Did New Mexico penalty and interest on tax caused by an IRS adjustment begin only when the Department later notified the taxpayers?

Plain-English summary

Justo and Jessie Cordova owed penalty and interest from the original due date of their 1999 New Mexico personal income tax, not from the date the Department later notified them of an IRS adjustment. Their protest of $357.84 interest and a $70.90 penalty was denied.

The Cordovas timely filed federal and New Mexico returns. The IRS later disallowed some federal itemized deductions, creating an additional federal liability and $709 of additional New Mexico tax.

The Cordovas did not recall receiving the IRS notice and did not amend their state return. New Mexico did not receive the federal adjustment information until 2003 and assessed the additional tax, penalty, and interest on August 29, 2003.

Interest ran from the original due date

Section 7-1-67 imposed interest from the first day after tax was due until payment. The decision held that actual notice of the underpayment was not the starting point.

Although the reporting error was unintentional, the Cordovas retained the use of $709 legally due to the state. Interest therefore began April 16, 2000, the day after the original payment deadline.

Penalty also began at the due date

Section 7-1-69 imposed a 2% monthly negligence penalty from the tax due date, up to the former 10% maximum. The penalty reached that maximum in August 2000, long before the Department's assessment.

The Cordovas did not know why the IRS disallowed the deductions, did not pursue the issue with the IRS, and produced no evidence that they discussed the deductions with their tax preparer, whom Mr. Cordova described as inexperienced. Simply assuming the returns were correct met the regulation's definition of negligence.

The Department's later assessment was timely

New Mexico's self-reporting system placed responsibility on taxpayers to determine and report their liabilities. The Department could not detect the federal itemized-deduction error from the face of the state return and did not receive the IRS tape-match information until 2003.

The August 2003 assessment was within Section 7-1-18's three-year period measured from the end of the calendar year in which the tax was due. Issuing the assessment later within that period did not abate interest.

Result: protest DENIED. The $357.84 interest and $70.90 penalty stood.

What this means for you

Taxpayers whose federal return changes

Determine promptly whether the federal change affects the New Mexico return. Waiting for a state matching notice can allow interest to run from the original due date.

Taxpayers using a preparer

Review material positions and preserve the advice received. Unexplained reliance on an inexperienced preparer did not establish nonnegligence.

Taxpayers receiving a delayed state assessment

The notice date does not ordinarily reset interest or penalty. If the assessment is timely under the limitation period, statutory additions can still run from the original due date.

Common questions

Q: What caused the additional New Mexico tax?
A: The IRS disallowed federal itemized deductions, which increased the Cordovas' state income tax liability.

Q: When did interest begin?
A: April 16, 2000, the first day after the original 1999 tax payment deadline.

Q: Why did the penalty apply?
A: The Cordovas did not investigate the disallowed deductions or show informed reliance on their preparer; they simply assumed the returns were correct.

Q: When did the penalty stop increasing?
A: In August 2000, when it reached the former 10% maximum.

Q: Was the 2003 assessment too late?
A: No. It was issued within the cited three-year assessment period.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-67 — interest from the original due date
• NMSA 1978, § 7-1-69(A) — negligence penalty from the original due date
• NMSA 1978, § 7-1-13(B) — self-reporting responsibility
• NMSA 1978, § 7-1-18 — assessment limitation period
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• 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: Justo & Jessie Cordova
• Decision PDF: D&O 07-20

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 JUSTO F. AND JESSIE P. CORDOVA No. 07-20
TO ASSESSMENT OF PENALTY AND
INTEREST ISSUED UNDER LETTER
ID NO. L1252667392

DECISION AND ORDER

An administrative hearing on the above-referenced protest was held on November 7,

2007, before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

(“Department”) was represented by Jeffrey W. Loubet, Special Assistant Attorney General. Justo

and Jessie Cordova (“Taxpayers”) represented themselves. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers filed timely federal and New Mexico personal income tax returns

for the 1999 tax year.

2. The Internal Revenue Service (“IRS”) subsequently disallowed some of the

itemized deductions the Taxpayers claimed on their federal return, resulting in an additional

income tax liability for the 1999 tax year.

3. The Taxpayers do not recall receiving a notice from the IRS concerning the

adjustment to their federal return and did not amend their 1999 New Mexico personal income tax

return to report the additional state tax liability resulting from the IRS adjustment.

4. New Mexico’s personal income tax form uses federal adjusted gross income as the

starting point for reporting state tax and does not require disclosure of the itemized deductions
taken on the federal return. For this reason, the Department had no way of detecting the error in the

Taxpayers’ reporting of itemized deductions at the time they filed their state income tax return in

April 2000.

5. It was not until 2003 that the Department received information from the IRS

concerning its adjustment to the Taxpayers’ 1999 federal income tax return, which increased the

amount of state income tax due for that year.

6. On August 29, 2003, the Department assessed the Taxpayers for $709.00 of

additional 1999 income tax, plus $357.84 of interest and $70.90 of penalty.

7. On September 4, 2003, the Taxpayers filed a written protest to the assessment of

interest and penalty.

DISCUSSION

The Taxpayers question their liability for the interest and penalty that accrued on their

underpayment of 1999 personal income tax between April 2000, the original due date of the tax,

and August 2003, the date the Department issued its assessment. The Taxpayers maintain that it

was the Department’s responsibility to notify them of their additional tax liability and that

interest and penalty should not begin to accrue until the date they received actual notice of the

error in their calculation of 1999 personal income tax.

Burden of Proof. NMSA 1978, § 7-1-17(C) provides that any assessment of tax 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,

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the assessment issued to the Taxpayers is presumed to be correct, and it is the Taxpayers’ burden

to present evidence and legal argument to show that they are entitled to an abatement.

Assessment of Interest. When a taxpayer fails to make timely payment of taxes due to the

state, NMSA 1978, § 7-1-67 imposes interest “from the first day following the day on which the tax

becomes due...until it is paid.” The language of the statute makes it clear that interest begins to run

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

underpayment. In this case, the Taxpayers underreported their 1999 income tax liability by $709.

Although the error was unintentional, the fact remains that the Taxpayers have had the use of

money legally due to the state. For this reason, interest was properly assessed for the period

beginning on April 16, 2000, the first day following the due date for payment of their 1999

income taxes.

Assessment of Penalty. When a taxpayer fails to pay taxes due to the state as a result of

negligence or disregard of rules and regulations, NMSA 1978, § 7-1-69(A) imposes a penalty of

two percent per month “from the date the tax was due,” not to exceed ten percent of the

outstanding tax liability. As with interest, the amount of penalty is calculated from the date the

tax was due, not the date the taxpayer is notified of the underpayment.

The term “negligence” is defined in Regulation 3.1.11.10 NMAC to include “inadvertence,

indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this case, the

Taxpayers do not know why their itemized deductions were disallowed and have not pursued the

matter with the IRS. There is no evidence that they ever discussed the deductions claimed with

their tax preparer, who Mr. Cordova acknowledged was inexperienced. Instead, it appears that the

Taxpayers simply assumed that the returns had been prepared correctly. This meets the definition

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

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

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

an accountant as its agent in tax matters).

Timing of Assessment. The Taxpayers question why the Department took so long to

notify them of their 1999 personal income tax liability. Mr. Cordova testified that he would have

paid the additional tax if he had been alerted sooner and believes that the Department is

responsible for the interest that accrued between April 2000 and August 2003 (penalty stopped

accruing when it reached its maximum of 10 percent in August 2000). This argument is based on

a misunderstanding of New Mexico’s self-reporting tax system. It is the obligation of taxpayers—

not the Department—to accurately determine their tax liabilities and report those liabilities to the

state in a timely manner. 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).

No government has sufficient resources to audit every taxpayer to determine whether he or

she has fully complied with the tax laws. Although the Department performs periodic “tape

matches” that compare information reported to the IRS with information reported to New

Mexico, there is some delay before the federal tape match information is made available to the

state. In this case, the Department did not receive information concerning the adjustment to the

Taxpayers’ 1999 federal income tax return until 2003. The Department’s assessment was issued

a few months later and was well within the statutory time frame set out in NMSA 1978, § 7-1-18,

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

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issue an assessment. Nothing in § 7-1-18 or § 7-1-67 provides for the abatement of interest when

the Department issues its assessment at the end, rather than at the beginning, of the three-year

limitations period. In either case, § 7-1-67 requires interest to be paid from the first day

following the day on which the tax was due until the tax is paid.

CONCLUSIONS OF LAW

A. The Taxpayers filed a timely protest to the Department’s assessment of interest and

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

B. The Department’s assessment was issued within the three-year limitations period

provided in NMSA 1978, § 7-1-18.

C. Pursuant to NMSA 1978, § 7-1-67, the Taxpayers are liable for interest on their

underpayment of 1999 personal income tax from April 16, 2000 until the date the tax is paid.

D. Pursuant to NMSA 1978, § 7-1-69, the Taxpayers are liable for the penalty that

accrued on their underpayment of 1999 personal income tax from April 16, 2000 until the date the

penalty reached its maximum of ten percent.

For the foregoing reasons, the Taxpayers’ protest IS DENIED.

DATED November 9, 2007.

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