Could interest on tax from a joint return be waived because the couple divorced, the Department gave incorrect refund information, and payment caused hardship?

Plain-English summary

Penny Mitchell could not obtain a waiver of interest on $672 of additional personal income tax from a joint 2001 return. She and her former husband remained jointly and severally liable for interest from the original due date until the tax was fully paid.

The Mitchells filed joint federal and New Mexico returns. In 2003, the IRS notified them that they had underreported their 2001 income and assessed additional federal tax. They did not seek advice about the state consequences and did not amend their New Mexico return.

After receiving the IRS information, the Department assessed $672.00 of additional state tax and $336.41 of interest in August 2005. By then, the Mitchells had separated and later divorced. Penny Mitchell began paying $50 per month, with her former husband contributing $25 toward each monthly payment.

A federal adjustment required a state amendment

Section 7-1-13(C) imposed an affirmative duty to file an amended New Mexico return within 90 days after an adjustment to the federal return. The Mitchells did not do that.

The Department issued its August 2005 assessment within the statutory period described in Section 7-1-18(A) for tax originally due April 15, 2002.

Interest was mandatory until payment

Section 7-1-67 required interest from the first day after tax became due until payment, regardless of an extension or installment agreement. Interest compensated the state for the time value of unpaid revenue and did not depend on negligence or fraud.

Mitchell had been told that her former husband's refund would be applied to the assessment. It was not; the refund was paid to him. Because he rather than the state had the use of the money, the incorrect information did not stop interest on the unpaid tax.

Their divorce and Mitchell's lack of benefit from her former husband's refund did not change the continuing liability created by errors on the joint return.

Hardship did not authorize a waiver

Mitchell asked the Department to consider that she was a single mother and student and that payment would cause financial hardship. Regulation 3.1.6.14 NMAC stated that the Secretary could not compromise liability because a taxpayer could not pay.

The hearing officer concluded that neither the Department nor the hearing officer had authority to alter the Legislature's interest requirement based on an individual taxpayer's personal or financial circumstances.

Result: protest DENIED. Interest continued on the $672 joint tax liability from April 15, 2002, until final payment.

What this means for you

Taxpayers whose federal return is adjusted

Check the state filing obligation promptly. In this decision, a federal adjustment triggered a duty to amend the New Mexico return within 90 days.

Former spouses with joint-return debt

Divorce did not remove joint and several liability arising from the couple's joint state return. The hearing officer treated both former spouses as responsible for interest until payment.

Taxpayers making installment payments

An installment arrangement does not stop statutory interest. Interest continues while tax principal remains unpaid.

Taxpayers facing hardship

The Department could not reduce the liability solely because payment was difficult. The governing regulation expressly barred compromise based on inability to pay.

Common questions

Q: Why did the Mitchells owe additional New Mexico tax?
A: The IRS found that they had underreported 2001 income, and they did not amend their New Mexico return after that federal adjustment.

Q: Did their divorce end Penny Mitchell's liability?
A: No. The decision held that the former spouses remained jointly and severally liable for interest on tax from their joint return.

Q: Why did the former husband's expected refund not stop interest?
A: The refund was paid to him instead of applied to the debt, so the state never received those funds.

Q: Could the hearing officer waive interest because Mitchell was a single mother and student?
A: No. The decision said the Department lacked authority to reduce interest based on personal or financial hardship.

Q: When did interest run?
A: From April 15, 2002, the original due date, until the additional tax was finally paid.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-13(B) — taxpayer's self-reporting obligation
• NMSA 1978, § 7-1-13(C) — amended state return after a federal adjustment
• NMSA 1978, § 7-1-18(A) — assessment limitation period
• NMSA 1978, § 7-1-67 — mandatory interest on late-paid tax
• NMSA 1978, § 12-2A-4(A) — "shall" expresses a duty
• Regulation 3.1.6.14 NMAC — no compromise based on inability to pay

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• Redman v. Board of Regents, 102 N.M. 234, 693 P.2d 1266 (Ct. App. 1984)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Penny Mitchell
• Decision PDF: D&O 06-20

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
PENNY MITCHELL TO ASSESSMENT No. 06-20
ISSUED TO ROB AND PENNY MITCHELL
UNDER LETTER ID 2088973824

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on November 29, 2006,

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

(“Department”) was represented by Peter Breen, Special Assistant Attorney General. Penny

Mitchell, the taxpayer who filed the protest, represented herself. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 2002, Rob and Penny Mitchell filed joint federal and state personal income

tax returns for the 2001 tax year.

2. In 2003, the Internal Revenue Service (“IRS”) notified the Mitchells that they

had underreported their 2001 income and assessed them for additional federal income tax.

3. The Mitchells did not consult with a tax professional or call the Department to

determine whether they were liable for additional state tax as a result of the IRS adjustment,

and did not file an amended New Mexico income tax return for 2001.

4. In August 2005, after receiving information from the IRS concerning the

adjustment to the Mitchells’ federal return, the Department assessed the Mitchells for

$672.00 of additional 2001 state income tax, plus interest of $336.41.

5. Penny Mitchell received the Department’s assessment and filed a written

protest to the assessment of interest, which was acknowledged by the Department on August

30, 2005.

6. The Mitchells had separated prior to the date of the Department’s assessment

and subsequently divorced.

7. Ms. Mitchell began to make payments of $50 per month against the tax

principal due, with Mr. Mitchell contributing $25 toward this monthly payment.

8. At some point, Ms. Mitchell called the Department to ask for the current

balance on the assessment and was told that the Department planned to apply her former

husband’s tax refund against the liability, which would have satisfied the amount of

outstanding tax principal.

9. Ms. Mitchell later discovered that the refund had not been applied, but had

been paid to Mr. Mitchell.

DISCUSSION

The issue to be decided is whether Penny Mitchell is liable for the interest assessed on

the $672.00 of additional 2001 personal income tax due as a result of errors on the joint

income tax return she filed with her former husband. Ms. Mitchell does not dispute her legal

liability for the assessment, but asks for a waiver of interest because it will create a financial

hardship for her and because the Department gave her erroneous information concerning

application of her former husband’s tax refund to the couple’s liability.

New Mexico has a self-reporting tax system, and it is the obligation of taxpayers to

determine their tax liabilities and accurately report those liabilities to the state. See, NMSA

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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). When

adjustments are made to a taxpayer’s federal tax return, NMSA 1978, § 7-1-13(C) imposes an

affirmative duty on the taxpayer to file an amended New Mexico return within ninety days

from the date of the adjustment. The Mitchells failed to comply with this statutory

requirement. The Department did not discover the Mitchells’ error until 2005, when it

received information under its information sharing agreement with the IRS. Pursuant to

NMSA 1978, § 7-1-18(A), the Department had until December 31, 2005 to issue an

assessment for income taxes due on April 15, 2002. The August 2005 assessment issued to

the Mitchells was within this statutory time limit.

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. Redman v. Board of Regents, 102 N.M. 234, 238, 693 P.2d 1266,

1270 (Ct.App. 1984); see also, NMSA 1978, § 12-2A-4(A). Unlike penalty, interest is not

based on a finding that the taxpayer acted negligently or fraudulently, but is simply designed to

compensate the state for the time value of unpaid revenues. Ms. Mitchell believes that interest

should be waived for the period after she was advised that Mr. Mitchell’s tax refund would be

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applied to the balance of the assessment. Mr. Mitchell subsequently received his refund,

however, and he, rather than the state, has had the use of those funds. The fact that the couple

is now divorced and Ms. Mitchell did not share in the benefit of her former husband’s refund

does not affect her continuing liability for interest on tax still due to the state as a result of

errors on the Mitchells’ joint 2001 income tax return.

Ms. Mitchell also asks the Department to take into consideration the fact that she is a

single mother and a student and that payment of the interest will impose a financial hardship.

Unfortunately, this is not something the Department can consider. Department Regulation

3.1.6.14 NMAC specifically states that the Secretary “may not compromise a taxpayer’s

liability because of the taxpayer’s inability to pay.” In addition, the New Mexico Supreme

Court has held that “the Legislature, not the administrative agency, declares the policy and

establishes primary standards to which the agency must conform,” and that an administrative

agency’s discretion does not justify “altering, modifying or extending the reach of a law

created by the Legislature.” State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961

P.2d 768, 774-775. 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

and has not granted the Department or its Hearing Officer the authority to abate or adjust tax

assessments based on the financial or personal situations of individual taxpayers.

CONCLUSIONS OF LAW

A. Penny Mitchell filed a timely, written protest to the assessment issued under

Letter ID 2088973824, and jurisdiction lies over the parties and the subject matter of this

protest.

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B. The Mitchells underreported $672.00 of their joint 2001 New Mexico income

tax liability, and they are jointly and severally liable for the interest that accrues on this amount

from April 15, 2002, the original due date of the tax, until final payment is made.

C. The Department does not have the authority to waive or reduce the amount of

interest due based on Ms. Mitchell’s personal or financial circumstances.

For the foregoing reasons, Penny Mitchell’s protest IS DENIED.

DATED December 4, 2006.

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