Did an online filing confirmation count as payment when the bank rejected the electronic check and the taxpayer did not follow up for 16 months?

Plain-English summary

Rexbrun Corporation owed penalty and interest because its $9,221.68 electronic tax payment was rejected and it did not replace the payment for nearly 16 months. An online confirmation of the submitted return and check did not establish that the state received the money.

Rexbrun reported gross receipts, compensating, and withholding taxes through New Mexico's monthly combined reporting system. Its accountant filed the August 2004 return through CRS-NET and submitted an electronic check for $9,221.68.

CRS-NET confirmed receipt of the submission. But Wells Fargo rejected the payment because the nine-digit account number in the request omitted one digit from Rexbrun's ten-digit account number.

The Department assessed the unpaid tax, penalty, and interest 16 days after the due date and warned that interest continued to accrue. Rexbrun protested. Its accountant later reconciled the bank statements and knew the payment had never cleared, yet contacted neither the bank nor the Department.

After the backlogged protest office explained the rejected payment in January 2006, Rexbrun finally sent a paper replacement check.

Filing a protest did not complete payment

New Mexico's self-reporting system required Rexbrun to make sure the tax was actually paid by the statutory due date. The assessment and the uncleared bank balance put the accountant on notice that the electronic transaction had failed.

Section 7-1-13.4 stated that neither the Department nor the state's fiscal agent had to resubmit a reversed or dishonored electronic payment. If rejection made the payment late, the interest and penalty statutes applied.

Interest ran until the replacement check

Section 7-1-67 made interest mandatory from the first day after tax was due until payment. Both the assessment and protest acknowledgment warned Rexbrun that interest would continue.

The accountant's decision to wait for the protest office rather than investigate or replace the payment did not stop accrual. Interest ran from September 2004 until January 21, 2006.

The payment failure and inaction were negligence

The record did not establish whether the missing digit originated with Rexbrun's accountant or its bank. Either way, the error came from the taxpayer's agent, and Rexbrun remained responsible.

The accountant's later inaction, after learning that the funds were still in the company's account, independently showed a failure to use ordinary business care and prudence.

Result: protest DENIED. Penalty and interest remained due on the late CRS payment.

What this means for you

Taxpayers paying electronically

Distinguish a submission confirmation from settled payment. Confirm that the debit actually clears the bank and reaches the tax agency.

Businesses reconciling tax payments

Investigate any expected tax debit missing from the bank statement immediately. An uncleared payment can signal rejection while interest and penalty continue.

Taxpayers protesting an assessment

A protest does not automatically stop interest. In this decision, unpaid principal continued accruing interest until the replacement payment reached the Department.

Businesses using accountants or banks

The taxpayer can remain responsible for payment errors made by its agents. Assign clear ownership for validating settlement and correcting rejected transactions.

Common questions

Q: What did the CRS-NET confirmation prove?
A: It confirmed receipt of the return and electronic-check submission, not successful settlement by the bank.

Q: Why did the bank reject the payment?
A: The transmitted account number omitted one digit from Rexbrun's ten-digit account number.

Q: Who had to resubmit the payment?
A: Section 7-1-13.4 placed that responsibility on Rexbrun, not the Department or state fiscal agent.

Q: When did Rexbrun finally pay?
A: January 21, 2006, by paper check.

Q: Why was the penalty upheld?
A: The original agent error and the accountant's failure to act after discovering the uncleared payment constituted negligence.

Citations and references

Statutes:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-13 — self-reporting obligation
• NMSA 1978, § 7-1-13(E) — interest despite an extension
• NMSA 1978, § 7-1-13.4 — taxpayer must resubmit a reversed electronic payment
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-67 — mandatory interest on late-paid tax
• NMSA 1978, § 7-1-69 — negligence penalty

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: Rexbrun Corporation
• Decision PDF: D&O 06-04

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
REXBRUN CORPORATION; ID NO. 02-274842-00 3 No. 06-04
TO NOTICE OF ASSESSMENT OF PENALTY AND
INTEREST ISSUED UNDER LETTER ID L1413562880

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 8, 2006, before

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

was represented by Susanne Roubidoux, Special Assistant Attorney General. Rexbrun

Corporation (“Taxpayer”) was represented by its accountant, Laura Krawiecki. Based on the

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

FINDINGS OF FACT

1. The Taxpayer is engaged in business in New Mexico and is registered with the

Department for payment of gross receipts, compensating, and withholding taxes, which are

required to be paid monthly under the Department’s combined reporting system (“CRS”).

2. On September 26, 2004, Linda Krawiecki, the Taxpayer’s accountant, filed the

Taxpayer’s CRS return for the August 2004 reporting period. The return was filed

electronically using the Department’s CRS-NET online reporting system and payment was

made by means of an electronic check in the amount of $9,221.68.

3. Ms. Krawiecki received a confirmation from CRS-NET confirming receipt of

the Taxpayer’s return and electronic check.

4. The electronic payment information was then transmitted, without any editing

or re-keying of the information by the Department, from the CRS-NET system to Wells Fargo

Bank New Mexico, N.A., the Taxpayer’s bank.

5. On October 8, 2004, Wells Fargo notified the Department that it had rejected

the electronic payment request because the bank could not identify the account number. The

nine-digit account number listed in Wells Fargo’s rejection notice was the same as the

Taxpayer’s ten-digit account number, with the exception of one omitted number. Department

Exhibit B.

6. On October 13, 2004, after receiving notice that the bank would not honor the

Taxpayer’s electronic payment, the Department assessed the Taxpayer for the amount of CRS

taxes reported on the Taxpayer’s August 2004 CRS return, plus interest and penalty. The

following statement appeared on the face of the assessment: “Interest continues to accrue on

the unpaid principal of the tax due.”

7. On October 24, 2004, Ms. Krawiecki filed a written protest to the assessment.

8. The protest letter stated: “Attached is a copy of the Electronic Check

confirmation for the GR Tax return due under this Assessment,” and noted “Enc: 2” at the

bottom of the letter.

9. Only one enclosure was included with the protest letter, which was a print out

from the Department’s CRS-NET system summarizing the information received from the

Taxpayer for the August 2004 reporting period. Department Exhibit A.

10. The second enclosure should have been a print out of a computer screen from

the CRS-NET system asking the Taxpayer to verify the bank routing number and the account

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number for the Taxpayer’s account at Wells Fargo. The print out of this screen shows the

correct bank account number for the Taxpayer but does not have a date indicating the

reporting month to which the screen pertains. Taxpayer Exhibit 1.

11. On November 15, 2004, the Department sent Ms. Krawiecki a letter

acknowledging receipt of the Taxpayer’s protest and stating: “The issues you raise are being

reviewed and Alexis Lotero will contact you or your authorized representative if any

additional information is needed.”

12. The Department’s November 15, 2004 also advised the Taxpayer that interest

and penalty on any amount of tax determined to be due at the conclusion of the protest would

continue to accrue during the pendency of the protest.

13. Ms. Krawiecki was responsible for reconciling the Taxpayer’s bank statements

and was aware that the $9,221.68 payment of the Taxpayer’s August 2004 CRS returns had

never cleared the Taxpayer’s bank account.

14. Even with this knowledge, Ms. Krawiecki made no attempt to follow up with

the Department to determine why the October 13, 2004 assessment had been issued or to

contact the Taxpayer’s bank to determine why the tax payment for the August 2004 reporting

period had not cleared the Taxpayer’s account.

15. Because the Department’s protest office was backlogged, Alexis Lotero, the

protest officer assigned to the Taxpayer’s case, did not contact Ms. Krawiecki until January

2006. At that time, Ms. Lotero sent Ms. Krawiecki a letter explaining that the Taxpayer’s

electronic payment of CRS taxes for the August 2004 reporting period had been rejected by

the Taxpayer’s bank.

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16. On January 21, 2006, after receiving Ms. Lotero’s letter, Ms. Krawiecki sent

the Department a paper check to replace the rejected electronic check.

DISCUSSION

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

that accrued on its late payment of CRS taxes between September 27, 2004, the due date for

August 2004 CRS taxes, and January 21, 2006, the date the taxes were paid. NMSA 1978, §

7-1-17 NMSA 1978 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 penalty and interest at issue in this

case, and it is the Taxpayer’s burden to present evidence and legal arguments to support 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).

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

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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).

In this case, an error made by the Taxpayer’s accountant or the Taxpayer’s bank

caused the electronic check submitted in payment of the Taxpayer’s August 2004 CRS taxes

to be rejected. As a result, the Department did not receive the payment by the statutory due

date. Sixteen days later, on October 13, 2004, the Department sent the Taxpayer an

assessment for the taxes due. Although Ms. Krawiecki testified that she did not understand

the basis for the assessment, it should have put her on notice that something had gone wrong

with the Taxpayer’s electronic payment. This was confirmed when Ms. Krawiecki reconciled

the Taxpayer’s monthly bank statements and found that the funds intended to pay the

Taxpayer’s August 2004 CRS taxes had not been transferred to the State and were still in the

Taxpayer’s bank account.

Ms. Krawiecki believes that she fulfilled any duty the Taxpayer had to the State when

she filed a protest to the Department’s assessment. She maintains that the Taxpayer had no

obligation to follow up with its bank or with the Department to determine what happened to

the August 2004 tax payment. Ms. Krawiecki misunderstands the nature of New Mexico’s

self-reporting tax system, which 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). Once she received the Department’s assessment and

confirmed that the August 2004 payment had not cleared the bank, Ms. Krawiecki had an

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obligation to insure that those funds were properly transferred. As set out in NMSA 1978, § 7-1-

13.4, the obligation to resubmit the rejected payment was on the Taxpayer, not the Department:

When an electronic payment transaction is reversed...neither the depart-
ment nor the fiscal agent of New Mexico is obligated to resubmit the
transaction or check for payment. If the reversal or dishonoring causes
the final payment of taxes to be not timely, then the provisions of
Section 7-1-67 and 7-1-69 NMSA 1978 apply.

Section 7-1-67 requires the payment of interest whenever a tax is not paid “on or before

the day on which it becomes due.” The Department’s October 13, 2004 assessment notified the

Taxpayer that “[i]nterest continues to accrue on the unpaid principal of the tax due.” The same

notice appeared in the Department’s November 15, 2004 acknowledgment letter, which advised

the Taxpayer that “interest on any amount of tax determined to be due at the conclusion of your

protest will continue to accrue at a rate of .041% per day until such liability has been paid.”

Given these warnings, the Taxpayer has no grounds to complain about the accrual of interest

resulting from its accountant’s decision not to follow up on the Department’s assessment.

Assessment of Penalty. NMSA 1978, § 7-1-69 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 the taxpayer receives an assessment or the date the taxpayer is contacted by the

Department after filing a protest. For purposes of § 7-1-69, the term “negligence” is defined

as follows:

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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.

Based on the evidence presented, it is not clear whether the error that led to the rejection

of the Taxpayer’s electronic check was made by its accountant or by its bank. In either case, the

error was made by an agent of the Taxpayer and the Taxpayer is liable for that error. 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

by the appointment of an agent). The Taxpayer is also liable for the additional penalty that

accrued as a result of Ms. Krawiecki’s inaction in failing to follow up with the Department or

the Taxpayer’s bank once she determined that the State had not received the Taxpayer’s August

2004 tax payment. Given the facts of this case, such inaction clearly constitutes negligence.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely protest to the penalty and interest assessed under

Letter ID L1413562880, and jurisdiction lies over the parties and the subject matter of this

protest.

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

interest that accrued from the first day following the day on which its August 2004 CRS taxes

became due in September 2004 until the date the taxes were paid in January 2006.

C. Pursuant to NMSA 1978, § 7-1-69, the Taxpayer was negligent in failing to pay

its August 2004 CRS taxes in a timely manner and penalty was properly assessed.

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

DATED March 22, 2006.

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