Was a 2016 assessment of 2011-2012 construction receipts timely when the contractor underreported gross receipts tax by more than 25%?

Plain-English summary

The Department timely assessed Kinsey Construction under the six-year limitations period because the company underreported its gross receipts tax liability by more than 25%. The AHO upheld the hearing-date balance of $58,888.09 tax, $11,878.83 penalty, and $7,409.44 interest.

Kinsey had provided New Mexico construction services since 2002. In 2011, the Department required it to change from quarterly to monthly reporting and from paper to electronic filing because its income exceeded the filing threshold. Kinsey continued filing CRS returns but struggled to report and pay accurately after the change.

A federal Schedule C mismatch showed major differences:

• For 2011, CRS returns reported $418,381.09 while Schedule C reported $976,614.
• For 2012, CRS returns reported $23,324.15 while Schedule C reported $249,896.

Kinsey challenged the timing of the assessment, penalty, and interest rather than the remaining tax principal.

More than 25% underreporting allowed six years

Section 7-1-18 generally gave the Department three years to assess, but subsection (D) allowed six years when tax liability was underreported by more than 25%.

At the hearing, the Department auditor confusingly testified that the threshold had not been crossed, and counsel initially referred to the ordinary three-year period. But the admitted exhibit plainly showed differences far above 25%, and argument was not evidence.

Because Kinsey presented nothing to rebut the exhibit, the January 20, 2016 assessment of 2011 and 2012 periods was timely within six years.

Filing difficulties did not establish penalty relief

Negligence included failing to act, inadvertence, carelessness, and erroneous belief. Kinsey's inaccurate reporting therefore met the regulatory definition.

The company did not show an informed, reasonable mistake of law or any other non-negligence factor. Mr. Kinsey hired a tax professional in 2012, but that professional prepared only his personal income-tax returns—not the business's CRS returns—so there was no relevant professional advice on which to rely.

Interest remained mandatory from each original due date until payment of the tax principal.

Result: protest DENIED. Tax, penalty, and continuing interest remained due.

What this means for you

Construction businesses

Reconcile federal Schedule C or business-return receipts to New Mexico CRS filings every period. Large mismatches can extend the Department's assessment window from three years to six.

Businesses changing filing frequency or systems

Operational difficulty with monthly or electronic filing does not remove tax, penalty, or interest. Add review controls when reporting rules change.

Accountants and tax professionals

Document the scope of each engagement. Reliance on a preparer for personal returns does not establish reliance for separate gross receipts filings the preparer never handled.

Common questions

Q: What triggered the six-year period?
A: The admitted Schedule C comparison showed underreporting exceeding 25% for both assessed years.

Q: Did the auditor agree at the hearing?
A: The auditor testified otherwise, but the documentary exhibit contradicted that testimony and Kinsey offered no rebuttal evidence.

Q: Why was the penalty upheld?
A: Inaccurate reporting through inadvertence or failure to act was negligence, and Kinsey proved no statutory or regulatory exception.

Q: Did hiring a tax professional help?
A: No. The professional prepared personal income-tax returns, not Kinsey Construction's CRS returns.

Q: What amounts remained at the hearing?
A: $58,888.09 tax, $11,878.83 penalty, and $7,409.44 interest, with interest continuing to accrue.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-18(A) and (D) — three- and six-year assessment periods
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69(B) — interest, negligence, and mistake of law
• Regulations 3.1.6.13, 3.1.11.10, and 3.1.11.11 NMAC — presumption, negligence, and non-negligence

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer's duty to determine tax consequences
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error as civil negligence
• Archuleta v. O'Cheskey, 1972-NMCA-165 — assessment presumption and taxpayer burden
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kinsey Construction
• Decision PDF: D&O 16-30

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
KINSEY CONSTRUCTION No. 16-30
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L2147275312

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on March 29, 2016 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Carlos Kinsey

appeared for Kinsey Construction (“Taxpayer”). Staff Attorney Elena Morgan appeared

representing the State of New Mexico Taxation and Revenue Department (“Department”).

Protest Auditor Veronica Galewaler appeared as a witness for the Department. Department

Exhibits A-D 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 January 20, 2016, under letter id. no. L2147275312, the Department assessed

Taxpayer for $59,393.08 in gross receipts tax, $11,878.62 in penalty, and $7,071.02 in interest

for the CRS reporting periods between January 1, 2011 and December 31, 2012.

2. On February 1, 2016, Taxpayer protested the Department’s assessment.

3. On February 9, 2016, the Department’s protest office acknowledged receipt of a

valid protest.

4. On February 26, 2016, the Department filed a request for hearing in this matter

with the Administrative Hearings Office.

5. On March 7, 2016, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on March 29, 2016, within

90-days of the Department’s acknowledgment of receipt of a valid protest.

6. Taxpayer is in business in New Mexico, providing construction services.

7. Taxpayer began its business in 2002.

8. On September 26, 2011, the Department informed Taxpayer under letter id. No.

L117456441 that it would have to switch from the quarterly reporting method to the monthly

reporting method because its monthly income exceeded $200. [Dept. Ex. A-1].

9. Taxpayer was also required to switch from the paper reporting method to the

electronic reporting method.

10. Although Taxpayer continued to file the CRS returns, because of these changes,

Taxpayer struggled to accurately report and pay gross receipts tax on those returns.

11. Eventually, in 2012, Mr. Kinsey hired a tax professional to assist with preparing

his personal income tax returns but not Taxpayer’s CRS returns.

12. Through its Schedule C mismatch program with the IRS, the Department detected

that Mr. Kinsey had reported more gross receipts business income on its Federal Schedule C than

was reported by Taxpayer on its CRS returns in New Mexico during the relevant period.

13. Taxpayer only reported a total of $418,381.09 in gross receipts for the year

ending December 31, 2011 on its CRS-1 returns, but Mr. Kinsey’s federal income tax Schedule

C reported gross receipts totaling $976,614.00, a discrepancy exceeding 25%. [Dept. Ex. C-2].

14. Taxpayer only reported a total of $23,324.15 in gross receipts for the year ending

December 31, 2012 on its CRS-1 returns, but Mr. Kinsey’s federal income tax Schedule C

reported gross receipts totaling $249,896.00, a discrepancy exceeding 25%. [Dept. Ex. C-2].

In the Matter of the Protest of Kinsey Construction, page 2 of 8

15. Based on this mismatch, the Department issued its assessment described in

finding of fact #1.

16. As of the date of hearing, Taxpayer owed $58,888.09 in tax, $11,878.83 in

penalty, and $7,409.44 in interest. [Dept. Ex. D].

DISCUSSION

Taxpayer challenged the assessment of penalty and interest, particularly given what

Taxpayer believed was a lengthy delay in the Department’s assessment. The only issues at

protest then are the timeliness of the Department’s assessment, the assessment of interest, and the

assessment of civil penalty.

Presumption of Correctness.

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

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. 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,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

Timeliness of Assessment.

The Tax Administration Act (“TAA”) places limitations on the Department’s ability to

assess a tax. Generally, under NMSA 1978, Section 7-1-18 (A) (2013), the Department has “three

years from the end of the calendar year in which payment of the tax was due” to assess a tax

In the Matter of the Protest of Kinsey Construction, page 3 of 8
liability, unless otherwise expressly allowed in the remaining subparagraphs of that section.

Potentially pertinent to this case is Section 7-1-18 (D), where if a taxpayer underreports a tax

liability by more than 25%, the Department has six years from the end of the calendar year in which

payment of the tax was due to issue an assessment.

When pressed about the timeliness of its assessments in the face of Taxpayer’s concerns

about pre-assessment delay, the Department’s protest auditor confusingly testified that Taxpayer did

not underreport its tax liability by more than 25% percent. After taking a recess to review the statute

of limitations provision, Department’s counsel indicated her belief that the Department was

proceeding only under the general three-year statute of limitations (argument of counsel is not

evidence). However, Department Ex. C-2 clearly shows that Taxpayer underreported its gross

receipts tax liability by far more than 25%. In the face of this admitted exhibit, Taxpayer presented

no evidence to overcome the presumption of correctness of the assessment regarding the 25%

underreported tax liability. Thus, because the Department’s January 20, 2016 assessment was made

within six-years of the end of the calendar year in which the tax was due, the assessment was timely

under the Section 7-1-18 (D)’s statute of limitations for an underreported tax liability exceeding

25%.

Interest.

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,

regardless of the reason for non-payment of the tax, 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,

In the Matter of the Protest of Kinsey Construction, page 4 of 8
146 N.M. 24. The language of Section 7-1-67 also makes it clear that interest begins to run from the

original due date of the tax until the tax principal is paid in full. In this case, the Department has no

discretion under Section 7-1-67 and must assess interest against Taxpayer from when the tax was

originally due until Taxpayer pays the gross receipts tax principal in this matter.

Penalty.

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 , ¶22 (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.” Under

New 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. Tiffany Construction Co. v. Bureau

of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. In New Mexico inadvertent error constitutes the

civil negligence subject to penalty under Section 7-1-69. See El Centro Villa Nursing Center v.

In the Matter of the Protest of Kinsey Construction, page 5 of 8
Taxation and Revenue Department, 1989-NMCA-070, 108 N.M. 795. In this case, Taxpayer was

negligent under Regulation 3.1.11.10 (B) & (C) NMAC because Taxpayer did not report and pay an

accurate amount of tax in the remaining assessed period. This inadvertent error constituted

negligence under El Centro Villa Nursing Center.

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.

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, none of which are applicable to the facts of this protest.

While Mr. Kinsey eventually used a tax professional to prepare his personal income tax returns,

since that person did not prepare CRS-1 returns, there could be no reasonable reliance on that

person that would justify abating penalty in this case. The Department’s assessment of penalty

and interest in this matter was appropriate.

CONCLUSIONS OF LAW

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

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

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

Section 7-1B-8 (2015).

C. Because Taxpayer underreported its tax liability by more than 25%, the

Department’s January 20, 2016 assessment was timely made within six-years of when the tax was

In the Matter of the Protest of Kinsey Construction, page 6 of 8
due, satisfying NMSA 1978, Section 7-1-18 (D)’s statute of limitations for an underreported tax

liability exceeding 25%.

D. Taxpayer did not overcome the presumption of correctness on the assessed penalty

and interest under NMSA 1978, Section 7-1-17 (C) (2007), NMSA 1978, §7-1-3 (X) (2013),

Regulation 3.1.6.13 NMAC, and Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

E. Under NMSA 1978, Section 7-1-67 (2007)’s mandatory “shall” language,

Taxpayer is liable for accrued interest under the assessment. See Marbob Energy Corp. v. N.M.

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

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

penalty because Taxpayer’s failure to accurately report and pay gross receipts tax in the assessed

period met the definition of civil negligence under Regulation 3.1.11.10 NMAC. See El Centro

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

G. 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).

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

allow for abatement of penalty in this protest.

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

Taxpayer owed $58,888.09 in tax, $11,878.83 in penalty, and $7,409.44 in interest. Interest

continues to accrue under Section 7-1-67 until tax principal is satisfied.

DATED: June 27, 2016.

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

In the Matter of the Protest of Kinsey Construction, page 7 of 8
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), 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 Kinsey Construction, page 8 of 8