

In this case, the Chaissons’ 1998 income taxes were due April 15, 1999. By the time the

taxpayers filed their second amended 1997 return and requested that their 1997 refund be applied to

1998, the Chaissons’ 1998 tax payment was already four-and-one-half months late. The fact that

they obtained an extension of time to file their 1998 return did not excuse them from timely

payment of the tax due. NMSA 1978, § 7-1-13(E), which sets out the rules applicable to

extensions, states that “no extension shall prevent the accrual of interest as otherwise provided by

law.” As noted above, § 7-1-67 provides that interest accrues “from the first day following the

day on which the tax becomes due, without regard to any extension of time…until it is paid....”

(Emphasis added). In addition, during the period at issue in this protest, an overpayment for one

reporting period could not be offset against tax due for another reporting period until the taxpayer

requested and was granted a refund of the overpaid tax.1 See, Amoco Production Company v. New

Mexico Taxation and Revenue Department, 118 N.M. 72, 878 P.2d 1021 (Ct. App. 1994). For this

reason, the Chaissons were premature in reporting their anticipated 1997 refund as an estimated

payment on their 1998 return.

In November 1999, the Department granted the $5,179 refund requested in the Chaissons’

first amended 1997 tax return. At the time the taxpayers received and cashed the state’s refund

1
Effective July 1, 2001, the Tax Administration Act was amended to allow an earlier offset of
overpayments against underpayments in some limited circumstances. See, NMSA 1978, §§ 7-1-29(D)
and (E), 7-1-67(A)(5).

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check, they should have realized that this portion of the $5,315 refund requested on their second

amended return was no longer available to be applied against their 1998 tax liability.

Unfortunately, neither the Chaissons nor their accountant took the time to check the refund against

their 1997 returns or verify that the estimated payment claimed on their 1998 return had actually

been made. In their protest, the Chaissons fault the Department for failing to process their second

amended return, which asked that their refund be applied to the following tax year, before

processing their first amended return, which asked for the refund in cash. There is no basis for the

Chaissons’ complaint. New Mexico has a self-reporting tax system, and it is the obligation of

taxpayers, who have the most 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).

In this case, the Chaissons reported their 1997 income incorrectly on their original return.

They made additional errors on their first amended return, misstating both the amount and the

preferred method of receiving the refund. The Department is not responsible for these errors, nor is

it responsible for the confusion that resulted from a second amended return being filed three days

after the date of the first amended return. In the normal course of events, returns are processed in

the order received. The cash refund sent to the Chaissons in November 1999 was correctly issued

in response to the request made in their first amended return. Once the refund check was issued, it

was not possible for the Department to comply with request made in the Chaissons’ second

amended return that this amount be applied against their 1998 tax liability.

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The assessment of interest is designed to compensate the state for the time value of

unpaid revenues. In this case, the Chaissons’ 1998 tax payment was due in April 1999.

Although the Chaissons obtained an extension of time to file their 1998 return, they did not make

an estimated payment to cover their projected tax liability for that year. In September 1999, the

taxpayers attempted to pay the tax due by filing a second amended 1997 return asking that their

refund be applied to 1998, but this attempt was nullified in November 1999 when they cashed the

refund check requested in their first amended return. Even after the Chaissons were notified in

March 2000 that 1998 taxes were still oustanding, they failed to make any payments on their

liability. Final payment of the Chaissons’ 1998 taxes was not received by the Department until

September 2003. In summary, the Chaissons had the use of money that legally belonged to the

state from April 1999 until September 2003. Pursuant to NMSA 1978, § 7-1-67, interest is due

for this period.

Assessment of Penalty. NMSA 1978, § 7-1-69 imposes a penalty of two percent per

month, up to a maximum of ten percent, whenever a taxpayer fails “due to negligence or

disregard of rules and regulations” to pay tax in a timely manner. Taxpayer negligence for

purposes of assessing penalty is defined in Regulation 3.1.11.10 NMAC as:

A. failure to exercise that degree of ordinary business care and prudence
which reasonable taxpayers would exercise under like circumstances;

B. inaction by taxpayers where action is required;

C. inadvertence, indifference, thoughtlessness, carelessness, erroneous
belief or inattention.

In this case, the Chaissons’ failure to pay their 1998 taxes in a timely manner resulted from their

failure to match the 1997 refund they received from the Department against their 1997 tax returns.

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This inaction and inattention to their financial affairs constitutes negligence under the regulation.

Although Ms. Chaisson relied on her accountant to determine whether the refund was correct, New

Mexico law is clear that a taxpayer’s responsibility for payment of taxes due to the state cannot be

delegated to a third party. As the Court of Appeals held in El Centro Villa Nursing Center v.

Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989):

"[e]very person is charged with the reasonable duty to ascertain the
possible tax consequences of his action [or inaction]." Tiffany Constr.
Co. v. Bureau of Revenue, 90 N.M. at 17, 558 P.2d at 1156. We are
not inclined to hold that the taxpayer can abdicate this responsibility
merely by appointing an accountant as its agent in tax matters.

The Chaissons were also negligent in failing to pay the tax due once the Department sent

them notice of the underpayment in March 2000. The taxpayers’ argument that they were

waiting to find out whether penalty and interest would be waived before making payment makes

little sense. On May 20, 2000, Kathy Johnson sent Daria Chaisson a fax explaining the problem

with the 1997 refund and stating: “End result you owe the NM tax.” At that point, there was no

question that the Chaissons were liable for payment of the tax principal—whether they also owed

penalty and interest would have no affect on this liability. Delaying payment of the tax principal

simply resulted in the accrual of additional interest. The February 25, 2002 protest letter Kathy

Johnson filed on behalf of the taxpayers indicates that the real reason the Chaissons failed to pay

their 1998 taxes when they first learned of the liability was because they had suffered financial

reversals in the stock market and subsequently lost their employment due to lay offs. While this

series of events was unfortunate, it does not excuse their late payment of the tax due or provide a

basis for abating penalty.

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CONCLUSIONS OF LAW

A. Errol Chaisson filed a timely, written protest to the Department’s assessment of

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

B. Pursuant to NMSA 1978, § 7-1-67, Mr. Chaisson is liable for payment of the

interest that accrued on his underpayment of 1998 personal income tax.

C. Pursuant to NMSA 1978, § 7-1-69, Mr. Chaisson was negligent in failing to pay his

1998 income tax liability in a timely manner and penalty was properly assessed.

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

DATED June 16, 2005.

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