Could a nonprofit recover an electronic-filing penalty because its finance director ignored notices and kept submitting paper monthly returns?

Plain-English summary

Easter Seals El Mirador could not recover a penalty imposed for filing paper monthly returns when electronic filing was required. Its finance director's failure to follow the rule or communicate Department notices was attributed to the nonprofit, and financial hardship did not provide a statutory basis for relief.

Easter Seals was required to file its monthly returns electronically beginning in 2011. It instead filed paper returns from approximately September 2011 through September 2012.

The Department sent letters for several months explaining the requirement and allowing a grace period. After that period ended, it rejected the mailed returns and instructed Easter Seals to file electronically.

Responsibility stayed with the organization

Easter Seals did not realize it was out of compliance until the Department assessed a penalty in September or October 2012. Its former finance director had been responsible for filing returns and handling Department correspondence but failed to comply or alert others.

New Mexico law recognizes relief when a taxpayer reasonably relies on advice from a competent accountant after fully disclosing the facts. That exception did not apply: Easter Seals admitted it had not relied on advice from an accountant or attorney. It had relied on an employee to act as its filing agent.

The decision held that reliance on an employee did not excuse improper filing. Lack of knowledge also counted as negligence for penalty purposes.

Nonprofit hardship did not authorize a refund

After assessment, Easter Seals electronically refiled the affected returns and began complying. It paid the penalty and sought a refund.

The organization explained that donations were scarce, the penalty strained its resources, and the hardship could affect its operations. The hearing officer found no legal relief on that basis. Inability to pay and financial hardship were not valid reasons to abate a negligence penalty.

Result: protest denied. The penalty was properly assessed, so its payment was not an excess amount refundable under Section 7-1-26. The decision did not state the penalty's dollar amount.

What this means for you

Organizations delegating tax filing

Delegation does not transfer legal responsibility. Build controls that surface agency notices and verify that required filing methods are being used.

Taxpayers required to e-file

Paper submission may not count as proper filing once the Department mandates electronic returns, even when the forms are otherwise prepared.

Nonprofits facing financial strain

Nonprofit status and hardship did not create an exception to the negligence-penalty statute in this decision.

Common questions

Q: Did the Department give advance notice?
A: Yes. It sent notices for several months, provided a grace period, and later said mailed returns were rejected.

Q: Did Easter Seals correct the filing problem?
A: Yes. After assessment, it refiled electronically and continued filing that way.

Q: Was relying on the finance director enough to avoid negligence?
A: No. The decision distinguished employee agency from reasonable reliance on advice from a competent accountant.

Q: Did financial hardship justify refunding the penalty?
A: No. The cited regulation did not recognize inability to pay or hardship as grounds for abatement.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and definition of tax
• NMSA 1978, § 7-1-69(A) — penalty for failure to file a required return
• NMSA 1978, § 7-1-13(B) and § 9-11-6.4 — mail filing and Department electronic-filing authority
• Regulation 3.1.4.18(F) NMAC — required electronic filing
• Regulations 3.1.11.11(D) and 3.1.11.9 NMAC — reliance and hardship standards
• NMSA 1978, § 7-1-26 — refund of amounts exceeding liability

Cases cited:

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

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Easter Seals El Mirador
• Decision PDF: D&O 13-35

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
EASTER SEALS EL MIRADOR, No. 13-35
TO THE DENIAL OF REFUND
LETTER ID NO. L1456642880

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 24, 2013, before Dee Dee

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

Aaron Rodriguez, Staff Attorney, and Ms. Elena Morgan, Staff Attorney. Mr. Tom Dillon, Auditor,

also appeared on behalf of the Department. Easter Seals el Mirador (Taxpayer) appeared for the

hearing by and through its Controller, Mr. Michael Easley. The Hearing Officer took notice of all

documents in the administrative file. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a non-profit organization. The Taxpayer was required to file its monthly

returns electronically beginning in 2011.

2. The Taxpayer continued to file paper returns, and failed to file electronically from

approximately September 2011 through September 2012.

3. The Department notified the Taxpayer by letter for several months in 2011 that it was

required to file electronically. The Department explained that they were providing a grace

period for compliance.

4. After the grace period expired, the Department issued the Taxpayer notices that their returns

that were filed by mail were rejected and that the Taxpayer needed to file electronically.

5. Sometime in September or October 2012, the Department assessed the Taxpayer for penalty

for failing to file its returns electronically.

6. When the Taxpayer was assessed, the Taxpayer refiled all of the returns from the assessment

electronically. The Taxpayer is now filing electronically, as required.

7. The Taxpayer did not realize that it was required to file electronically until it received the

assessment. During 2011, the Taxpayer was employing a Director of Finance. The

Director’s job duties included filing the returns and dealing with correspondence from the

Department.

8. The Director no longer works for the Taxpayer. The former Director failed to comply with

the electronic filing requirements on behalf of the Taxpayer.

9. The Taxpayer paid the assessed penalty.

10. The Taxpayer requested a refund of the payment on the penalty on May 8, 2013.

11. The Department denied the request for refund on May 16, 2013.

12. The Taxpayer filed a formal protest to the denial of refund on June 14, 2013.

13. On October 8, 2013, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

DISCUSSION

The issue to be decided is whether the Taxpayer is entitled to a refund of an assessed penalty.

Burden of Proof.

Although the protest in this case is for a denial of refund, the denial was based on the fact that

the payment made was pursuant to an assessment. 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

Easter Seals el Mirador
Letter ID No. L1456642880
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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 it is entitled to an abatement of penalty.

Assessment of Penalty.

Generally, a taxpayer is liable for penalty “in the case of failure…to file by the date required

a return[.]” NMSA 1978, § 7-1-69 (A). Generally, “the payment of any tax or the filing of any

return may be accomplished by mail.” NMSA 1978, § 7-1-13 (B). However, the Department has the

authority to require some taxpayers to file their returns electronically. See NMSA 1978, § 9-11-6.4.

When a taxpayer is required to file electronically, “the taxpayer may not file future returns by mail or

any method other than electronically.” 3.1.4.18 (F) NMAC (2010). There was no dispute that the

Taxpayer was required to file its returns electronically. The Taxpayer explained that it did not know

of this requirement until it was assessed for penalty because its former Director of Finance failed to

communicate this requirement to anyone.

A taxpayer’s lack of knowledge 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 file a return properly 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 admitted that it was not relying on advice from an accountant or an

attorney at the time that it failed to file its returns electronically. The Taxpayer was relying on its

Director to file its returns properly. Reliance on an employee as an agent for filing returns does not

excuse the failure to properly file. See id. Therefore, the exception does not apply, and the penalty

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Letter ID No. L1456642880
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was properly assessed. Consequently, the Taxpayer is not entitled to a refund of the penalty. See

NMSA 1978, § 7-1-26 (allowing refunds only when an amount paid was in excess of a taxpayer’s

liability).

Hardship.

The Taxpayer explained that the penalty assessed caused it severe financial hardship. The

Taxpayer emphasized its non-profit status, and explained that donations have been scarce in this

tough economy. The Taxpayer explained that the large amount of the penalty strained its financial

resources, and that it may not be able to continue operating as it has in the past due to this hardship.

Unfortunately for the Taxpayer, the statute provides no legal relief in such a situation. Penalty must

be assessed when there is a negligent failure to file a return properly. See NMSA 1978, § 7-1-69. A

taxpayer’s inability to pay and financial hardship are not valid reasons to abate the penalty. See

3.1.11.9 NMAC (2001).

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the denial of refund issued under Letter

ID number L1456642880, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer was properly assessed for penalty for failing to file its returns

electronically as required.

3. As the penalty was properly assessed, the Taxpayer is not entitled to a refund for its

payment of the penalty.

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

DATED: November 5, 2013.

Easter Seals el Mirador
Letter ID No. L1456642880
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Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, the parties have the right to appeal this decision by filing

a notice of appeal with the New Mexico Court of Appeals within 30 days of the date shown above.

See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision and Order will

become final. A copy of the Notice of Appeal should be mailed to John Griego, P. O. Box 630,

Santa Fe, New Mexico 87504-0630. Mr. Griego may be contacted at 505-827-0466.

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Letter ID No. L1456642880
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