Could Jesus Hernandez avoid gross-receipts-tax penalties because his accountant told him that income-tax filings covered all his tax obligations?

Plain-English summary

Jesus Hernandez remained liable for 2005-2006 gross receipts tax and interest, but all civil-negligence penalty was abated because he reasonably relied on a licensed accountant's advice. The accountant knew Hernandez provided services in New Mexico and told him that federal and state income-tax filings covered all of his tax obligations.

Hernandez provided services in New Mexico during 2005 and 2006 but filed no gross receipts tax reports. The Department identified the nonfiling by matching his federal Schedule C business income against its Combined Reporting System.

The assessments were:

• 2005: $1,254.38 tax, $250.88 penalty, and $584.40 interest; and
• 2006: $1,540.76 tax, $308.15 penalty, and $486.93 interest.

Together, that was $2,795.14 of tax, $559.03 of penalty, and $1,071.33 of interest at assessment.

The tax calculation properly excluded wages

Hernandez did not dispute that gross receipts tax applied, but questioned whether the Department had included W-2 wages in the calculation. The Department showed that it relied only on Schedule C income reported separately from wages. The tax principal was therefore correct.

Accountant reliance established nonnegligence

An erroneous belief that tax is not due ordinarily supports a negligence penalty. The cited regulation and cases recognize an exception when a taxpayer reasonably relies on a competent accountant after fully disclosing the relevant facts.

Hernandez used the accountant for all tax matters and had informed him about the nature of the business and New Mexico services. The accountant wrote the Department admitting that he had negligently, but without fraudulent intent, failed to advise Hernandez about gross receipts tax. Hernandez testified that the accountant said the federal and state income-tax returns satisfied every tax obligation.

Although the decision described some of the accountant's practices as questionable, the total evidence showed reasonable reliance on a licensed accountant who had the necessary business facts. Hernandez was not negligent, so penalty was inappropriate.

Interest remained mandatory

Section 7-1-67(A) required interest on tax not paid by its due date. Unlike the negligence penalty, interest compensated the state for the time value of unpaid revenue and did not depend on fault. It continued to accrue while the principal remained unpaid.

Result: $559.03 of penalty was fully abated; $2,795.14 of tax and the assessed and continuing interest remained due.

What this means for you

Service businesses using an income-tax preparer

Ask specifically about gross receipts tax and other business filings. Income-tax returns do not automatically satisfy separate transaction-tax obligations.

Taxpayers seeking penalty relief for professional advice

Document that the adviser was competent, received all relevant facts, and gave advice addressing the obligation at issue. Hernandez prevailed because the accountant knew about the New Mexico services and admitted the advice failure.

Taxpayers who qualify for penalty abatement

Penalty relief does not erase tax or interest. Interest can remain mandatory even when the taxpayer acted reasonably and without negligence.

Common questions

Q: Did Hernandez contest the gross receipts tax itself?
A: He accepted that tax was due but questioned the calculation. The Department proved that it used Schedule C business income and excluded W-2 wages.

Q: Why was accountant reliance reasonable?
A: Hernandez used the accountant for all tax needs, disclosed his service business, and was told that the filed income-tax returns covered every obligation.

Q: Did the accountant acknowledge the mistake?
A: Yes. The accountant wrote that he had negligently failed to advise Hernandez about gross receipts tax, without fraudulent intent.

Q: How much penalty was abated?
A: All $559.03—$250.88 for 2005 and $308.15 for 2006.

Q: Why did interest remain due?
A: The statute made interest mandatory when tax was not paid on time, regardless of the taxpayer's reasonable reliance.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-1-17 and 7-1-3 — presumption of correctness and definition of tax
• NMSA 1978, § 7-1-67(A) — mandatory interest
• Regulation 3.1.11.11(D) NMAC — nonnegligence based on reasonable reliance on a competent accountant after full disclosure

Cases cited:

• C&D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• 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)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jesus Hernandez
• Decision PDF: D&O 11-16

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
JESUS HERNANDEZ, No. 11-16
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0158866496 and L1328230976

DECISION AND ORDER

A formal hearing on the above-referenced protest was held July 12, 2011, before Dee Dee

Hoxie, Hearing Officer. The Taxation and Revenue Department (Department) was represented by

Ms. Ida Lujan, Staff Attorney. Ms. Sylvia Sena, Auditor, also appeared on behalf of the

Department. Mr. Jesus Hernandez (Taxpayer) appeared for the hearing and represented himself.

Mr. Alejandro Macias appeared as a witness and translator on behalf of the Taxpayer. The

Hearing Officer took notice of all documents in the administrative file. TRD exhibits “A”

through “N” were admitted at the hearing. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was engaged in providing services in New Mexico in 2005 and 2006.

2. The Taxpayer failed to file gross receipts tax with the Department for 2005 and 2006.

3. The Department determined that the Taxpayer was a non-filer on gross receipts tax for

2005 and 2006 through the Schedule C of his federal tax form, which was reported to the

Department as a mismatch through the Combined Reporting System.

4. On December 7, 2010, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period ending on December 31, 2005. The assessment

was for $1,254.38 tax, $250.88 penalty, and $584.40 interest.

5. On December 8, 2010, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period ending on December 31, 2006. The assessment

was for $1,540.76 tax, $308.15 penalty, and $486.93 interest.

6. On December 20, 2010, the Taxpayer filed a formal protest letter.

7. On June 8, 2011, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

8. The Taxpayer was using an accountant to determine his tax obligations. The Taxpayer

trusted the accountant when the accountant said that all of the Taxpayer’s taxes were

being filed correctly.

DISCUSSION

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

periods ending in December 2005 and December 2006, due to his failure to file gross receipts tax

reports. The Taxpayer did not dispute that he owed the gross receipts tax.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17. Tax

includes, by definition, the amount of tax principal imposed and, unless the context otherwise

requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, § 7-1-3. See

also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d

982 (Ct. App. 1989). Therefore, the assessment issued to the Taxpayer is presumed to be correct, and

it is the Taxpayer’s burden to present evidence and legal argument to show that he is entitled to an

abatement of penalty and interest.

Gross Receipts Tax.

In the Matter of Jesus Hernandez, page 2 of 5
Although the Taxpayer did not dispute that he owed gross receipts tax, he did raise the issue

of how the gross receipts tax amount was calculated. The Taxpayer thought that some wages from

2005 were being included in the amount. However, the Department established that it was relying

solely on the Schedule C amounts that were reported as income separate from any wages on the W-2.

Therefore, the amount of the gross receipts tax is correct and did not include wages from the W-2.

Assessment of Penalty.

The Taxpayer argued that he should not owe penalty and interest on the gross receipts tax for

2005 and 2006 because he was relying on the advice he had received from his accountant in taking

care of his 2005 and 2006 taxes. A taxpayer’s lack of knowledge or erroneous belief that the

taxpayer did not owe tax is considered to be negligence for purposes of assessment of penalty. See

Tiffany Const. Co., Inc. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976).

However, when a taxpayer’s belief is based on the advice of a competent accountant, the taxpayer is

not negligent and application of penalty is inappropriate. See C&D Trailer Sales v. Taxation and

Revenue Dept., 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979). The burden is on the taxpayer to prove

that a failure to pay a tax or to file a return was caused by reasonable reliance on the advice of a

competent accountant after a full disclosure of all relevant facts. See 3.1.11.11 (D) NMAC (2001).

The Taxpayer established that he went to the accountant for all of his tax needs. Although

the testimony suggested that the accountant engaged in some very questionable practices, it was also

clear that the accountant was properly informed of the kind of business and services that the

Taxpayer was engaged in performing. The accountant wrote a letter to the Department on December

14, 2010 and explained that he had negligently and without fraudulent intent failed to properly

advise the Taxpayer about filing gross receipts tax. A copy of the accountant’s letter was part of the

administrative file. The Taxpayer explained that the accountant had refused to appear as a witness

for the hearing. The Taxpayer also explained that the accountant had filed the Taxpayer’s federal

In the Matter of Jesus Hernandez, page 3 of 5
and state income taxes and had told the Taxpayer that those filings would take care of all of the

Taxpayer’s tax obligations. Based upon the totality of the evidence, I find that the Taxpayer

reasonably relied upon the advice of a licensed accountant and that the accountant had told the

Taxpayer that the Taxpayer did not need to file anything other than federal and state income taxes

even though the accountant knew that the Taxpayer was engaged in providing services in the state of

New Mexico. Consequently, the Taxpayer was not negligent. Therefore, the assessment of penalty

is not appropriate and is hereby abated.

Assessment of Interest.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is due.

NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is mandatory,

not discretionary. See State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The assessment

of interest is not designed to punish taxpayers, but to compensate the state for the time value of

unpaid revenues. Because the gross receipts tax was not paid when it was due, interest was properly

assessed. Taxpayer was advised at the hearing that while the tax principal remains unpaid the

interest will continue to accrue.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely written protest to the Notice of Assessment of 2005 and

2006 gross receipts taxes issued under respective Letter ID numbers L0158866496 and

L1328230976, and jurisdiction lies over the parties and the subject matter of this protest.

2. Taxpayer was properly assessed for gross receipts tax and interest for 2005 and

2006.

In the Matter of Jesus Hernandez, page 4 of 5

3. The Taxpayer was not negligent because he relied on the advice of a licensed

accountant and therefore the penalty should not have been assessed. The penalty assessment is

HEREBY ABATED.

For the foregoing reasons, the Taxpayer's protest is GRANTED IN PART AND DENIED

IN PART.

DATED: July 27, 2011.

In the Matter of Jesus Hernandez, page 5 of 5