Could Elizabeth Brower avoid estimated-tax penalties because her retirement distributions arrived mostly in December and she paid based on income received by each due date?

Plain-English summary

Elizabeth Brower remained liable for estimated-personal-income-tax penalties even though she received most of her retirement distributions in December and based her payments on income received by each due date. The AHO upheld adjusted penalties of $31 for 2011 and $430 for 2012.

Brower owed $37,155 of personal income tax for 2011 and $32,319 for 2012. She made four estimated payments for each year, but the earlier installments were substantially smaller than the amounts required under the statutory calculation.

The Department initially offset part of Brower's 2013 refund against 2011 and 2012 estimated-tax penalties. It later refunded the 2012 offset because it had not formally assessed that year, then issued a formal assessment. During the protest, it recalculated and abated penalty above the $31 and $430 amounts.

Estimated tax followed a statutory payment formula

Section 7-2-12.2 required an annual payment equal to the lesser of 90% of current-year tax or 100% of prior-year tax. The amount generally had to be paid in installments on April 15, June 15, September 15, and January 15.

For 2011, Brower's prior-year liability produced required installments of $1,367. For 2012, the current-year calculation produced required installments of $7,272.

Brower instead paid according to retirement distributions received by each due date. She argued that equal payments were unfair because the due dates did not divide the calendar evenly, investment distributions varied, and requiring payments before December effectively taxed income not yet earned.

The AHO found the statute clear and applied it as written. A taxpayer uncertain about 90% of current-year tax could use 100% of the prior year's tax, and full payment of the required annual amount by the following January 15 also avoided penalty under the cited provision.

The temporary refund did not erase underpayment

Brower argued that penalty should be excused because the Department initially took the 2012 amount without a formal assessment, refunded it, and then assessed it.

The decision cited Section 7-1-30 for the rule that the Department did not need a formal assessment before collecting penalty and interest. In any event, returning the offset and later issuing an assessment did not change whether Brower had underpaid the required installments.

Her interpretation did not establish nonnegligence

The estimated-tax provision allowed relief when underpayment was not due to fraud, negligence, or disregard of rules. Brower believed her payment method complied.

The AHO applied Tiffany Construction: lack of knowledge or an erroneous legal belief constituted negligence for penalty purposes. Because Brower neither paid the required installments nor completed the required annual payment by January 15, penalty applied.

Result: protest DENIED. The adjusted $31 and $430 penalties remained due.

What this means for you

Retirees with year-end distributions

Do not assume estimated payments can track only cash received by each installment date. Calculate both statutory annual-payment alternatives and plan installments from the lower amount.

Taxpayers with volatile income

The prior-year-tax method can provide a known figure when current-year income is difficult to predict. Document the calculation and verify whether the January 15 full-payment rule applies.

Taxpayers disputing a refund offset

A procedural correction to an offset does not necessarily remove the underlying liability. Separate collection mechanics from the substantive estimated-tax calculation.

Common questions

Q: What annual payment standard applied?
A: The lesser of 90% of current-year tax or 100% of prior-year tax.

Q: Why did Brower object to equal installments?
A: Most of her retirement distributions arrived in December, so she believed payments should follow income actually received.

Q: Could uncertainty about current-year tax excuse payment?
A: No. The decision noted that a taxpayer could use 100% of the prior year's tax instead.

Q: Did the Department reduce the penalties?
A: Yes. After adjustment, $31 remained for 2011 and $430 for 2012.

Q: Did refunding the original 2012 offset eliminate penalty?
A: No. The later formal assessment and the underlying installment shortfall remained valid.

Citations and references

Statutes:

• NMSA 1978, § 7-2-12.2 — required annual payment, installment dates, and underpayment penalty
• NMSA 1978, § 7-1-30 — collection of penalty and interest without formal assessment
• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and inclusion of penalty in “tax”

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — lack of knowledge or erroneous belief as negligence
• State v. Davis, 2003-NMSC-022 — legislative intent and statutory interpretation
• Wood v. State Educational Retirement Board, 2011-NMCA-020 — plain-language statutory construction

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Elizabeth Brower
• Decision PDF: D&O 15-31

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
ELIZABETH BROWER, No. 15-31
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L1299218384
AND TO THE DENIAL OF REFUND ISSUED UNDER
LETTER ID NO. L1355493328

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 31, 2015, before

Hearing Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department) was

represented by Ms. Elena Morgan, Staff Attorney. Ms. Milagros Bernardo, Auditor, also appeared

on behalf of the Department. Ms. Elizabeth Brower (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 March 10, 2015, the Department denied the Taxpayer’s request for refund of an

amount that was offset from the refund of her 2013 tax year. The offset was done to

satisfy a penalty for underpayment of estimated tax on her 2011 and 2012 tax years.

[L1355493328]

2. On March 23, 2015, the Taxpayer filed a formal protest letter.

3. On May 21, 2015, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

4. On May 26, 2015, the Administrative Hearings Office issued a notice of hearing for a

telephonic scheduling hearing on June 10, 2015. The hearing was set within 90 days of

the protest.

5. At some point, the Department refunded the amount taken for the 2012 tax year because a

formal assessment of that year had not been done.

6. On May 22, 2015, the Department formally assessed the Taxpayer for the penalty for

underpayment of estimated tax for the 2012 tax year. [L1299218384]

7. On June 4, 2015, the Taxpayer filed a formal protest letter.

8. On June 18, 2015, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

9. Based upon the discussions at the scheduling hearing on June 10, 2015, the second

protest was consolidated with the first protest. An order and notice was issued on June

23, 2015, which set the hearing for August 31, 2015. The hearing was set within 90 days

of the second protest.

10. In 2011 and 2012, the Taxpayer was required to make estimated payments of her

personal income tax.

11. For 2011 estimated tax payments, the Taxpayer paid $700.00 in April, $500.00 in June,

$1,700.00 in September, and $2,500.00 in January of 2012.

12. For 2012 estimated tax payments, the Taxpayer paid $3,500.00 in April, $500.00 in June,

$700.00 in September, and $2,500.00 in January of 2013.

13. The Taxpayer receives the bulk of her retirement distributions in December of each year.

14. The Taxpayer owed $5,468.00 in personal income taxes for the 2010 tax year, $37,155.00

for the 2011 tax year, and $32,319.00 for the 2012 tax year.

Elizabeth Brower
Letter ID Nos. L1299218384 and L1355493328
page 2 of 6

15. The Taxpayer should have paid equal installments of estimated tax for 2011 in the

amounts of $1,367.00, which would be 100% of her tax liability for the previous year.

16. The Taxpayer should have paid equal installments of estimated tax for 2012 in the

amounts of $7,272.00, which would be 90% of her tax liability for that year.

17. After the protest was filed, the Department adjusted the amounts of penalty assessed and

abated amounts in excess of the adjustment. The current penalty for 2011 is $31.00, and

for 2012 is $430.00.

DISCUSSION

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

underpayment of estimated tax for the 2011 and 2012 tax years.

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 Taxpayer’s burden to present evidence and legal argument to show that she is

entitled to an abatement of penalty.

Estimated Tax.

Taxpayers are required to make “the required annual payment in installments through

either withholding or estimated tax payments.” NMSA 1978, § 7-2-12.2 (A) (2011). The

required annual payment is either 90% of the current taxable year or 100% of the prior tax year,

whichever is less. See NMSA 1978, § 7-2-12.2 (B). Estimated payments are to be made by the

Elizabeth Brower
Letter ID Nos. L1299218384 and L1355493328
page 3 of 6
15th days of April, June, and September of the taxable year, and by the 15th day of January of the

following year. See NMSA 1978, § 7-2-12.2 (D). Each installment should be equal to 25%, or

more as required in some situations, of the required annual payment, so that 100% of the

required annual payment has been paid by January 15th of the following year. See NMSA 1978,

§ 7-2-12.2 (C). When a taxpayer makes underpayments of the estimated tax, a penalty applies to

the amounts of underpayment for the period of underpayment. See NMSA 1978, § 7-2-12.2 (G).

The Taxpayer essentially argued that the statute was unfair. The Taxpayer argued that

requiring equal payments was unreasonable since the payment due dates do not divide the

calendar into even quarters. The Taxpayer made her estimated tax payments based upon the

actual distributions she had received by the due dates. The Taxpayer argued that it was an

impossible task to determine what 90% of a current taxable year would be since distribution

amounts can vary dramatically based on payment dates, market rates, and interest rates. The

Taxpayer argued that by requiring equal estimated payments without regard to when funds are

actually distributed to the Taxpayer, the Department is essentially taxing income that has not

been earned yet. For all of those reasons, the Taxpayer felt that the statute was unfair,

unreasonable, and should not apply to her.

The Department argued that the statute was fair as it treats all similarly situated taxpayers

in the same manner. The Department argued that a taxpayer who is uncomfortable estimating

90% of the taxable year’s income can simply pay 100% of the prior year’s tax. The Department

argued that the statute should be followed.

The primary goal in interpreting a statute is to give it the effect that the Legislature

intended. See State v. Davis, 2003-NMSC-022, 134 N.M. 172. Statutory construction begins by

looking at the plain meaning of the language. See id. See also Wood v. State Educ. Ret. Bd., 2011-

Elizabeth Brower
Letter ID Nos. L1299218384 and L1355493328
page 4 of 6
NMCA-020, ¶ 12, 149 N.M. 455. See also State v. Maestas, 2007-NMSC-001, 149 P.3d 933. See

also Johnson v. NM Oil Conservation Com’n, 1999-NMSC-021, 127 NM 120. The statute

requires that equal payments of estimated tax be made by their respective due dates or that 100%

of the required annual payment be made by January 15th of the following year. See NMSA 1978, §

7-2-12.2. The law is clear, and the Hearing Officer is bound to apply the law as it is written,

despite the Taxpayer’s arguments to the contrary. Therefore, the Taxpayer was required to make

equal payments of estimated tax or to pay the required annual payment in full by January 15th of

the following tax year.

Assessment of Penalty.

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

penalty should be excused since the Department initially took part of her return as an offset

against the 2012 penalty when she had not been formally assessed for 2012. The Department is

not required to make a formal assessment before collecting penalty and interest. See NMSA

1978, § 7-1-30 (1965). The fact that the Department refunded the amount seized and then issued

a formal assessment does not negate the Taxpayer’s failure to make full estimated tax payments.

Penalty applies when any installment of estimated tax is underpaid. See NMSA 1978, §

7-2-12.2 (G). Penalty is not applied some situations even when there is an underpayment of

estimated tax. See NMSA 1978, § 7-2-12.2 (H). If the underpayment is “not due to fraud,

negligence, or disregard of rules and regulations”, then penalty is not imposed. Id. The

Taxpayer felt that her payments were made as required and that she was not negligent or in

disregard of the rules. A taxpayer’s lack of knowledge or erroneous belief 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. No penalty will be imposed when a taxpayer pays the

Elizabeth Brower
Letter ID Nos. L1299218384 and L1355493328
page 5 of 6
required annual payment in full by January 15th of the following year. See NMSA 1978, § 7-2-

12.2 (H). The Taxpayer failed to pay the full amounts of estimated tax that were due when they

were due. The Taxpayer failed to pay 100% of the required annual payment by January 15th of

the following tax year. Therefore, penalty was properly assessed.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Assessment issued under Letter ID

number L1299218384 and to the Denial of Refund issued under Letter ID number L1355493328,

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

B. The Taxpayer was required to pay estimated tax for 2011 and 2012 in equal

installments or so that the required annual payment was paid in full no later than January 15, 2012

and January 15, 2013, respectively. See NMSA 1978, § 7-2-12.2. The Taxpayer failed to do so.

C. Therefore, the Taxpayer was properly assessed penalty on the underpayments of

estimated tax for 2011 and 2012. See id.

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

DATED: September 29, 2015.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

Elizabeth Brower
Letter ID Nos. L1299218384 and L1355493328
page 6 of 6