Did a tax preparer's fax of an unsigned federal return prove that a 2010 return was filed and require New Mexico to recalculate a 1099-based assessment?

Plain-English summary

Melinda Schramm did not prove that she had filed either a federal or New Mexico 2010 income tax return. A preparer's attempted fax to the IRS was rejected for lacking an original signed return, so the AHO upheld New Mexico's assessment based on her employer-reported Form 1099-MISC income.

Schramm worked as a case manager for an agency serving developmentally delayed and disabled individuals under a state contract. She did not file 2010 federal or state personal income tax returns.

After the Department identified the New Mexico income in January 2014, Schramm hired Guidance Tax Services in Los Angeles. On May 5, the preparer faxed a federal return to the IRS office in Fresno.

The IRS responded that it could not accept the fax and needed an original copy bearing Schramm's signature.

The transcript did not show a filed return

The Department asked for an IRS transcript confirming the filing. During the hearing, the preparer faxed Schramm a February 6 wage-and-income transcript.

That transcript showed only the Form 1099-MISC income reported by her employer. It did not show that an income tax return had been filed. The Department's own system likewise contained no 2010 New Mexico return.

Schramm had relied on the preparer and never independently confirmed acceptance by either agency. At the hearing, she still could not prove a formal federal or state filing.

The 1099 was the only available income information

Section 7-2-12 required a person deriving New Mexico income to file a state return. New Mexico personal income tax began with federal adjusted gross income, but Schramm supplied no accepted federal return establishing a different amount.

The Department therefore used the only income evidence it had: the Form 1099-MISC reported by the New Mexico employer. Without proof of adjusted gross income and a state return, there was no basis to recalculate or abate the assessment.

Penalty and interest remained

Responsibility for filing remained with Schramm despite her use of a preparer. Her continued failure to file, even months after Department notice, constituted inaction where action was required and supported civil-negligence penalty.

Interest was mandatory until the tax principal was paid.

Result: protest DENIED. At the hearing, Schramm owed $2,127.00 tax, $425.40 penalty, and $211.53 interest, totaling $2,763.93.

The decision noted that, upon proving her federal adjusted gross income, she might still be able to pursue a refund within the applicable deadline.

What this means for you

Taxpayers using a preparer

Ask for acceptance confirmations, not just a copy or transmission receipt. A document sent to a tax agency is not filed when the agency rejects the submission.

Tax preparers

Use an accepted filing method and obtain the taxpayer's required signature. A wage-and-income transcript reports third-party forms; it does not necessarily prove that a return was filed.

Nonfilers facing an estimated assessment

The Department can use available third-party income records. A later properly filed return may support a recalculation or refund, but unsupported assertions about what the return would show do not overcome the assessment.

Common questions

Q: Why didn't the fax count?
A: The IRS rejected it and required an original signed return.

Q: What did the IRS transcript prove?
A: Only that the employer had reported Form 1099-MISC income; it did not prove a filed 2010 return.

Q: Did New Mexico have a state return on file?
A: No. The protest auditor checked during the hearing and found none.

Q: Was a later refund still possible?
A: The decision said Schramm might still claim one upon proof of federal adjusted gross income and compliance with the refund deadline.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-2-2(A), 7-2-3, and 7-2-12 — federal adjusted gross income, resident tax, and filing duty
• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and definition of tax
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and civil-negligence penalty
• NMSA 1978, § 7-1-26 — refund claim
• Regulation 3.1.11.10(B) NMAC — inaction as negligence

Cases cited:

• Holt v. New Mexico Department of Taxation and Revenue, 2002-NMSC-034 — federal adjusted gross income as the state starting point
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer's self-reporting duty
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Melinda L. Schramm
• Decision PDF: D&O 14-29

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
MELINDA L. SCHRAMM No. 14-29
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1127935440

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 17, 2014, before Brian

VanDenzen, Esq., Hearing Officer, in Santa Fe. Ms. Melinda Schramm Broussard (“Taxpayer”)

appeared pro se. Staff Attorney Peter Breen appeared representing the State of New Mexico,

Taxation and Revenue Department (“Department”). Protest Auditor Milagros Bernardo appeared

as a witness for the Department. Taxpayer Exhibits 1-2 and Department Exhibit A were admitted

into the record, as described more thoroughly in the Administrative Protest Hearing Exhibit Log.

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

FOLLOWS:

FINDINGS OF FACT

1. On February 27, 2014, the Department assessed Taxpayer for $2,743.65 in

personal income tax, $425.00 in penalty, and $191.25 in interest for a then total assessment of

$2,743.65 for the income tax reporting period ending on December 31, 2010. [Letter id. no.

L1127935440].

2. On March 25, 2014, Taxpayer protested the Department’s assessment.

3. On May 9, 2014, the Department requested a hearing in this matter with the

Hearings Bureau.

4. On May 20, 2014, the Hearings Bureau sent Notice of Administrative Hearing,

scheduling this matter for a hearing on June 17, 2014.

5. During the relevant time, Taxpayer worked as a case manager for a case

management agency that contracted with the State of New Mexico to provide services to

developmentally delayed and disabled individuals.

6. Taxpayer was a non-filer of 2010 federal and state personal income tax returns.

7. Sometime in January of 2014, upon receipt of information from the IRS, the

Department detected that Taxpayer had unreported New Mexico income in personal income tax

year 2010, as shown by a Form 1099-MISC issued to Taxpayer by her New Mexico employer.

8. Sometime in January of 2014, the Department sent Taxpayer notice of that

unreported income.

9. In response to the Department’s notice, Taxpayer engaged the services of

Guidance Tax Services in Los Angeles, CA, to assist her with preparing and filing her 2010

federal and state tax returns.

10. On February 27, 2014, the Department issued its assessment to Taxpayer, as

described in Finding of Fact #1.

11. On May 5, 2014, Guidance Tax Services faxed Taxpayer’s 2010 personal income

tax return to the IRS office in Fresno, CA. [Taxpayer Ex. #1].

12. The IRS informed Taxpayer via letter that they could not accept the faxed 2010

personal income tax return because they needed an original copy with Taxpayer’s signature.

13. The Department requested that Taxpayer provide an IRS transcript showing that

her 2010 income tax return had been filed.

In the Matter of the Protest of Melinda L. Schramm., page 2 of 8

14. Taxpayer requested the IRS transcript from Guidance Tax Services to show proof

that her 2010 federal income tax return had been filed. Guidance Tax Services faxed Taxpayer a

transcript during the hearing, which is admitted into the record as Taxpayer Ex. #2.

15. The IRS Wage and Income Transcript dated February 6, 2014, showed only her

Form 1099-MISC income. The IRS Wage and Income Transcript did not indicate that Taxpayer

had filed her 2010 IRS income tax return. [Taxpayer Ex. #2].

16. Protest Auditor Milagros Bernardo checked Taxpayer’s records with the

Department on the date of hearing and did not see any indication that Taxpayer had filed her

2010 New Mexico personal income tax return.

17. Other than relying on Guidance Tax Services, Taxpayer never independently

verified that either her 2010 federal or state personal income tax returns were formally filed with

the IRS and New Mexico respectively.

18. At the hearing, Taxpayer was unable to prove that her 2010 tax returns had ever

been filed with the IRS or with the Department.

19. As of the date of hearing, Taxpayer owed $2,127.00 in personal income tax,

$425.40 in penalty, and $211.53 in interest for a total liability of $2,763.93.

DISCUSSION

Taxpayer did not file either federal or state 2010 personal income tax returns. The

Department learned from the IRS that Taxpayer had received income in New Mexico in 2010, as

shown by a Form 1099-MISC issued to Taxpayer by her New Mexico employer. The

Department assessed Taxpayer for 2010 personal income tax based on the income reported on

the Form 1099-MISC. Taxpayer protested, arguing that once she filed her 2010 returns, she

would not owe the assessed tax amount.

In the Matter of the Protest of Melinda L. Schramm., page 3 of 8
Under NMSA 1978, Section 7-1-17(C) (2007), the assessment of tax issued in this case is

presumed correct. Unless otherwise specified, for the purposes of the Tax Administration Act,

“tax” is defined to include interest and civil penalty. See NMSA 1978, §7-1-3 (X) (2013).Under

Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C) extends to

the Department’s assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't

of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting

a statute are presumed proper and are to be given substantial weight). Taxpayer has the burden to

overcome the assessment. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 431.

However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the

Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue

Dep't, 2003-NMCA-21, ¶13, 133 N.M. 217.

Payment of New Mexico personal income tax is governed by NMSA 1978, §§ 7-2-1 to

36. Unless otherwise exempted by law, a tax is imposed “upon the net income of every” New

Mexico resident. NMSA 1978, § 7-2-3 (1981). NMSA 1978, Section 7-2-12 (2003) requires any

resident or any person deriving income from New Mexico to file a state income tax return. Like

many states, the calculation of New Mexico’s personal income tax liability begins with a

taxpayer’s adjusted gross income as reported to the IRS. See NMSA 1978, § 7-2-2 (A) (2010);

See also Holt v. N.M. Dep't of Taxation & Revenue, 2002- NMSC-34, ¶23, 133 N.M. 11

(“calculation of the taxpayers’ state income tax is based upon their adjusted gross income…on their

federal return.”).

In this case, Taxpayer derived income from New Mexico, as indicated by the Form 1099-

MISC that Taxpayer’s employer prepared. As such, Taxpayer was required to file a New Mexico

personal income tax return under Section 7-2-12. Because Taxpayer was a non-filer of both federal

In the Matter of the Protest of Melinda L. Schramm., page 4 of 8
and state income tax returns in 2010, the Department relied on the Form 1099-MISC income

information reported by Taxpayer’s New Mexico employer to determine the assessed tax liability.

Taxpayer has not presented sufficient evidence that she filed her 2010 federal income tax

returns showing a different federal adjusted gross income other than the income information the

Department received on the Form 1099-MISC. Taxpayer’s representative Guidance Tax Services

did fax a 2010 federal income tax return to the IRS office in Fresno, California on May 5, 2014.

However, the IRS only accepts the filing of tax returns via mail or e-file, not via facsimile. See IRS

Form 1040 Instructions, (2010). Indeed, as Taxpayer testified, she received a letter from the IRS in

May informing her that she needed to submit an original signed copy of her 2010 federal income tax

return to the IRS rather than the faxed copy. Consequently, Guidance Tax Services’ faxing of

Taxpayer’s tax return to the IRS does not establish that Taxpayer formally filed her 2010 federal

income tax returns.

Moreover, Taxpayer has not been able to produce a IRS transcript showing that she

officially filed her 2010 federal income tax returns. The only IRS transcript that Taxpayer was able

to produce merely confirms the amount of income reported on Form 1099-MISC. That transcript

does not indicate that Taxpayer filed her 2010 federal income tax returns. Taxpayer further did not

demonstrate that she filed a New Mexico personal income tax return for tax year 2010. The

Department’s Protest Auditor Milagros Bernardo checked the Department’s computer system the

morning of the hearing and found no indication that Taxpayer’s 2010 state personal income tax

return had been filed with the Department.

While Taxpayer may have been relying on Guidance Tax Services to file her returns,

ultimately Taxpayer has the responsibility for filing her 2010 personal income tax returns. See

Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16 (under New

In the Matter of the Protest of Melinda L. Schramm., page 5 of 8
Mexico's self-reporting tax system, “every person is charged with the reasonable duty to ascertain

the possible tax consequences” of his or her actions).In addition to failing to file the tax returns

when due on April 15, 2011, Taxpayer had notice from the Department since January of 2014 of

the unreported income. Yet, some six months after the Department first notice in this matter,

Taxpayer still was unable to show at the hearing that she had filed her required federal and state

personal income tax returns. Without some federal filing showing a federal adjusted gross income

and a corresponding state income tax return that might warrant a recalculation of Taxpayer’s New

Mexico personal income tax liability, the Department has no evidence or grounds to abate the

assessment.

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the statute, the

Department has no discretion in the imposition of interest, as the statutory use of the word

“shall” makes the imposition of interest mandatory. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24.

Further, the Department has no basis to abate civil negligence penalty under NMSA 1978,

Section 7-1-69 (2007) in this case. When a taxpayer fails to pay taxes due to the State because of

negligence or disregard of rules and regulations, but without intent to evade or defeat a tax, by its

use of the word “shall”, Section 7-1-69 requires that civil penalty be added to the assessment. As

discussed above, the statute’s use of the word “shall” makes the imposition of penalty mandatory

in all instances where a taxpayer’s actions or inactions meets the legal definition of “negligence.”

Despite being required to file a return by Section 7-2-12, Taxpayer was a non-filer of New

In the Matter of the Protest of Melinda L. Schramm., page 6 of 8
Mexico personal income tax in 2010, subjecting her to penalty under Section 7-1-69. See

Regulation 3.1.11.10 (B) NMAC (defining negligence to include inaction when action is required).

Taxpayer’s protest is denied and Taxpayer owes the assessed amount. However, upon proof

of her federal adjusted gross income, Taxpayer may still be able to claim a refund against her paid

New Mexico personal income tax liability until at a minimum the end of this calendar year. See

generally NMSA 1978, Section 7-1-26 (2013).

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessment. Jurisdiction lies over the

parties and the subject matter of this protest. The hearing was timely set and held in compliance

with NMSA 1978, Section 7-1-24.1 (A) (2013).

B. Since Taxpayer derived income in New Mexico in 2010, Taxpayer was required to

file a New Mexico personal income tax return under Section 7-2-12 but failed to do so by the time

of the hearing.

C. The Department’s assessment relied on the only income information it ever received

in this matter: the Form 1099-MISC income that Taxpayer’s New Mexico employer reported to the

IRS. Section 7-2-2 (A) and Holt, ¶23, establish that federal adjusted gross income is the starting

point for calculating New Mexico personal income tax liability. However, because Taxpayer did

not provide evidence of a federal return establishing a federal adjusted gross income that might

justify a recalculation of her state income tax liability, the Department has no basis to abate the

assessment.

D. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

In the Matter of the Protest of Melinda L. Schramm., page 7 of 8
E. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty under the negligence definition found under Regulation 3.1.11.10 (B) NMAC.

For the foregoing reasons, Taxpayer’ protest IS DENIED. As of the date of hearing,

Taxpayer owed $2,127.00 in personal income tax, $425.40 in penalty, and $211.53 in interest for a

total liability of $2,763.93. Interest continues to accrue until the tax principal is satisfied.

DATED: July 16, 2014.

Brian VanDenzen, Esq.,
Chief Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), 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. Either party filing an appeal shall file a courtesy copy of

the appeal with the Hearing Bureau contemporaneous with the Court of Appeals filing so that the

Hearing Bureau can begin to prepare the record proper.

In the Matter of the Protest of Melinda L. Schramm., page 8 of 8