Could taxpayers recover voluntarily paid tax because the Department's assessment deadline had expired, and avoid penalty and interest for correcting their own returns?

Plain-English summary

Phillip and Peggy Soice could not recover correctly owed tax merely because the deadline for a Department-issued assessment had expired. Their amended returns were valid self-assessments, and voluntarily correcting the error did not eliminate mandatory interest or the 10% negligence penalty.

From 1998 through 2003, Phillip Soice received wages from his wholly owned S corporation. He mistakenly believed the W-2 wages included nontaxable SIMPLE retirement-plan contributions and subtracted those contributions again on the couple's federal returns. Because New Mexico began with federal adjusted gross income, the same error reduced their state income.

Soice did not ask the CPA who prepared the W-2s whether his assumption was correct. In 2005, he discovered the contributions had not been included in wages and filed corrected federal and New Mexico returns for six years. The additional New Mexico payments were:

• 1998: $505
• 1999: $501
• 2000: $537
• 2001: $553
• 2002: $703
• 2003: $810

The IRS returned payments for older federal years because its collection period had expired. The Soices argued that New Mexico should do the same and should waive penalty and interest because they corrected the returns voluntarily.

An expired assessment period did not erase the debt

Section 7-1-18(A) limited when the Department could issue its own assessment. But Section 7-1-13(A) said tax remained due from the taxable event until payment.

The decision held that the limitation period stopped affirmative Department assessment action; it did not forgive or extinguish the underlying state debt. The New Mexico Constitution also prohibited extinguishing an obligation owed to the state except by payment or proper court proceeding.

The amended returns were valid self-assessments

Section 7-1-17(B)(1) treated a taxpayer's return showing liability as an assessment. Regulation 3.1.6.10 likewise described a filed return as an effective self-assessment.

The three-year limit applied to an assessment "made by the department," not to a taxpayer's voluntary self-assessment. Because the Soices admitted the amended income figures were correct, the payments were not erroneous overpayments and there was no factual doubt supporting compromise, abatement, or refund.

Voluntary correction did not remove interest or penalty

Section 7-1-67 made interest mandatory from the original due date until payment. The state had been deprived of $1,543 for the 1998-2000 years until July 2005, and no cited exception covered a voluntary amended return outside a managed audit.

The negligence penalty also applied. Regulation 3.1.11.10 included erroneous belief and failure to use ordinary business care. Soice changed the W-2 wages without checking with the CPA who had prepared them, which the hearing officer found negligent rather than reasonably careful.

The same analysis applied to penalty and interest for 2001 through 2003. Under Sections 7-1-19 and 7-1-30, the Department had 10 years from the July 2005 self-assessments to collect the related amounts.

The taxpayer-rights claims failed

The Soices alleged slow responses, incorrect advice, improper collection, and encouragement to file fraudulent returns. The hearing officer found that the Department's legal explanations were correct, the supposed fraudulent-return advice resulted from the CPA's misunderstanding, and the response times were reasonable given the agency's workload.

The Department ultimately read an ambiguous CPA letter liberally as a protest, including years the letter did not specifically identify. That accommodation was not a taxpayer-bill-of-rights violation. Because the Soices were not the prevailing party, they also could not receive costs under Section 7-1-29.1.

Result: protest DENIED. No refund or abatement was due, and the tax, penalty, and interest remained collectible.

What this means for you

Taxpayers discovering an old underpayment

An expired deadline for the Department to issue an assessment does not necessarily mean the underlying tax debt has disappeared. A voluntarily filed amended return can create a valid self-assessment.

Taxpayers correcting returns voluntarily

Voluntary disclosure is not, by itself, a statutory basis to erase interest or a negligence penalty. Check whether a specific program or exception applies before assuming relief.

Owners changing wage information from their own company

Verify W-2 treatment with the preparer or payroll records. Changing reported wages based on an unconfirmed assumption was negligence in this decision.

Taxpayers seeking a refund

The taxpayer must show an actual overpayment or other legal basis. A procedural bar on agency assessment did not turn correctly owed tax into an overpayment.

Common questions

Q: Why did the IRS refund some older payments while New Mexico did not?
A: The decision said the federal refund rested on a federal limitation rule, while New Mexico law treated the still-owed state tax and the taxpayer-filed amended returns differently.

Q: Did Section 7-1-18 eliminate the 1998-2000 tax?
A: No. It limited Department assessments but did not extinguish the underlying liability.

Q: Why were the amended returns effective assessments?
A: Section 7-1-17(B)(1) and Regulation 3.1.6.10 treated a taxpayer return showing liability as a self-assessment.

Q: Why was the error negligent?
A: Soice reduced the W-2 wages based on an erroneous belief without checking with the CPA who prepared the forms.

Q: Did the Department violate the taxpayer bill of rights?
A: No. The hearing officer found the information correct, response times reasonable, and collection handling accommodating rather than improper.

Citations and references

Statutes, constitutional provision, and regulations:

• NMSA 1978, § 7-1-13(A) — tax remains due until payment
• NMSA 1978, § 7-1-17(B)(1) — taxpayer return as an assessment
• NMSA 1978, § 7-1-18(A) — time limit on Department assessments
• NMSA 1978, § 7-1-19 — ten-year collection period after assessment
• NMSA 1978, § 7-1-30 — collection of related penalty and interest
• NMSA 1978, § 7-1-67 — interest on late-paid tax
• NMSA 1978, § 7-1-69(A) — negligence penalty
• NMSA 1978, § 7-1-4.2 — taxpayer bill of rights
• NMSA 1978, § 7-1-29.1 — costs for a prevailing taxpayer
• N.M. Const. art. IV, § 32 — obligations owed to the state
• Regulation 3.1.6.10 NMAC — a filed return is an effective self-assessment
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• State ex rel. Public Employees Retirement Association v. Longacre, 2002-NMSC-033, 133 N.M. 20, 59 P.3d 500
• Gutierrez v. Gutierrez, 99 N.M. 333, 657 P.2d 1182 (1983)
• State v. Montoya, 32 N.M. 314, 255 P. 634 (1927)
• Asplund v. Alarid, 29 N.M. 129, 219 P. 786 (1923)
• Board of Education v. McRae, 29 N.M. 85, 218 P. 346 (1923)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: V. Phillip and Peggy J. Soice
• Decision PDF: D&O 06-12

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTESTS OF
V. PHILLIP AND PEGGY J. SOICE
TO COLLECTION OF PENALTY AND INTEREST
FOR TAX YEARS 1998-2001; No. 06-12
TO DENIAL OF CLAIM FOR REFUND OF TAXES
PAID FOR TAX YEARS 1998-2000; and
TO DENIAL OF CLAIM FOR REFUND OF PENALTY
AND INTEREST PAID FOR TAX YEARS 2002-2003

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 27, 2006, before

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

was represented by Bruce J. Fort, Special Assistant Attorney General. Phillip and Peggy Soice

(“Taxpayers”) were represented by Phillip Soice. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers were residents of New Mexico during tax years 1998-2003.

2. During those years, Phillip Soice had wage income from an S corporation of

which he was the sole shareholder.

3. The W-2 forms the corporation issued to Mr. Soice were prepared by Rick Moore,

the corporation’s and the Soices’certified public accountant.

4. Mr. Soice erroneously believed that the wages reported on his W-2 forms included

nontaxable contributions to his Savings Incentive Match Plan for Employees (“SIMPLE”)
retirement account and subtracted the amount of those contributions from the income he reported

on his federal income tax returns for tax years 1998-2003.

5. Because New Mexico uses federal adjusted gross income as the starting point for

reporting New Mexico income, Mr. Soice’s erroneous deduction was carried over to his New

Mexico personal income tax returns for those years.

6. Mr. Soice did not check with Rick Moore, the certified public accountant who

prepared Mr. Soice’s W-2 forms, to verify whether his assumption concerning the wages

reported on those forms was correct.

7. When preparing his 2004 personal income tax returns in April 2005, Mr. Soice

was unable to reconcile the wages reported on his W-2 with his previous assumption concerning

his SIMPLE contributions and called Rick Moore to determine how the wages had been

calculated.

8. As a result of his conversation with Mr. Moore, Mr. Soice learned that the

SIMPLE contributions had not been included in the wages reported on his W-2 forms and that

the income tax returns he had filed for the previous six tax years were incorrect.

9. Mr. Soice then worked with Mr. Moore to prepare corrected federal and state

income tax returns for tax years 1998-2003.

10. On July 22, 2005, Mr. Soice sent a letter to the Department transmitting amended

New Mexico personal income tax returns and checks in the following amounts:

Tax Year 1998 $ 505
Tax Year 1999 $ 501
Tax Year 2000 $ 537
Tax Year 2001 $ 553
Tax Year 2002 $ 703
Tax Year 2003 $ 810

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Mr. Soice’s letter explained that: “Confusion with respect to the inclusion of the SIMPLE

contribution in the W-2 for those years led me to erroneously deduct it on my personal tax

forms.”

11. After receiving the Taxpayers’ amended returns, the Department mailed the

Taxpayers statements of account for penalty and interest on their late payment of personal

income taxes for tax years 1998-2003.

12. On September 28, 2006, Rick Moore sent a letter to the Department concerning

the notices for tax years 1998 and 2000; on October 26, 2005, he sent a second letter concerning

the notices for tax years 2002 and 2003.

13. In his letters, Mr. Moore stated that the Internal Revenue Service (“IRS”) had

refunded the Taxpayers’ payment of federal income taxes for tax years 1998-2001 because the

time for collecting additional federal tax had expired by the time the Taxpayers’ amended returns

were filed. Mr. Moore indicated his belief that the Taxpayers should be entitled to a refund of

state taxes on the same grounds and asked whether the rules for state taxes were different than

the rules for federal taxes. He also asked the Department to consider abating penalty and interest

since the Taxpayers amended their returns voluntarily.

14. On November 10, 2005, the Department responded to Mr. Moore’s letters,

explaining the Department’s position as follows:

Penalty and interest are assessed on tax that is due as described in Section
7-1-67 and Section 7-1-69 NMSA 1978. The Department does not have
the authority, based on the circumstances described in your letter, to abate
any of the penalty and interest charges you were assessed.

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In response to Mr. Moore’s inquiry concerning differences between federal and state statutes

governing refunds of tax based on a statute of limitations, the Department enclosed copies of

NMSA 1978, § 7-1-18, which sets out the time limitations on the Department’s ability to assess

taxes, and NMSA 1978, § 7-1-26, which sets out the requirements for claims for refund.

15. In December 2005, the Taxpayers filed a claim for refund of the additional

personal income taxes they paid for tax years 1998-2001. As grounds for the refund, the

Taxpayers asserted that those taxes were not due at the time they filed their amended returns in

July 2005 because the statute of limitations for the Department to assess those taxes had expired.

16. In January 2006, Rick Moore had a telephone conversation with Roberta

DeHerrera, a supervisor in the Department’s income tax unit, which receives an average of 2,500

taxpayer calls per week.

17. Mr. Moore informed Ms. DeHerrera that the IRS had refunded the Taxpayers’

additional income tax payments for 1998-2001. Ms. DeHerrera then advised Mr. Moore that if

the IRS had adjusted the Taxpayers’ returns, they could amend their New Mexico returns a

second time to reflect this adjustment.

18. Ms. DeHerrera later reviewed the Taxpayers’ correspondence with the IRS and

determined that no refund of New Mexico taxes was due because the federal refund was based on

a federal statute of limitations and not on any adjustment to the income reported on the

Taxpayers’ amended returns.

19. Rick Moore misinterpreted Ms. DeHerrera’s advice and did not understand that

the Taxpayers could not refile personal income tax returns using their original income figures

unless the IRS had adjusted the Taxpayers’ amended returns back to those original figures.

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20. As a result of this misunderstanding, Mr. Moore advised the Taxpayers that they

could obtain a refund of 1998-2001 New Mexico taxes by filing new amended returns that

restated the erroneous figures reported on their original returns. The Taxpayers correctly

concluded that filing such returns would be fraudulent and declined to do so.

21. Mr. Soice subsequently called Ms. DeHerrera to discuss the matter, at which time

she referred him to her supervisor, Gale Kessler.

22. Ms. Kessler spoke with Mr. Soice in late January and again in early February

2006, after which she reviewed the Taxpayers’ filing history and the other documents relating to

the Taxpayers’ amended returns for tax years 1998-2003.

23. On March 1, 2006, Ms. Kessler sent the Taxpayers a detailed, three-page letter

denying their claim for refund of taxes paid for 1998-2001. Ms. Kessler explained that because

the Taxpayers voluntarily paid the taxes at issue based on their own self-assessment, and not on

any action or assessment by the Department, the statute of limitations set out in NMSA 1978, §

7-1-18 did not apply.

24. Ms. Kessler further explained that in the absence of evidence that the income

taxes paid were not, in fact, due to the state, there was no basis for the cabinet secretary or

anyone else in the Department to refund those taxes.

25. Finally, Ms. Kessler’s March 1, 2006 letter set out the legal basis for the

Department’s position that the Taxpayers were liable for penalty and interest on their late

payment of personal income taxes.

26. On March 15, 2006, the Taxpayers filed a written protest to the denial of their

claim for refund of additional personal income taxes paid for tax years 1998-2001.

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27. Up until March 2006, the Department had not interpreted Rick Moore’s letters of

inquiry concerning the statements of account sent to the Taxpayers as a formal protest under

NMSA 1978, § 7-1-24.

28. Because the Taxpayers’ account was not considered to be in protest, the

Department began to take collection action against the Taxpayers, prompting them to pay the

$541.59 of penalty and interest assessed for tax years 2002 and 2003.

29. On January 12, 2006, the Taxpayers mailed their payment, together with a letter

stating that the payment was being made “despite our continued protest (see letters of September

28, 2005 from Rick Moore, CPA and December 13, 2005 from V. Phillip Soice) of the

assessment of penalty and interest.”

30. The Department’s protest office subsequently reviewed the Taxpayers’ file and,

on March 3, 2006, notified them that the Department would accept Rick Moore’s September 28,

2005 letter as a protest of the penalty and interest associated with the amended returns the

Taxpayers filed in July 2005. Although Mr. Moore’s September 28, 2005 letter only referenced

notices for tax years 1998 and 2000, the Department accepted his letter as a formal protest to the

penalty and interest related to tax years 1998-2001.

31. Because the Taxpayers had already paid the penalty and interest assessed for tax

years 2002 and 2003, the protest office advised them to file a claim for refund for those years.

32. On March 14, 2006, the Taxpayers filed a claim for refund of the penalty and

interest paid for tax years 2002 and 2003.

33. Also on March 14, 2006, the Taxpayers wrote a letter to the Department’s protest

office asking for a response to eight questions.

6

34. An auditor from the Department’s protest office and one of the Department’s

attorneys subsequently met with the Taxpayers for an informal conference. During this meeting,

the Department responded to all of the Taxpayers’ inquiries, except for their request that the

Department provide copies of New Mexico court cases concerning the meaning of the word

“shall” and the term “mistake of law.”

35. On April 25, 2006, the Department denied the Taxpayers’ claim for refund of the

penalty and interest they had paid for tax years 2002 and 2003.

36. On April 30, 2006, the Taxpayer filed a protest to the Department’s denial of their

claim for refund.

37. At the administrative hearing held on July 27, 2006, the Taxpayers withdrew their

protest to the denial of their claim for refund of additional tax principal paid for the 2001 tax year.

The Taxpayers conceded that pursuant to the provisions of NMSA 1978, § 7-1-18(A), the

Department had until December 31, 2005 to assess taxes due for that year and the 2001 personal

income taxes they paid in July 2005 were still within this limitations period.

ISSUES PRESENTED

Issue I. Whether the Taxpayers are entitled to a refund of the personal income taxes they

voluntarily reported and paid for tax years 1998-2000 based on their argument that, at the time their

amended returns were filed in July 2005, the limitations period set out in NMSA 1978, § 7-1-18(A)

would have prevented the Department from assessing the Taxpayers for those tax years.

Issue II. If they are not entitled to a refund of additional taxes paid for the 1998-2000 tax

years, whether the Taxpayers are entitled to an abatement of penalty and interest on those taxes

based on their arguments that: (a) the time for the Department to assess taxes for those years had

7
expired, and (b) penalty and interest should not be charged when the Taxpayers voluntarily reported

and paid the additional taxes due without prompting from the Department.

Issue III. Whether the Taxpayers are entitled to an abatement of the penalty and interest

assessed on their late payment of 2001 taxes, as well as a refund of the penalty and interest paid on

their late payment of 2002 and 2003 personal income taxes, based on the fact that the Taxpayers

voluntarily reported and paid the additional taxes without prompting from the Department.

Issue IV. Whether the actions (or inaction) of Department employees violated the taxpayer

bill of rights set out in NMSA 1978, § 7-1-4.2 and, if so, whether this entitles the Taxpayers to an

award of costs and fees under NMSA 1978 § 7-1-29.1.

DISCUSSION

Issue I. Refund of Taxes Paid for 1998-2000 Tax Years. A. Personal income taxes for

the 1998-2000 tax years were still due and owing to the state in July 2005. The Taxpayers

maintain that at the time they filed their amended returns in July 2005, no taxes were due for the

1998-2000 tax years because the Department could no longer assess taxes for those years. In

support of their argument, the Taxpayers cite to NMSA 1978, § 7-1-18(A) which states as follows:

A. Except as otherwise provided in this section, no assessment of tax may be made
by the department after three years from the end of the calendar year in which
payment of the tax was due, and no proceeding in court for the collection of such tax
without the prior assessment thereof shall be begun after the expiration of such
period.

There is no dispute that when the Taxpayers filed their amended tax returns, the Department could

not have issued its own assessment for tax years 1998-2000. This does not mean, however, that

those taxes were no longer due to the State of New Mexico. NMSA 1978, § 7-1-13(A) provides:

8
A. Taxpayers are liable for tax at the time of and after the transaction or incident
giving rise to tax until payment is made. Taxes are due on and after the date on
which their payment is required until payment is made.

Personal income taxes are due on April 15 of the year following the close of each taxable year. See,

NMSA 1978, § 7-2-12(A). Pursuant to § 7-1-13(A), those taxes continue to be due “until payment

is made.” Nothing in § 7-1-18 indicates that the expiration of the period within which the

Department may assess taxes for a particular year serves to forgive or extinguish those taxes. In

fact, it would be beyond the legislature’s authority to enact such a provision.

Article IV, Section 32 of the New Mexico Constitution states: “No obligation or liability

of any person...owing to the state...shall ever be exchanged, transferred, remitted, released,

postponed or in any way diminished by the legislature, nor shall any such obligation or liability

be extinguished except by the payment thereof into the proper treasury, or by proper proceeding

in court.” In interpreting this provision, the New Mexico Supreme Court has consistently held

that while the legislature may limit the time within which an agency may take affirmative action

to collect money due to the state, the legislature does not have the power to release or extinguish

the underlying debt. See, State ex rel. Public Employees Retirement Association v. Longacre,

2002-NMSC-033, 133 N.M. 20, 59 P.3d 500; Gutierrez v. Gutierrez, 99 N.M. 333, 657 P.2d

1182 (1983); State v. Montoya, 32 N.M. 314, 255 P. 634 (1927); Asplund v. Alarid, 29 N.M. 129,

219 P. 786 (1923); Board. of Education v. McRae, 29 N.M. 85, 88, 218 P. 346, 347 (1923). In

this case, the fact that the Department could not assess taxes for the 1998-2000 tax years did not

extinguish the Taxpayers’ liability for those taxes, which were still due and owing to the state at

the time the Taxpayers filed their amended returns in July 2005.

9
B. The Taxpayers’ amended returns were valid assessments. NMSA 1978, § 7-1-

17(B) states that assessments of tax are effective:

(1) when a return of a taxpayer is received by the department showing a
liability for taxes;

(2) when a document denominated “notice of assessment of taxes,” issued
in the name of the secretary, is mailed or delivered in person to the
taxpayer against whom the liability for tax is asserted...; or

(3) when an effective jeopardy assessment is made as provided in the Tax
Administration Act.

Regulation 3.1.6.10 NMAC further explains that when a tax return is submitted by a taxpayer

and received by the Department, “this self-assessment constitutes an effective assessment under

Section 7-1-17 NMSA 1978.” Turning to § 7-1-18, subsection A states that “no assessment of

tax may be made by the department after three years from the end of the calendar year in which

payment of the tax was due....” (emphasis added). The statute does not limit a taxpayer’s right

to voluntarily self-assess and pay his or her outstanding tax liability to the state, which is what

the Taxpayers did in this case. The amended personal income tax returns the Taxpayers filed in

July 2005 constituted valid assessments of tax under § 7-1-17(B)(1) and the Department’s

regulations.

C. The Department does not have the authority to refund taxes without a good faith

doubt that the taxes are due or evidence that the payment of tax was erroneous. The

Taxpayers insist that NMSA 1978, §§ 7-120 and 7-1-29 give the Department (or its secretary) the

authority to grant the Taxpayers’ refund claim. The Taxpayers are mistaken. Section 7-1-20

allows the Department’s secretary, with the written approval of the attorney general, to

compromise a taxpayer’s asserted liability for taxes when the secretary “in good faith is in doubt

10
of the liability for the payment thereof.” Section 7-1-29(A) gives the secretary or her delegate the

authority to refund “any overpayment of tax determined...to have been erroneously made.”

Section 7-1-29(F) also allows the Department to issue a refund of “an overpayment of tax.” In

this case, however, there is no doubt that the Taxpayers owed the taxes they reported on their

amended income tax returns. In his letter transmitting those returns to the Department, Mr. Soice

acknowledged that “confusion with respect to the inclusion of the SIMPLE contribution in the

W-2 for those years led me to erroneously deduct it on my personal tax forms.” Mr. Soice

confirmed this statement under oath at the administrative hearing. Based on this evidence, there

was no overpayment of the Taxpayers’ 1998-2000 personal income taxes, and no refund is due.

Issue II. Abatement of Penalty and Interest for the 1998-2000 Tax Years. The

Taxpayers maintain that they are entitled to an abatement of penalty and interest on their late

payment of 1998-2000 taxes because the time for the Department to assess tax for those years

had expired and because penalty and interest should not be charged when the Taxpayers

voluntarily reported and paid the additional taxes due without prompting from the Department.

A. Based on the Taxpayers’ self-assessment of 1998-2000 taxes, the Department has

ten years to collect the penalty and interest associated with those taxes. As discussed under

Issue I, above, the amended personal income tax returns the Taxpayers filed in July 2005

constituted valid assessments of tax under § 7-1-17(B)(1). Once a tax has been assessed, NMSA

1978, § 7-1-30 authorizes the Department to collect the penalty and interest associated with that

tax without the need for a further assessment, stating:

Any amount of civil penalty and interest may be collected in the same manner as,
and concurrently with, the amount of tax to which it relates, without assessment or
separate proceedings of any kind.

11
Because the Department’s collection of penalty and interest for the 1998-2000 tax years was

based on the Taxpayers’ own self-assessments, and not on assessments issued by the Department,

the limitations period set out in § 7-1-18(A) does not apply. Pursuant to NMSA 1978, § 7-1-19,

the Department has ten years from the date of an assessment to collect taxes due to the state.

Although the Taxpayers argue that the limitations period set out in § 7-1-19 should not apply to

the type of assessments defined in § 7-1-17(B)(1), they have not provided any legal authority to

support their position.

B. A taxpayer’s voluntary payment of tax is not a basis for abating penalty and

interest. (1) 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 assessment of interest is 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). While subsections

(A)(1) through (A)(7) of § 7-1-67 set out some exceptions to the general rule, none of those

exceptions include a waiver of interest on taxes voluntarily paid by a taxpayer, except in cases

where the taxpayer has entered into a managed audit agreement with the Department. There is no

contention that the Taxpayers paid their overdue personal income taxes pursuant to a managed

audit agreement.

12
The assessment of interest is intended to compensate the state for the time value of

unpaid revenues. In this case, the Taxpayers underreported their taxable income for the 1998-

2000 tax years. If they had completed their returns correctly, the State of New Mexico would

have received an additional $1,543 between April 1999 and April 2001. As a result of the

Taxpayers’ error, these funds were not made available to the state until July 2005, and interest

was properly imposed. Although the Taxpayers question whether the statutory interest rate

accurately reflects the time value of money, that is a matter of opinion. The state’s interest rate is

higher than the prime rate, but lower than the rate charged by many credit card companies. In the

end, it is up to the legislature to set the interest rate to be assessed on the late payment of taxes

due to the State of New Mexico. Pursuant to NMSA 1978, § 7-1-67(B), that rate is 15 percent

per year.

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

to pay taxes as a result of negligence or disregard of rules and regulations, a penalty “shall be

added” to the amount of the underpayment. The term “negligence” as used in § 7-1-69(A) 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, Mr. Soice made an erroneous assumption that led him to change the wage income

reported on his W-2 form. This erroneous belief resulted in the underpayment of personal income

taxes due to the state. Mr. Soice decided to change his W-2 without consulting the certified public

13
accountant who had prepared the form on behalf of Mr. Soice’s wholly-owned S corporation. This

decision does not demonstrate the degree of ordinary business care and prudence which a

reasonable taxpayer would be expected to exercise. The errors that led to the Taxpayers’

underpayment of 1998-2000 personal income taxes meet the definition of negligence set out in

Department regulations and in New Mexico case law. See, El Centro Villa Nursing Center v.

Taxation & Revenue Department, 108 N.M. 795, 797, 779 P.2d 982, 984 (Ct. App. 1989) (§ 7-1-69

is designed specifically to penalize unintentional failure to pay tax.). For this reason, penalty was

properly imposed and there is no legal basis for an abatement.

Issue III. Abatement of Penalty and Interest for the 2001-2003 Tax Years. This

issue concerns the Taxpayers’ protest to the Department’s notices of penalty and interest on their

late payment of 2001 taxes, and their protest to the Department’s denial of their claim for refund of

the penalty and interest they paid for tax years 2002 and 2003. These protests raise the same

arguments previously addressed under Issue II, above, and no further discussion is necessary.

Issue IV. Allegations Concerning Violations of Taxpayer Bill of Rights. The

Taxpayers maintain that the Department violated the taxpayer bill of rights set out in NMSA

1978, § 7-1-4.2, and that this entitles them to an award of costs under NMSA 1978, § 7-1-29.1.

They argue that the Department did not respond to their inquiries quickly enough, gave them

incorrect advice, and took unwarranted collection action against them. In particular, the

Taxpayers allege that the Department employed deceptive wording in its letters and encouraged

the Taxpayers to file fraudulent tax returns. These allegations are unfounded.

A. The Information Provided to the Taxpayers was Correct. On September 28 and

October 26, 2005, Rick Moore wrote to the Department asking that penalty and interest on the

14
Taxpayers’ late payment of personal income taxes be abated. On November 10, 2005, the

Department responded to Mr. Moore’s letters, explaining that “the Department does not have the

authority, based on the circumstances described in your letter, to abate any of the penalty and

interest charges you were assessed.” At the administrative hearing, Mr. Soice maintained that the

Department worded its letter in a deceptive manner. He argued that while “the Department” may

not have the authority to abate penalty and interest, the secretary of the Department does have such

authority under NMSA 1978, §§ 7-1-20 and 7-1-28.

As previously discussed under Issue I, § 7-1-20 allows the secretary to enter into a

compromise agreement when there is a good faith doubt as to a tax liability, while § 7-1-29

authorizes refunds when there is evidence that a tax has been overpaid. Similarly, § 7-1-28

authorizes the abatement of an assessment that was “incorrectly, erroneously or illegally made.” In

this case, the Taxpayers acknowledge that the amended returns they filed in July 2005 corrected

errors made on their original returns. They also acknowledge that the income reported on their

amended returns was accurate. That being the case, there is no legal basis for the Department—or

its secretary—to compromise, refund or abate the taxes, penalty and interest related to those returns.

The information provided to the Taxpayers in the Department’s November 10, 2005 letter was

correct and did not violate the taxpayer bill of rights.

The Taxpayers’ allegation that the Department instructed them to file fraudulent returns is

based on a miscommunication between Roberta DeHerrera, a supervisor in the Department’s

income tax unit, and Rick Moore, the Taxpayer’s accountant. Ms. DeHerrera testified that when

she spoke to Mr. Moore in January 2006, she advised him that if the IRS had adjusted the

Taxpayers’ returns, they could amend their New Mexico returns a second time to reflect this

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adjustment. Ms. DeHerrera later reviewed the Taxpayers’ correspondence with the IRS and

determined that no refund of New Mexico taxes was due because the federal refund was based on

a federal statute of limitations and not on any adjustment to the income reported on the

Taxpayers’ returns.

Unfortunately, Mr. Moore misinterpreted Ms. DeHerrera’s advice and told the Taxpayers

they could obtain a refund of 1998-2001 taxes by filing new amended returns that restated the

erroneous figures reported on their original returns. The Taxpayers correctly concluded that

filing such returns would be fraudulent and declined to do so. At this point, there is no way to

determine what caused the miscommunication between Mr. Moore and Ms. DeHerrera because

Mr. Moore was not present to testify at the administrative hearing. Based on Ms. DeHerrera’s

testimony, which I find to be credible, the advice she gave Mr. Moore was correct.

B. The Department Responded to the Taxpayers’ Inquiries Within a Reasonable

Time Period. The Taxpayers contend that the Department failed to respond to their inquiries in

a timely manner. This complaint must be viewed in context. More than 750,000 personal

income tax returns are filed with the Department each year (plus amended returns filed for prior

years). Ms. DeHerrera testified that the income tax unit receives an average of 2,500 telephone

calls per week, or 10,000 calls per month. Given this volume, the Department responded to the

Taxpayers inquiries within a reasonable period of time. The Department responded to Mr.

Moore’s September 28 and October 26, 2005 letters on November 10, 2005—six weeks after the

date of the first letter and two weeks after the date of the second letter. Gale Kessler responded

to Mr. Soice’s telephone inquiries within 30 days of her conversations with him in late January

and early February 2006.

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The three-page letter Ms. Kessler wrote to the Taxpayers on March 1, 2006 contained a

comprehensive analysis of their case and laid out the Department’s position in some detail,

including copies of pertinent tax statutes. The Taxpayers believe this information should have

been provided to them immediately upon the Department’s receipt of Mr. Moore’s letters in

September and October of 2005. They also complain that the Department failed to respond to

their request for copies of New Mexico court cases concerning the meaning of the word “shall”

and the term “mistake of law.” The Taxpayers have an unrealistic view of the Department’s

resources and responsibilities. Section 7-1-4.2(F) entitles taxpayers to “an explanation of the

results of and the basis for audits, assessments or denials of refunds.” This does not mean that

every taxpayer is entitled to a detailed written analysis of his tax liability or to have the

Department engage in legal research on his behalf. A taxpayer who believes that his situation

merits this level of examination must engage the services of a tax advisor to assist him. See, § 7-

1-4.2(B) (taxpayers have “the right to be represented or advised by counsel or other qualified

representatives at any time in administrative interactions with the department”). In this case, Ms.

Kessler’s March 1, 2006 letter not only met, but clearly exceeded, the Department’s

responsibilities under the taxpayer bill of rights.

On the issue of collections, the delay in the Department’s acknowledgment of the

Taxpayers’ protest of penalty and interest can be traced to the ambiguous nature of Mr. Moore’s

September 28, 2006 letter. Although Mr. Soice characterized Mr. Moore’s letter as a “protest” in

his January 2006 correspondence with Secretary Goodwin, the letter itself appears to be in the

nature of a request for information, not a formal protest of the Department’s action. The

Department reasonably could have refused to accept the September 28, 2005 letter as a timely

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protest and required the Taxpayers to pay all of the penalty and interest associated with their July

2005 returns and file a claim for refund. Instead, the Department agreed to reconsider Mr.

Moore’s letter and ultimately gave it a liberal interpretation, even going so far as to accept it as a

protest of tax years not specifically referred to in the letter itself. The Department’s attempt to

accommodate the Taxpayers does not constitute a violation of the taxpayer bill of rights.

C. An Award of Costs to the Taxpayers is not Warranted in this Case. Even if a

violation of the taxpayer bill of rights had occurred, § 7-1-4.2 is silent as to any remedy. At the

administrative hearing, Mr. Soice suggested that an appropriate form of relief would be an award

of costs and fees to the Taxpayers under NMSA 1978, § 7-1-29.1. That statute provides for an

award of reasonable costs incurred in connection with an administrative proceeding if the

taxpayer is the prevailing party. In this case, the Taxpayers are not the prevailing party.

Accordingly, the issue of costs is moot.

CONCLUSIONS OF LAW

A. The Taxpayers filed timely protests to the Department’s statements of account for

penalty and interest and the Department’s denial of the Taxpayers’ claims for refund, and

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

B. The expiration of the limitations period set out in NMSA 1978, § 7-1-18 does not

extinguish a liability for outstanding taxes, and the Taxpayers’ personal income taxes for the 1998-

2000 tax years were still due and owing to the state in July 2005.

C. The amended personal income tax returns the Taxpayers filed in July 2005

constituted valid assessments of tax under NMSA 1978, § 7-1-17(B)(1).

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D. The Taxpayer’s error in completing their 1998-2003 income tax returns resulted in

the late payment of New Mexico tax, and interest is due on the amount of the late payment.

E. The Taxpayers’ error in completing their 1998-2003 income tax returns was

negligent, and the ten percent negligence penalty is due on the amount of the underreported tax.

F. Pursuant to NMSA 1978, §§ 7-1-19 and 7-1-30, the Department has ten years

from the date the Taxpayers’ amended returns were filed in July 2005 to collect the penalty and

interest associated with those returns.

G. Because the taxes reported on the Taxpayers’ amended returns correctly stated

their liability to the state, there is no legal basis for the Department (or its secretary) to

compromise, refund or abate the additional taxes paid by the Taxpayers or the penalty and interest

associated with those taxes.

H. The Department did not violate the taxpayer bill of rights.

I. The Taxpayers are not entitled to an award of costs or fees.

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

DATED August 10, 2006.

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