Did a taxpayer avoid penalty and interest when she paid additional federal audit tax but did not file the required New Mexico amended return?

Plain-English summary

Sara Mills owed penalty and interest because she did not file a New Mexico amended return after an IRS audit increased her 2007 federal taxable income. The Department's September 2013 assessment was within the special limitations period that follows a federal adjustment.

Mills had timely filed her original 2007 New Mexico personal income tax return. The IRS audited her in 2010, adjusted the federal return, and imposed additional federal tax. She paid the IRS on June 22, 2010.

Mills did not realize that she also had to report the federal change to New Mexico. She paid the additional state principal after receiving the assessment and conceded that the $716.00 tax was due. She disputed only the $143.20 penalty and $149.53 interest.

The federal adjustment started a new state deadline

Section 7-1-13 placed responsibility on the taxpayer to file returns and report federal adjustments; the Department did not have to notify Mills of that duty.

The law in effect in 2010 required the New Mexico amended return within 90 days of the final federal adjustment. The AHO assumed that the June 22 payment date was also the final-adjustment date, making the state filing due September 20, 2010.

Section 7-1-18 then gave the Department three years from the end of the calendar year in which that amended return should have been filed. The assessment deadline was December 31, 2013, so the September 20 assessment was timely.

Ignorance did not remove penalty

Regulation 3.1.11.11(F) could support penalty abatement after a federal adjustment, but not when the taxpayer failed to file the required amended return on time.

Mills's lack of knowledge was an erroneous belief treated as negligence. The penalty therefore remained.

Interest also remained mandatory because the tax was not paid by its due date.

Result: protest DENIED. The $143.20 penalty and $149.53 interest were upheld; Mills had already paid the conceded tax principal after assessment.

What this means for you

Taxpayers audited by the IRS

A federal change can trigger a separate state filing duty even if you pay the IRS promptly. Determine the state reporting deadline as soon as the federal adjustment becomes final.

Accountants and tax preparers

Track federal audit adjustments through every affected state return. The limitations period for a state assessment may run from when the amended state return should have been filed, not only from the original tax year.

Taxpayers disputing delay

An assessment that arrives years after the original return can still be timely when a later federal adjustment restarts the applicable state window.

Common questions

Q: Did Mills dispute the additional state tax?
A: No. She conceded it and paid after the assessment.

Q: Who had to notify New Mexico about the IRS change?
A: Mills did. The decision held that filing the amended state return was the taxpayer's responsibility.

Q: Why was the 2013 assessment timely for a 2007 return?
A: The federal adjustment created a later amended-return deadline, and the Department assessed within three years after the end of that calendar year.

Q: Did the rule still use 90 days when the decision was issued?
A: The decision noted that current law then allowed 180 days, but the 90-day version in effect in 2010 governed Mills.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-1-13 and 7-1-18 — amended return after a federal adjustment and assessment period
• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and definition of tax
• NMSA 1978, § 7-1-67(A) — mandatory interest
• Regulation 3.1.11.11(F) NMAC — penalty after a federal adjustment

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — lack of knowledge or erroneous belief as negligence
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sara Mills
• Decision PDF: D&O 14-26

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
SARA MILLS, No. 14-26
TO ASSESSMENT ISSUED UNDER
ID NO. L0717900240

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 22, 2014, before Dee Dee

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

Peter Breen, Staff Attorney. Ms. Mary Griego, Auditor, also appeared on behalf of the Department.

Ms. Sara Mills (Taxpayer) appeared for the hearing and represented herself. 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. On September 20, 2013, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2007. The assessment was

for $716.00 tax, $143.20 penalty, and $149.53 interest.

2. On September 30, 2013, the Taxpayer filed a formal protest letter.

3. On October 23, 2013, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

4. On October 24, 2013, the Hearings Bureau issued a notice of hearing. The hearing date was

set within ninety days of the protest.

5. On November 22, 2013, the Taxpayer requested a continuance of the hearing due to travel for

work.

6. On December 5, 2013, the request for continuance was granted, and the delay of the hearing

was attributable to the Taxpayer.

7. On December 10, 2013, the Hearings Bureau sent amended notices of hearing. On December

18, 2013, the Hearings Bureau sent second amended notices of hearing.

8. The Taxpayer filed a timely PIT return for the 2007 tax year.

9. In 2010, the Taxpayer was audited by the Internal Revenue Service (IRS). Her federal return

was adjusted pursuant to the audit, and the Taxpayer had an additional tax liability. The

Taxpayer paid the IRS the additional tax on June 22, 2010.

10. The Taxpayer did not file an adjusted PIT return. The Taxpayer did not realize that she was

required to report her federal adjustment to the state.

11. The Taxpayer paid the PIT after she received the assessment and does not dispute that she

owed additional tax.

12. The Taxpayer argued that penalty and interest were inappropriate because the Department did

not assess her until 2013.

DISCUSSION

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

period ending on December 31, 2007.

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 Ctr. v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M.

795. Therefore, the assessment issued to the Taxpayer is presumed to be correct, and it is the

Sara Mills
Letter ID No. L0717900240
page 2 of 5
Taxpayer’s burden to present evidence and legal argument to show that she is entitled to an

abatement of penalty and interest.

Timeliness of the Assessment.

The Taxpayer argued that the assessment was not timely since it occurred six years after the

2007 tax year. The Taxpayer argued that the Department should have taken action earlier and should

have notified her in 2010 that she needed to file an adjusted return after her federal audit. The

Department argued that the federal paperwork generally includes language that notifies taxpayers of

their obligations to report changes to their states. The Taxpayer denied receiving any such

paperwork from the IRS during her audit. The Department also argued that it was the Taxpayer’s

responsibility to file the adjusted return and that the assessment was timely.

Generally, assessments must be made within three years of the end of the calendar year in

which the tax was due. See NMSA 1978, § 7-1-18 (2013). The tax was due in April 2008 for the

2007 tax year. If the Taxpayer had not been federally audited, the Department would have had until

December 31, 2011 to assess. However, when a taxpayer is audited and an adjustment is made

federally, the Department has three years to assess from the end of the calendar year in which the

amended return should have been filed. See id.

Filing tax returns is a taxpayer’s responsibility, and the Department is not required to notify a

taxpayer of that responsibility. See NMSA 1978, § 7-1-13 (2013). When a taxpayer’s tax is adjusted

by a federal audit, it is the taxpayer’s responsibility to file an amended return with the state. See id.

Current provisions require that the amended return be filed within 180 days of the final federal

adjustment. See id. The statute in effect in 2010 required that the amended return be filed within 90

days of the final adjustment. See NMSA 1978, § 7-1-13 (2007). The Taxpayer paid the final federal

adjustment on June 22, 2010. Assuming that the date of payment was also the date of the final

adjustment, the Taxpayer had until September 20, 2010 to file an amended return with the state. The

Sara Mills
Letter ID No. L0717900240
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Taxpayer failed to do so. Nevertheless, the Department had until December 31, 2013 to assess. See

NMSA 1978, § 7-1-18 (2013). Consequently, the assessment was timely as it was made on

September 20, 2013.

Assessment of Penalty.

The Taxpayer argued that she should not have to pay penalty. The Taxpayer felt that her

mistake was due to ignorance and that the Department should have notified her in 2010 of her

additional liability. 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, 1976-NMCA-127, 90 N.M. 16. Penalty can be abated when a taxpayer

receives a federal adjustment of tax liability. See 3.1.11.11 (F) (2001). However, when a taxpayer

fails to file a timely amended return after a federal adjustment, penalty is to be assessed. See id.

Therefore, penalty was properly assessed to the Taxpayer as she failed to file a timely amended

return as required.

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 Marbob Energy Corp. v. N.M. Oil Conservation Comm’n., 2009-NMSC-013, ¶ 22,

146 N.M. 24. The assessment of interest is not designed to punish taxpayers, but to compensate the

state for the time value of unpaid revenues. Because the tax was not paid when it was due, interest

was properly assessed.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the Notice of Assessment of 2007

personal income taxes issued under Letter ID number L0717900240, and jurisdiction lies over the

parties and the subject matter of this protest.

Sara Mills
Letter ID No. L0717900240
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2. The Taxpayer conceded that she owed the tax for the 2007 tax year.

3. The Taxpayer was properly assessed for penalty and interest for the 2007 tax year.

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

DATED: June 25, 2014.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

Sara Mills
Letter ID No. L0717900240
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