Did Frank's Electric avoid negligence penalties by voluntarily finding and correcting gross receipts and withholding underpayments caused by its accounting system?

Plain-English summary

Frank's Electric did not avoid negligence penalties by voluntarily discovering and correcting its own gross receipts and withholding tax errors. The AHO upheld $5,739.61 of penalty; with remaining tax and interest, $7,663.54 was due at the hearing.

After an earlier audit, Frank's used multiple bookkeepers and accountants to build an accounting and CRS reporting system. In April 2015, a newly hired bookkeeper discovered that the system had underreported and underpaid tax for numerous periods.

The owner directed her to correct the problem, amend prior returns, and improve the system going forward. The AHO found the errors were not intentional or willful.

Inadvertent underreporting was still civil negligence

Section 7-1-69 made penalty mandatory when failure to pay resulted from negligence. Regulation 3.1.11.10 included inaction, inadvertence, erroneous belief, and inattention.

Frank's failure to report and pay the correct amounts when originally due met those definitions even though it later acted responsibly and did not intend to evade tax.

Reliance on the accounting system was not proven professional-advice relief

Frank's argued that its prior bookkeepers and accountants had effectively misled it. The Department-employee provision did not apply because those people were the company's own agents, not Department employees.

The competent-adviser provision required reasonable reliance on tax counsel or an accountant after full disclosure of all relevant facts. Frank's did not establish the advisers' competency, what facts it gave them, or what tax-liability advice they actually provided.

The AHO also explained that a taxpayer cannot transfer its self-reporting duty entirely to an accountant, and an inadequate accounting system can itself support penalty.

Voluntary amendments did not reset the penalty start date

Frank's detected the errors and submitted amended returns before the Department found them through another audit. Even so, penalty was calculated from the original tax due dates until correction; voluntary disclosure did not retroactively make the earlier underpayments timely.

The protest auditor had already applied adjustments and credits that removed penalty for some periods. The amounts still at issue after those adjustments remained supported.

Result: protest DENIED. At the hearing, Frank's owed $559.26 of gross receipts and withholding tax, $5,739.61 of penalty, and $1,364.67 of interest.

What this means for you

Businesses correcting their own returns

Correct errors promptly, but do not assume voluntary amendments automatically remove additions dating from the original due dates. Evaluate specific statutory or regulatory relief before filing.

Businesses relying on accountants

Preserve engagement terms, adviser qualifications, the facts disclosed, and the precise tax advice received. General evidence that professionals designed a system may not prove reasonable reliance on liability advice.

Owners reviewing accounting controls

Reconcile CRS returns to books and bank activity regularly. A system can consistently produce timely filings and still understate the tax legally due.

Common questions

Q: Did Frank's intentionally underpay?
A: No. The AHO found no intentional or willful failure.

Q: Who found the errors?
A: A newly hired bookkeeper discovered them in the company's existing accounting and reporting system.

Q: Did voluntary disclosure remove penalty?
A: No. Penalty still ran from the original due dates for the underpayments.

Q: Why did accountant reliance fail?
A: Frank's did not prove adviser competency, full factual disclosure, or specific advice about its tax liability.

Q: What remained due?
A: $559.26 tax, $5,739.61 penalty, and $1,364.67 interest, totaling $7,663.54.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17 and 7-1-69 — assessment presumption and mandatory negligence penalty
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence definitions and nonnegligence indicators
• Regulation 3.1.6.13 NMAC — presumption for assessed penalty and interest

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error, inadequate accounting systems, and limits on delegating tax responsibility
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer's duty to determine tax consequences
• GEA Integrated Cooling Technology v. State Taxation and Revenue Department, 2012-NMCA-010 — penalty calculated from the tax due date
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — informed consultation required for reasonable mistake-of-law relief

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Frank’s Electric LLC
• Decision PDF: D&O 16-05

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
FRANK’S ELECTRIC LLC No. 16-05
TO ASSESSMENTS ISSUED UNDER
LETTERS ID NOs. L0106696752, L1180438576, L0643567664, L1717309488, L0375132208,
L1058791472, L1217073200, L0680202288, L1753944112, L0623988784, L0411766832,
L2132533296, L0010215472, L1485508656, L1083957296, L0948637744, L0547086384,
L2022379568

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on November 30, 2015 before

Brian VanDenzen, Esq., Interim Chief Hearing Officer, in Santa Fe. At the hearing, Frank

Zamora, owner of Frank’s Electric LLC (“Taxpayer”) appeared, along with Taxpayer employee

AnnaBeth Del Canto. Staff Attorney Elena Morgan appeared representing the State of New

Mexico Taxation and Revenue Department (“Department”). Protest Auditor Sonya Varela

appeared as a witness for the Department. Taxpayer Exhibits #1-2 were admitted into the record.

Department Exhibits A-C were admitted into the record. All exhibits are more thoroughly

described in the Administrative Exhibit Coversheet. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On August 5, 20151, under letter id. no. L0106696752, the Department assessed

Taxpayer for $914.98 in penalty and $116.41 in interest for the CRS reporting period ending on

May 31, 2012.

1
The dates of assessments in these findings of fact are out of order so that the reporting periods at issue are in
sequential order.

2. On August 5, 2015, under letter id. no. L1180438576, the Department assessed

Taxpayer for $1,135.90 in penalty and $385.76 in interest for the CRS reporting period ending

on June 30, 2012.

3. On August 5, 2015, under letter id. no. L0643567664, the Department assessed

Taxpayer for $653.30 in penalty and $185.47 in interest for the CRS reporting period ending on

July 31, 2012.

4. On August 5, 2015, under letter id. no. L1717309488, the Department assessed

Taxpayer for $599.30 in penalty and $168.81 in interest for the CRS reporting period ending on

August 31, 2012.

5. On August 5, 2015, under letter id. no. L0375132208, the Department assessed

Taxpayer for $593.60 in penalty and $147.29 in interest for the CRS reporting period ending on

November 30, 2012.

6. On July 8, 2015, under letter id. no. L1058791472, the Department assessed

Taxpayer for $1,759.43 in gross receipts tax, $443.80 in penalty, $146.98 in interest, $259.93 in

withholding tax, $65.60 in penalty, and $21.72 in interest for the CRS reporting period ending on

February 28, 2013.

7. On July 15, 2015, under letter id. no. L1217073200, the Department assessed

Taxpayer for $1,030.50 in gross receipts tax, $1,030.50 in penalty, and $340.92 in interest for the

CRS reporting period ending on March 31, 2013.

8. On July 15, 2015, under letter id. no. L0680202288, the Department assessed

Taxpayer for $2,258.18 in gross receipts tax, $451.60 in penalty, and $132.52 in interest for the

CRS reporting period ending on June 30, 2013.

In the Matter of the Protest of Frank’s Electric LLC, page 2 of 11

9. On July 15, 2015, under letter id. no. L1753944112, the Department assessed

Taxpayer for $1,346.29 in gross receipts tax, $1,164.80 in penalty, and $304.74 in interest for the

CRS reporting period ending on August 31, 2013.

10. On August 11, 2015, under letter id. no. L0623988784, the Department assessed

Taxpayer for $23.02 in penalty for the CRS reporting period ending on September 30, 2013.

11. On July 15, 2015, under letter id. no. L0411766832, the Department assessed

Taxpayer for $22.65 in gross receipts penalty and $18.32 in withholding tax penalty for the CRS

reporting period ending on January 31, 2014.

12. On July 8, 2015, under letter id. no. L2132533296, the Department assessed

Taxpayer for $15.41 in withholding tax penalty and $2.67 in withholding tax interest for the CRS

reporting period ending on March 31, 2014.

13. On July 8, 2015, under letter id. no. L0010215472, the Department assessed

Taxpayer for $76.88 in withholding tax penalty and $9.28 in withholding tax interest for the CRS

reporting period ending on September 30, 2014.

14. On July 15, 2015, under letter id. no. L1485508656, the Department assessed

Taxpayer for $47.44 in gross receipts tax penalty and $5.73 in interest for the CRS reporting

period ending on September 30, 2014.

15. On July 8, 2015, under letter id. no. L1083957296, the Department assessed

Taxpayer for $96.74 in withholding tax penalty and $11.70 in interest for the CRS reporting

period ending on October 31, 2014.

16. On July 15, 2015, under letter id. no. L0948637744, the Department assessed

Taxpayer for $96.88 in gross receipts tax penalty and $11.72 in interest for the CRS reporting

period ending on October 31, 2014.

In the Matter of the Protest of Frank’s Electric LLC, page 3 of 11

17. On July 8, 2015, under letter id. no. L0547086384, the Department assessed

Taxpayer for $63.24 in withholding tax penalty and $7.41 in interest for the CRS reporting

period ending on January 31, 2015.

18. On July 15, 2015, under letter id. no. L2022379568, the Department assessed

Taxpayer for $56.96 in gross receipts tax penalty and $6.67 in interest for the CRS reporting

period ending on January 31, 2015.

19. On July 20, 2015, Taxpayer protested the Department’s assessments, arguing that

it should not be liable for assessed penalty because it had detected and reported its errors to the

Department.

20. On August 17, 2015, the Department’s protest office acknowledged receipt of a

valid protest.

21. On October 6, 2015, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

22. On October 6, 2015, the Administrative Hearings Office sent Notice of

Telephonic Scheduling Conference, scheduling this matter for a scheduling hearing on

November 5, 2015, within 90-days of the Department’s acknowledgment of receipt of a valid

protest.

23. A Scheduling Hearing in fact occurred on November 5, 2015, where a merits

hearing date of November 30, 2015 was selected. The parties did not object that conducting the

scheduling conference satisfied the 90-day hearing requirement under NMSA 1978, Section 7-

1B-8 (A) (2015).

24. On November 6, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on November 30, 2015.

In the Matter of the Protest of Frank’s Electric LLC, page 4 of 11

25. The only issue at protest is whether the Department’s assessments of penalty

should be abated in light of Taxpayer’s arguments at protest.

26. Taxpayer is engaged in the electrical business and is located in Albuquerque, NM.

27. Taxpayer had previously been subject to Department audit and assessment of an

an outstanding tax liability.

28. As a result of that audit, Taxpayer engaged the services of numerous bookkeepers

and accountants who helped develop an accounting and tax reporting system.

29. During the relevant periods, Taxpayer filed and paid CRS taxes in accord with the

protocols developed by the various bookkeepers and accountants it had employed over the years.

30. On or about April of 2015, Taxpayer hired AnneBeth Del Canto as its

bookkeeper.

31. Ms. Del Canto detected that the system Taxpayer had developed resulted in the

underreporting and paying CRS taxes during certain periods during the relevant time.

32. Ms. Del Canto brought that to the attention of Frank Zamora, Taxpayer’s owner.

33. Mr. Zamora directed Ms. Del Canto to correct the problem, including amending

previously filed returns, because he wanted to ensure that Taxpayer was compliant with all of its

tax obligations.

34. Taxpayer did not intentionally or willfully fail to pay the gross receipts tax and

withholding taxes when due.

35. Ms. Del Canto spoke with a Department employee in Albuquerque about

preparing amended returns for the periods with an outstanding liability, which Ms. Del Canto

submitted on Taxpayer’s behalf.

36. Ms. Del Canto also improved Taxpayer’s accounting system going forward.

In the Matter of the Protest of Frank’s Electric LLC, page 5 of 11

37. After receiving the amended returns, the Department issued assessments to

Taxpayer, as described in findings of fact #1-18.

38. After Taxpayer’s protest, Department Protest Auditor Sonya Varela did make a

series of adjustments and credits to certain periods on Taxpayer’s account, which resulted in the

abatement of penalty for the reporting periods ening in February 2014, September 2014, October

2014, January 2015, and February 2015. [Taxpayer Ex. 3-1].

39. As of the date of hearing, Taxpayer owed $559.26 in assessed gross receipts and

withholding tax, $5,739.61 in penalty, and $1,364.67 in interest for a total tax liability of

$7,663.54. [Department Ex. B].

DISCUSSION

Taxpayer agrees that it owes assessed tax principal. However, Taxpayer argues that

penalty should be abated because the errors it made were not intentional, because it detected and

self-reported its error to the Department, and because Taxpayer believed under 3.1.11.11 (A)

NMAC it was misled by the accounting system its previous accountants and bookkeepers had

developed over the years.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessments issued in this case are

presumed correct. Consequently, Taxpayer has the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. 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,

In the Matter of the Protest of Frank’s Electric LLC, page 6 of 11
¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

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, NMSA 1978 Section 7-1-69

(2007) requires that

there shall be added to the amount assessed a penalty in an amount equal
to the greater of: (1) two percent per month or any fraction of a month
from the date the tax was due multiplied by the amount of tax due but not
paid, not to exceed twenty percent of the tax due but not paid.

(italics added for emphasis).

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.” See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24, 32 (use of

the word “shall” in a statute indicates provision is mandatory absent clear indication to the

contrary).

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

Although certainly Taxpayer’s underreporting and paying of the CRS taxes was not intentional in

this case, Taxpayer was nevertheless civilly negligent under Regulation 3.1.11.10 (B) & (C) NMAC

because Taxpayer failed to take action to report and pay the appropriate amount of CRS taxes when

required through inadvertent error. Inadvertent error constitutes negligence subject to penalty under

Section 7-1-69. See El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-

NMCA-070, ¶9-11, 108 N.M. 795.

In the Matter of the Protest of Frank’s Electric LLC, page 7 of 11
In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o penalty shall

be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

mistake of law made in good faith and on reasonable grounds.” Here, there is no evidence that

Taxpayer made an informed judgment or determination based on reasonable grounds that when

Taxpayer failed to report and pay CRS taxes. See C & D Trailer Sales v. Taxation and Revenue

Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty upheld where there was no evidence that the

taxpayer “relied on any informed consultation” in deciding not to pay tax). Consequently, this

mistake of law provision of Section 7-1-69 (B) does not mandate abatement of penalty in this

case.

The other grounds for abatement of civil negligence penalty are found under Regulation

3.1.11.11 NMAC. That regulation establishes eight indicators of nonnegligence where penalty

may be abated. Based on the argument of Taxpayer and the evidence presented, only two

factors under Regulation 3.1.11.11 NMAC are potentially pertinent in this proceeding:

A. the taxpayer proves the taxpayer was affirmatively misled by a
department employee;
…
D. the taxpayer proves that the failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax counsel or
accountant as to the taxpayer's liability after full disclosure of all relevant
facts; failure to make a timely filing of a tax return, however, is not
excused by the taxpayer's reliance on an agent;

In argument, Taxpayer asserted that under 3.1.11.11 (A) NMAC it was affirmatively

misled by its own accountants and bookkeepers who developed Taxpayer’s accounting system.

However, this regulation only applies to instances where a taxpayer is misled by a Department

employee, not their own employee. Under New Mexico's self-reporting tax system, “every person

In the Matter of the Protest of Frank’s Electric LLC, page 8 of 11
is charged with the reasonable duty to ascertain the possible tax consequences” of his or her

actions. Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. It is

the duty of Taxpayer to determine what CRS taxes need to be reported and paid. Unless a specific

Department employee affirmatively told Taxpayer that the gross receipts taxes and withholding

taxes were not due on the relevant CRS returns, which there is no evidence of in this protest,

Taxpayer’s employees own failings in developing an accurate tax reporting system does not

abrogate Taxpayer of its responsibility to file and pay the tax nor does under 3.1.11.11 (A) NMAC

provide any relief to Taxpayer.

The other factor potentially relevant in this case is found under Regulation 3.1.11.11 (D)

NMAC, where civil negligence penalty may be abated if Taxpayer reasonably relied on the

advice of competent tax counsel or accountant after full disclosure of all relevant facts. Here, the

only evidence is that the accountants and bookkeepers helped developed Taxpayer’s tax

reporting system. There is no evidence that the the accountants or bookkeepers Taxpayer used

were competent tax counsel or accountants, what information was provided to them as part of

developing the system, or what advice those accountants or bookkeepers provided to Taxpayer

about the system. When an accounting system at large is insufficient or inadequate, that can be a

basis for imposition of penalty in New Mexico. See El Centro Villa Nursing Center, 1989-NMCA-

070, ¶11. Given a taxpayer’s duty under Tiffany Construction Co., 1976-NMCA-127, ¶5, to

ascertain the tax consequences of its actions, a taxpayer cannot “abdicate this responsibility [to

learn of tax obligations] merely by appointing an accountant as its agent in tax matters.” El Centro

Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶14, 108 N.M. 795.

Taxpayer next argued that because it detected and corrected its own errors, penalty should

be abated. The Court of Appeals recently considered and rejected a similar argument in N.M.

In the Matter of the Protest of Frank’s Electric LLC, page 9 of 11
Taxation & Revenue Dep't v. Exerplay, Inc., 2014 N.M. App. Unpub. LEXIS 421 (Unpublished,

non-precedential summary reversal). Under the statute, at the time of the issuance of an

assessment, penalty is calculated from the date the tax was due. See GEA Integrated Cooling Tech.

v. State Taxation & Revenue Dep't, 2012-NMCA-010, ¶10. In this case, the tax was due at the time

the CRS returns were originally filed until Taxpayer amended those returns to include the

additional outstanding liabilities it had subsequently discovered. Therefore, the Department’s

imposition of penalty was legally supported. For the foregoing reasons, Taxpayer’s protest IS

DENIED.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessments, and

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

B. The hearing was timely set within 90-days of protest under NMSA 1978, Section 7-

1-24.1 (2013).

C. Taxpayer did not overcome the presumption of correctness, including the assessed

penalty, that attached to the assessments under NMSA 1978, Section 7-1-17 (C) (2007) and

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

D. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inaction in failing to include gross receipts tax and withholding tax

liabilities on its CRS returns during the relevant period met the definition of civil negligence under

Regulation 3.1.11.10 NMAC. Taxpayer did not establish a good faith, mistake of law made on

reasonable grounds that would allow for abatement of penalty under Section 7-1-69 (2007).

E. None of the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC

allow for abatement of penalty in this protest.

In the Matter of the Protest of Frank’s Electric LLC, page 10 of 11
For the foregoing reasons, the Taxpayers’ protest IS DENIED. IT IS ORDERED that the

Taxpayer is liable for the assessed penalty. As of the date of the hearing, Taxpayer owed $559.26

in assessed gross receipts and withholding tax, $5,739.61 in penalty, and $1,364.67 in interest for

a total tax liability of $7,663.54.

DATED: February 18, 2016.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

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 Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Frank’s Electric LLC, page 11 of 11