Did an earlier penalty waiver based on accountant reliance require New Mexico to waive later penalties for unfiled and unpaid CRS taxes?

Plain-English summary

Larkspur LLC remained liable for $47,095.76 in negligence penalties on late-filed and unpaid gross receipts and withholding taxes for July through October 2006. A penalty waiver for an earlier audit period did not automatically carry forward to these later reporting periods.

Larkspur, a residential four-plex builder, was notified in May and June 2006 that the Department would audit its gross receipts and withholding taxes for prior periods. During that audit, the company's accountant-reliance argument persuaded the auditor to request waiver of penalties for October 2003 through June 2006, and the Department granted that waiver.

In June 2007, however, the Department received Larkspur's CRS returns for July, August, September, and October 2006. The returns showed tax due, but none of it was paid. Larkspur did not dispute the tax or interest; it protested only the penalties.

The prior waiver did not prove reliance for the later periods

Larkspur argued that the same accountant-reliance theory supporting the earlier waiver should eliminate the later penalties.

The hearing officer found no evidence that Larkspur actively consulted its accountant about the specific July-through-October liabilities. It relied on the existence of the earlier abatement rather than proving reasonable reliance for the new periods.

The company also knew before the later reporting periods that it was under audit. The decision said that notice required it to take steps to determine whether it was correctly reporting and paying tax. Instead, it assumed the returns were correct and eventually filed them without payment.

Reliance must be active, informed, and specific

The decision explained that a taxpayer cannot delegate tax responsibility to an accountant and forget it. Avoiding negligence required evidence of “informed consultation” concerning the specific liability at issue, not passive reliance or a general belief that a prior waiver controlled.

Larkspur produced no evidence overcoming the presumption that the new penalty assessments were correct. Its mistaken belief that the first abatement required another one itself fit the regulatory definition of negligence.

The four assessments listed tax due of $410,697.18 for July, $16,490.34 for August, $43,980.84 for September, and $2,691.29 for October 2006. The former 10% maximum had been applied, and the decision states that no additional penalty would be added.

Result: protest DENIED. The $47,095.76 penalty remained due.

What this means for you

Businesses that received an earlier penalty waiver

A waiver is period- and fact-specific. It does not establish reasonable cause for later returns or payments, even when the same accountant and general tax issue are involved.

Taxpayers relying on accountants

Document the questions asked, facts supplied, and advice received for the exact liability. This decision required active, informed consultation rather than passive delegation.

Businesses under audit

An audit notice puts the taxpayer on warning that its reporting may be wrong. Continuing the same practices without investigation can support a negligence finding for later periods.

Common questions

Q: What taxes were involved?
A: Gross receipts and withholding taxes reported through the combined reporting system for July through October 2006.

Q: Did Larkspur dispute the tax and interest?
A: No. It acknowledged the taxes were due and unpaid and contested only the $47,095.76 penalty.

Q: Why didn't the first penalty waiver control?
A: It concerned an earlier audit period, and Larkspur offered no evidence of reasonable accountant reliance for the later liabilities.

Q: What kind of professional reliance could rebut negligence?
A: The decision required active and informed consultation about the specific tax liability, supported by evidence.

Q: Did the audit notice matter?
A: Yes. The hearing officer found that it gave Larkspur reason to verify its later reporting and payment obligations rather than simply assume compliance.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-3(V) (2003) — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-69(A) (2003) — negligence penalty and former 10% maximum
• Regulation 3.1.11.10 NMAC (2001) — definition of negligence

Cases cited:

• Holt v. New Mexico Department of Taxation & Revenue, 2002-NMSC-034, 133 N.M. 11, 59 P.3d 491
• Grogan v. New Mexico Taxation & Revenue Department, 2003-NMCA-033, 133 N.M. 354, 62 P.3d 1236
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• C & D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• Phillips Mercantile Co. v. Taxation & Revenue Department, 109 N.M. 487, 786 P.2d 1221 (Ct. App. 1990)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Larkspur LLC
• Decision PDF: D&O 09-03

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
LARKSPUR, LLC TO ASSESSMENTS
ISSUED UNDER L1098995328, L0562124416,
L0025253504 and L1518179968. No. 09-03

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 16, 2009, before Sally

Galanter, Hearing Officer. The Taxation and Revenue Department (“Department”) was represented

by Mr. Patrick Edward Preston, Special Assistant Attorney General. Larkspur LLC, (“Taxpayer”) was

represented by its attorney, Ms. Tracy T. Howell, Sommer, Udall, Hardwick, Ahern & Lyatt, LLP.

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

FINDINGS OF FACT

1. Taxpayer was engaged in the business of construction of residential four-plexes

during and prior to the assessment tax periods.

2. On May 10, 2006, auditor for the Department notified Taxpayer of a possible audit.

(Department Exhibit G)

3. On June 9, 2006 Taxpayer was mailed by first class and certified mail, a letter from

the Audit Supervisor of the Audit and Compliance Unit of the Department notifying Taxpayer that it

was selected for a tax audit for the time periods of October 1, 2003 through May 31, 2006 and that

included in the audit would be Gross Receipts and Withholding taxes notifying Taxpayer of records

to bring to the audit set for July 7, 2006. (Department Exhibit F and G)

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4. On August 18, 2006, Mr. Irv Abrams, then accountant for Taxpayer, met with

Department’s auditor supplying documentation requested. (Department’s Exhibit G)

5. On September 13, 2006, Taxpayer notified the Department’s auditor that Mr. Eric

Mulata, Vice President of Finance, was the contact person for all future communications regarding

the audit. (Department Exhibit G).

6. On November 15, 2006, Mr. Mulata, on behalf of Taxpayer, met with the

Department’s auditor and provided necessary documentation. He also discussed taxpayer’s reliance

on its accountant, Mr. Abrams, in determining prior tax liability; arguing that the penalty should be

waived based on Taxpayer’s reliance on its independent accountant. (Department Exhibit G)

7. On January 5, 2007 the Department’s auditor requested that the Department,

pursuant to NMSA 1978, § 7-1-69 (2003), waive all penalties for the audit period from October 2003

through June 2006 as the auditor opinioned that Taxpayer had “relied on the reasonable advice and

services of independent accountant. (Taxpayer Exhibit 1)

8. The penalties assessed for unpaid taxes for the tax period of October 1, 2003 through

June 30, 2006 were waived by the Department.

9. On June 26, 2007, the Audit and Compliance Division of the Department received

the completed CRS forms from Taxpayer for the months of July 2006, August 2006, September 2006

and October 2006 indicating that gross receipts taxes and withholding taxes were owed. None of the

reported taxes due for these months was paid. The documentation reveals that the documents were

originally faxed from Irv Abrams &Associates on June 21, 2007. (Department Exhibit H)

10. Taxpayer acknowledges that the taxes as indicated on the CRS Reports are due,

owing, not paid and does not contest the assessment of gross receipts taxes, withholding taxes or the

related interest assessed under L1098995328, L0562124416, L0025253504 and L1518179968.

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11. On July 31, 2007, the Department issued the following assessments of gross receipts

tax, withholding tax, plus accrued interest and penalty to Taxpayer:

Letter ID Reporting Period Tax Due Penalty

L1098995328 July 2006 $410,697.18 $40,980.52
L0562124416 August 2006 $ 16,490.34 $ 1,579.65
L0025253504 September 2006 $ 43,980.84 $ 4,330.29
L1518179968 October 2006 $ 2,691.29 $ 205.30
(Department Exhibits A, B, C, D & I)

12. There is no additional penalty to be added to the above amount as the maximum

penalty is charged based on NMSA 1978, § 7-1-69 (2003, prior to amendments through 2007), which

at the time of the assessments was capped at 10%. The total amount of penalty in dispute is

$47,095.76.

13. Taxpayer disputes only the assessment of penalty for the owed taxes. On August 14,

2007, Counsel for Taxpayer, filed a formal written protest to the assessment of penalties requesting

that such penalties be abated based on taxpayer reliance on the advice of its accountant. (Department

Exhibit B)

14. On August 31, 2007, a letter acknowledging the protest was mailed to counsel for

Taxpayer. This letter included the contact person for the Department, explaining the possibility of

informal conference and formal hearing. (Department Exhibit C)

DISCUSSION

The sole issue to be determined is whether Taxpayer is liable for the $47,095.76 negligence

penalties assessed in connection with its late filing of and non-payment of CRS taxes for the July

2006 through October 2006 reporting periods. The Taxpayer does not dispute that the filings were

late or that the taxes have not been paid but maintains that it should be excused from payment of the

penalty based on that fact that the Department’s auditor had waived the penalties assessed for the

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reporting periods of October 2003 through June 2006. Taxpayer argued that the same argument

applied for subsequent tax periods.

Burden of Proof. There is a statutory presumption that any assessment of tax made by the

Department is correct. NMSA 1978, § 7-1-17(C); Holt v. New Mexico Department of Taxation &

Revenue, 2002 NMSC 34, ¶ 4, 133 N.M. 11, 59 P.3d 491. NMSA 1978, § 7-1-3 (V) (2003) defines

tax to mean not only the total amount of tax imposed and required to be paid but also, “unless the

context otherwise requires, includes the amount of any interest or civil penalty relating thereto.” See

GTE Southwest Inc. v. Taxation & Revenue, 113 NM 610, 830 P.2d 162 (Ct. App. 1992) and El

Centro Villa Nursing Center v. Taxation and Revenue Dept., 108 NM 795, 779 P.2d 982 (Ct. App.

1989).

Therefore the assessments issued to Taxpayer are presumed to be correct and it is Taxpayer’s

burden to present evidence and legal argument establishing that it is entitled to the abatement of the

penalty. See Grogan v. New Mexico Taxation & Revenue,2003-NMCA-033, 133 NM 354, ¶ 12, 62

P.3d 1236. (“The effect of the presumption of correctness is that the taxpayer has the burden of coming

forward with some countervailing evidence tending to dispute the factual correctness of the assessment

made.”). Once the presumption of correctness is rebutted, however, the burden shifts to the Department

to show the correctness of the assessed tax. MPC Ltd. V. New Mexico Taxation and Revenue

Department, 2003 NMCA 21, ¶ 13, 133 NM 217, 62 P.3d 308.

Penalty due for failure to pay tax. NMSA 1978 § 7-1-69 (2003), the relevant statute in

effect prior to January 1, 2008 and the statute pertinent to the assessment of penalty for taxes owed

prior to January 2008, states in regard to the imposition of a penalty for failure to file and to pay tax

due and provides in pertinent part:

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A. Except as provided in Subsection C of this section, in the case of failure due
to negligence or disregard of department rules and regulations, but without intent to
evade or defeat a tax, to pay when due the amount of tax required to be paid, to pay
in accordance with the provisions of Section 7-1-13.1 NMSA 1978 when required to
do so or to file by the date required a return regardless of whether a tax is due, there
shall be added to the amount assessed a penalty in an amount equal to the greater of:
(1) 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.

§ 7-1-69 (2003), 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. The term “negligence” as used in § 7-1-69 is defined in Regulation 3.1.11.10 NMAC

(2001) 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.

See, Grogan v. New Mexico Taxation & Revenue,2003-NMCA-033, ¶ 32, 133 NM 354,62 P.3d

1236. (“A Taxpayer is subject to a penalty for failure to pay gross receipts taxes ‘due to negligence

or disregard of the rules and regulations, but without intent to evade or defeat a tax.”) Taxpayer

claims there are two relevant periods and that the abatement of a penalty for the initial audit period

requires the abatement of the penalty for the audit period of concern here. While there are two

periods discussed in regard to the penalty assessments only one is of relevance in this matter which is

the penalty assessment for non-filing and non-payment of taxes for July 2006 through October 2006.

Taxpayer submitted Exhibit 1, establishing that the Department’s auditor determined that Taxpayer

had reasonably relied on its independent accountant in its calculation of its gross receipts tax liability

with the Department’s auditor requesting that the penalty be waived for the initial audit period

ending in June 2006. Taxpayer claims that based on that prior abatement that the penalties assessed

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for late filing and non payment of gross receipts and withholding taxes due for the months of July

2006 through October 2006 should also be waived based on the same theory of reasonable reliance

on its independent accountant in the calculation of its tax liability. However Taxpayer presented no

evidence establishing reasonable reliance on its independent counsel but rather relied on the prior

abatement by the auditor. The Department’s witness, Ms. Sena, testified that the prior audit period

penalty assessment was waived based on reasonable reliance but such does not overcome the

presumption of correctness of the present penalty assessment for the periods covered by the current

assessments. See Grogan v. New Mexico Taxation & Revenue,2003-NMCA-033, ¶ 12, 133 NM

354,62 P.3d 1236. (“Unsubstantiated statements that the assessment is incorrect cannot overcome the

presumption of correctness.”)

The Department claimed that the assessment was proper based on Taxpayer knowing as early

as May 2006 and certainly in June 2006 that the Department was auditing Taxpayer in regard to its

reporting of its gross receipts and withholding taxes. The Department claims that with such

knowledge, Taxpayer had an obligation thereafter to ensure that it was properly reporting and paying

its taxes. Further in November 2006, Taxpayer was aware that taxes were owed for the initial audit

period. The Department further established that Taxpayer filed the CRS reports in June 2007 for July

through October of 2006 and did not pay the taxes although acknowledging that such taxes were due.

Here, taxpayer had notice of a possible audit in May 2006 and in June 2006 was mailed notification of

the audit and made aware that the Department would be auditing for the period from October 2003

through May 2006. There was no evidence to establish that Taxpayer took steps to ascertain the

correctness of the taxes involved in the initial audit and therefore Taxpayer assumed the risk in failing

to correctly report and pay the gross receipts and withholding taxes for the period of these assessments.

Taxpayer simply assumed that the returns had been prepared correctly even after being notified of the

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audit. Taxpayer failed to exercise that degree of ordinary business care and prudence that a reasonable

taxpayer would exercise under like circumstances of being notified that an audit was being conducted

for the three years prior to the current assessment period.

Further, there was no evidence to establish that Taxpayer actively pursued resolution of the

assessment when action was required but rather Taxpayer relied on the prior abatement to argue for a

subsequent abatement of penalty. Taxpayer completed the formal protest (Department Exhibit B) but

did nothing to establish reasonable reliance and therefore a legal basis for the abatement of the penalty.

Taxpayer failed to inquire and research about the reporting period from July through October after

being put on notice of the audit. Taxpayer erroneously believed that the prior abatement of a penalty

was sufficient to establish that the current penalty should be abated. This error meets the definition of

negligence set out in Department regulations and in New Mexico case law. There was no evidence

only argument that Taxpayer should not be held liable for the penalty based on its reliance that the

prior abatement of penalty had been awarded. Under § 7-1-69 (2003), a taxpayer must make a

showing of reasonable reliance. Having been notified of the audit, substantial evidence exists that it

was not reasonable for Taxpayer to rely on the prior abatement to establish that the subsequent

penalty should be abated.

A taxpayer’s reliance on a tax professional must be active and informed - not passive and

unaware - in order to support a finding that the taxpayer’s failure to pay tax was not negligent for

purposes of NMSA 1978, §7-1-69 (A) (2003). A taxpayer’s responsibility for payment of taxes

due cannot just be delegated to a third party and forgotten. See El Centro Vila Nursing Center. V.

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

(“every person is charged with the reasonable duty to ascertain the possible tax consequences of

his action [or action] Tiffany Constr. Co. V. Bureau of Revenue, 90 NM at 17, 558 P.2d at 1156.

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We are not inclined to hold that the taxpayer can abdicate this responsibility merely by

appointing an accountant as its agent in tax matters.”

A finding of non-negligence requires proof that the taxpayer engaged in “informed

consultation” concerning the specific liability at issue. See C & D Trailer Sales v. Taxation and

Revenue Dept., 93 N.M. 697, 699, 604 P.2d 835, 837 (Ct. App. 1979) (a taxpayer's mere belief that

he is not liable to pay taxes is tantamount to negligence within the meaning of the statute with

penalty upheld where there was no evidence that the taxpayer “relied on any informed consultation”

in deciding not to pay tax); El Centro Villa Nursing Center v. Taxation & Revenue Department, 108

N.M. 795, P.797, 779 P.2d 982, 984 (Ct. App. 1989) (§ 7-1-69 is designed specifically to penalize

unintentional failure to pay tax.);

Taxpayer bears the burden to show that it was not negligent or in disregard of the

Department’s rules and regulations in failing to report and pay taxes. Having failed to present

evidence to rebut the presumption of correctness as to the penalty assessed, the protest must fail.

Taxpayer’s argument that it should be able to rely on an abatement, by an auditor, of a prior penalty

assessment fails to overcome the presumption that the penalty assessment for the months of July

through October 2006 is correct. See Phillips mercantile Co. Taxation & Revenue, 109 NM 487, P. ¶

35, 786 P.2d 1221, ¶ 35 (Ct. App. 1990) (“Phillips failed to present any competent evidence negating

the inference that it was negligent in failing to pay the compensating tax assessed. Accordingly,

assessment of a negligence penalty pursuant to Section 7-1-69(A) was proper” with the penalty

upheld as there was no evidence that the failure to pay was the result of diligent protest “based on

informed consultation and advice”) and Sonic Industries v. State of New Mexico and John Chavez,,

Secretary of Taxation and Revenue, 2000-NMCA-087, 129 NM 657, 11 P.3d 1219 .

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CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessments of penalty issued under

L1098995328, L0562124416, L0025253504 and L1518179968, and jurisdiction lies over the parties and

the subject matter of this protest.

B. Taxpayer’s failure to timely file and pay CRS gross receipts and withholding taxes for

the months of July 2006 through October 2006 was negligent and penalty was properly assessed

pursuant to NMSA 1978 § 7-1-69 (2003).

For the foregoing reasons, the protest of Larkspur LLC IS DENIED.

Dated: August 7, 2009.

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