Could Donald Krumrey recover a $21.76 estimated-tax underpayment penalty because he did not understand the New Mexico PIT instructions to require 2015 payments?

Plain-English summary

Donald Krumrey could not recover a $21.76 estimated-tax underpayment penalty because the New Mexico PIT packet contained the relevant instructions and he did not fully read them. The AHO treated his oversight as negligence rather than Department misinformation.

Krumrey moved to New Mexico in 2014 and prepared his own state returns. His primary income came from Social Security and pensions from the City of Chicago and the Bahai National Center. Only the Chicago pension had federal withholding, and none of those sources withheld New Mexico income tax.

Krumrey had never before needed to make estimated payments. After reviewing portions of the 2014 New Mexico PIT packet, he concluded that the estimated-tax provisions did not apply to him and did not read the separate PIT-ES instructions.

The Department assessed a $21.76 penalty after he filed his 2015 return. Krumrey paid it and requested a refund. When the Department did not grant or deny the claim within 120 days, he timely protested the inaction.

The estimated-payment obligation applied

Section 7-2-12.2 required the annual payment through withholding or estimated installments. The required amount was generally the lesser of 90% of current-year tax or 100% of prior-year tax.

Krumrey had neither sufficient New Mexico withholding nor estimated payments. He did not dispute the Department's calculation method or the resulting $21.76 amount.

The PIT packet contained the rule

The PIT-ES instructions in the 2014 packet stated that every individual required to file a personal income tax return also had to pay estimated income tax through withholding or estimated payments. They also explained calculation, payment methods, and consequences of underpayment.

Krumrey argued that the “Who Must Pay Estimated Taxes?” section should have appeared earlier in the general “Who Must File” instructions. The AHO acknowledged his honest intentions but found that all relevant information was available to him.

His incomplete review led to inadvertence, inattention, and an erroneous belief—each included in the regulatory definition of negligence.

No nonnegligence exception applied

The potentially relevant exception required proof that a Department employee affirmatively misled the taxpayer.

No employee had misled Krumrey, and the written instructions were not misleading. He also had not consulted a tax professional about his New Mexico obligations.

Because the underpayment resulted from negligence, the statute made the penalty mandatory.

Result: protest DENIED. The Department lawfully assessed the $21.76 penalty, and the refund was not allowed.

What this means for you

Retirees moving to New Mexico

Review whether pensions, Social Security, and other retirement income have enough New Mexico withholding. Federal withholding does not itself satisfy the state estimated-payment requirement.

Self-preparing taxpayers

Read the complete PIT-ES instructions, not only the main return packet headings. A sincere misunderstanding may still be negligence when the applicable rule is included in the provided materials.

Taxpayers seeking penalty relief

Identify evidence of a statutory exception or nonnegligence indicator, such as an affirmative Department misstatement. Honest intent alone did not justify abatement here.

Common questions

Q: Why did Krumrey owe estimated tax?
A: His income sources did not withhold New Mexico tax, so estimated installments were required to meet the annual-payment rule.

Q: Did he dispute the $21.76 calculation?
A: No. He challenged only whether the penalty should apply.

Q: Were estimated-tax instructions in the 2014 PIT packet?
A: Yes. Krumrey acknowledged that he did not fully review the PIT-ES instructions.

Q: Did the Department mislead him?
A: No. The AHO found neither an employee misstatement nor misleading written instructions.

Q: Was his refund protest timely?
A: Yes. He timely protested after the Department failed to grant or deny the refund application, but he lost on the merits.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-12.2 — annual estimated-payment requirement and underpayment penalty
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-26 — refund application and protest after Department inaction
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and indicators of nonnegligence

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine tax consequences
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 1989-NMCA-070 — penalty and assessment presumption
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Donald W. Krumrey
• Decision PDF: D&O 17-22

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
DONALD W. KRUMREY No. 17-22
TO DEPARTMENT’S FAILURE TO GRANT OR DENY A REFUND

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 28, 2017, before

Hearing Officer Chris Romero in Santa Fe, New Mexico. The Taxation and Revenue Department

(Department) was represented by Ms. Diana Martwick, Staff Attorney. Ms. Veronica Galewaler,

Protest Auditor, also appeared and testified as a witness for the Department. Mr. Donald W.

Krumrey (Taxpayer) appeared by telephone, with the prior approval of the Hearing Officer, and

represented himself pro se. Department Exhibit A and Taxpayer Exhibits #1 and #2 were

admitted into the record and are described in the Administrative Protest Hearing Exhibit Log.

The Hearing Officer notified he would take administrative notice of the 2014 and 2015 New

Mexico Personal Income Tax (PIT) Form Packets. Each party was provided with five business

days to review the instructions and direct the hearing officer to any provisions they claimed were

relevant in support of their respective provisions. The Department provided its response on

March 29, 2017. The Taxpayer had until the close of business on April 4, 2017 but did not make

any further submissions. The record closed upon the end of business on April 4, 2017. Based on

the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On August 3, 2016, the Department assessed Taxpayer the sum of $21.76 in

penalty for underpayment of estimated taxes for tax year 2015 under Letter ID. No.

L1785368112.

2. Taxpayer paid the assessed penalty, and thereafter on October 9, 2016, submitted

an Application for Refund. [Testimony of Mr. Krumrey].

3. Having determined that the Department had failed to grant or deny his application

for a refund after 120 days had elapsed, the Taxpayer filed a Formal Protest which was received

in the Department’s Protest Office on February 13, 2017.

4. On March 2, 2017, the Department acknowledged the Taxpayer’s protest.

5. On March 13, 2017, the Department filed a Hearing Request asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

6. A Notice of Administrative Hearing was issued on March 13, 2017, which set the

hearing for March 28, 2017. The hearing was set within 90 days of the Department receiving the

Taxpayer’s protest.

7. On March 15, 2017, the Taxpayer requested permission to appear by telephone.

On March 17, 2017, the Department indicated that it did not object to Taxpayer’s request.

8. On March 20, 2017, the Administrative Hearings Office entered an Order

Permitting Telephonic Appearance.

9. Taxpayer moved to New Mexico from another state in 2014. Taxpayer has

resided in New Mexico since January 1, 2014. [Testimony of Mr. Krumrey].

10. Taxpayer prepared and filed his own 2014 personal income tax returns in New

Mexico. Taxpayer relied on the 2014 New Mexico Personal Income Tax (PIT) Form Packet and

did not identify any provisions therein which he understood to require estimated tax payments

for 2015. [Testimony of Mr. Krumrey].

In the Matter of the Protest of Donald W. Krumrey
Page 2 of 10

11. Although the 2014 New Mexico Personal Income Tax (PIT) Form Packet does

address estimated tax payment, Taxpayer did not understand those provisions to apply to him.

[Testimony of Mr. Krumrey].

12. Taxpayer did not seek the advice of a tax professional regarding his personal

income tax obligations in New Mexico. [Testimony of Mr. Krumrey].

13. Taxpayer was not aware that he may have incurred an obligation to pay estimated

taxes to New Mexico in 2015. Taxpayer had never previously been obligated to pay estimated

taxes. [Testimony of Mr. Krumrey].

14. Taxpayer’s primary sources of income for the relevant period of time were social

security, a pension from the City of Chicago, and a pension from the Bahai National Center in

Illinois. Taxpayer only has federal tax withheld on income from his pension with the City of

Chicago. [Testimony of Mr. Krumrey].

15. The Department did not notify the Taxpayer of the circumstances underlying the

underpayment penalty until the assessment dated August 3, 2016. [Testimony of Mr. Krumrey].

16. Taxpayer Ex. #2 was prepared by Ms. Galewaler. It illustrates the method utilized

to determine the amount of estimated tax penalty due in this matter. [Testimony of Ms.

Galewaler].

17. Taxpayer does not dispute the method utilized to calculate the underpayment

penalty or the result of the calculation as provided in Taxpayer Ex. #2. [Testimony of Mr.

Krumrey].

18. The Department was not able to assess underpayment penalty for 2015 until the

Taxpayer filed his 2015 return in 2016. [Testimony of Ms. Galewaler].

In the Matter of the Protest of Donald W. Krumrey
Page 3 of 10

19. Because state income taxes are not withheld from Taxpayer’s social security or

pensions, Taxpayer was required to make estimated tax payments. [Testimony of Ms.

Galewaler].

DISCUSSION

The issue to be decided is whether the penalty arising from the underpayment of

estimated taxes due for tax year 2015 may be abated. In support of his position, Taxpayer

contended that the penalty should be abated because he relied on the 2014 New Mexico Personal

Income Tax (PIT) Form Packet which inadequately informed him that he would be required to

pay estimated taxes in 2015.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, Section 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.” See NMSA

1978, Section 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

the penalty was improperly imposed or that he is entitled to an abatement of penalty.

Estimated Tax and Penalty

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

either withholding or estimated tax payments.” See NMSA 1978, Section 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, Section 7-2-12.2 (B).

In the Matter of the Protest of Donald W. Krumrey
Page 4 of 10
When a taxpayer underpays the required annual payment, the Department is required to

assess a penalty following the formula specified in Section 7-1-67 (B) for the period of

underpayment. See NMSA 1978, Section 7-2-12.2 (G). The Taxpayer did not challenge the

methodology of assessment in this case. Rather, Taxpayer argued that the penalty should be

abated because the 2014 New Mexico Personal Income Tax (PIT) Form Packet failed to

adequately notify him of his obligation to make estimated tax payments in 2015.

Although not specifically cited by Taxpayer, NMSA 1978, Section 7-2-12.2 (H) (3)

provides that “[n]o penalty shall be imposed under Subsection G of this section for any taxable year

if: … (3) “through either withholding or estimated tax payments, the taxpayer paid the required

annual payment as defined in Subsection B of this section; or (4) the secretary determines that the

underpayment was not due to fraud, negligence or disregard of rules and regulations.”

It was undisputed that the Taxpayer did not make the annual payment as defined in

Subsection B. Neither his social security benefits nor his pensions were subject to state tax

withholdings, and Taxpayer did not make estimated tax payments. Accordingly, the basis for the

relief Taxpayer seeks rests on whether the underpayment was attributable to fraud, negligence or

disregard of rules and regulations.

In Regulation 3.1.11.10 NMAC, the Department defined “negligence” as that term was used

in NMSA 1978, Section 7-1-69 (2015) of the Tax Administration Act. There is no indication that

the Legislature intended the term to be defined differently when it made reference to “negligence”

in NMSA 1978, Section 7-2-12.2 of the Income Tax Act. Both sections address imposition of

penalties resulting from taxpayer negligence.

Regulation 3.1.11.10 NMAC defines “negligence” as the: (A) “failure to exercise that

In the Matter of the Protest of Donald W. Krumrey
Page 5 of 10
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.” In this case, Taxpayer

denied that he was negligent. Rather, he asserted that the 2014 New Mexico Personal Income Tax

(PIT) Form Packet inadequately informed him of his estimated tax obligations for the upcoming

tax year. The entirety of Taxpayer’s claim is summarized in Taxpayer Ex. 1 which was an email

Taxpayer sent to the Protest Auditor in this case, Ms. Galewaler. Taxpayer Ex. 1 states in

relevant part:

My source document is the 2014 New Mexico PIT Form Packet.
Page 11 presents the PIT-ES payment voucher. Page 16 describes
the Penalty for Underpayment due to 2014 withholding and I have
NO withholdings since I came from another state. Page 33 lists the
line items about Estimated Taxes on the tax form. After reading
these references to Estimated Taxes, I concluded that they did not
apply to me and I did not read the instructions to PIT-ES.

I now realize and suggest that the WHO MUST PAY
ESTIMATED TAXES? section in those instructions be placed in
the WHO MUST FILE section of the general instructions in the
packet. Then I would have known the correct procedure to follow.

(Emphasis in original)

The section to which the Taxpayer refers in Taxpayer Ex. 1 is found in the Instructions

for 2014 PIT-ES, Estimated Tax Payment Voucher. It provides:

WHO MUST PAY ESTIMATED TAXES?

Every individual who must file a personal income tax return under
the Income Tax Act also must pay estimated income tax. This
occurs through withholding taxes or by making estimated tax
payments using the Personal Income Estimated Tax Payment
Voucher (PITES). You can also pay by check or credit card using
the Department’s website.

In the Matter of the Protest of Donald W. Krumrey
Page 6 of 10
The instructions go on to explain the method by which the estimated tax due should be

calculated, the acceptable methods of making payments, the consequences of not making the

obligatory payments, and other information pertinent to estimated taxes.

Although the Taxpayer asserted that the instructions were inadequate, the Taxpayer also

conceded that he did not fully review all of the instructions. The result was that Taxpayer

incurred underpayment penalty of $21.76 stemming from inadvertence, erroneous belief or

inattention, all of which constitute negligence.

When a taxpayer fails to make the required annual payment, NMSA 1978 Section 7-1-

12.2 (G) requires that:

there shall be added to the tax a penalty determined by applying the rate
specified in Subsection B of Section 7-1-67 NMSA 1978 to the amount of
the underpayment for the period of the underpayment[.]

(italics added for emphasis).

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer has failed to make the required annual payment due to 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 that a provision is mandatory absent clear indication to the

contrary).

However, Regulation 3.1.11.11 NMAC establishes eight indicators of non-negligence

where penalty may be abated. Based on Taxpayer’s argument, the only factor under Regulation

3.1.11.11 NMAC potentially applicable is subsection A, which reads:

the taxpayer proves the taxpayer was affirmatively mislead [sic] by a
department employee[.]

In the Matter of the Protest of Donald W. Krumrey
Page 7 of 10
The Hearing Officer was not persuaded that Taxpayer was affirmatively misled by any

employee of the Department or by the 2014 instructions. Despite Taxpayer’s honest intentions

and good faith, Taxpayer has not overcome the presumption of correctness. Taxpayer had at his

disposal all instructions applicable to his 2014 personal income taxes, including that information

relevant to determining whether or not estimated taxes for the upcoming tax year would be due.

Unfortunately, Taxpayer’s review of the instructions was incomplete resulting in Taxpayer

overlooking the requirement that he make estimated tax payments in 2015.

Notwithstanding Taxpayer’s rationale for overlooking the instructions on estimated taxes,

Taxpayer’s oversight was the result of inadvertence, indifference, thoughtlessness, carelessness,

erroneous belief or inattention which all constitute negligence in which penalty is mandated. See

Regulation 3.1.11.10; See also Tiffany Const. Co., Inc. v. Bureau of Revenue, 1976-NMCA-127,

90 N.M. 16 (“Every person is charged with the reasonable duty to ascertain the possible tax

consequences of his action. This can be done by consultation with one's legal advisor.

Depending on the facts, failure to do so may constitute negligence.”).

Taxpayer failed to overcome the presumption of correctness, and the Department’s

assessment was proper.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely refund application pursuant to NMSA 1978, Section 7-

1-26.

B. The Taxpayer filed a timely protest when the Department had not granted or denied

Taxpayer’s refund application pursuant to NMSA 1978, Section 7-1-26.

C. Jurisdiction lies over the parties and the subject matter of this protest. The hearing

was timely set and held within 90-days of protest under NMSA 1978, Section 7-1B-8.
In the Matter of the Protest of Donald W. Krumrey
Page 8 of 10
D. The Taxpayer was required to make estimated tax payments in 2015 and the

Department lawfully assessed a penalty for his failure to make such payments pursuant to NMSA

1978, Section 7-2-12.2.

E. Taxpayer’s failure to make estimated tax payments for the year in issue was the

result of negligence under NMSA 1978, Section 7-2-12.2 (H) (4).

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

DATED: May 12, 2017

Chris Romero
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

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. If an appeal is not filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

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 begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record with the Court of Appeals, which

In the Matter of the Protest of Donald W. Krumrey
Page 9 of 10
occurs within 14 days of the Administrative Hearings Office’s receipt of the docketing statement

from the appealing party. See Rule 12-209 NMRA.

In the Matter of the Protest of Donald W. Krumrey
Page 10 of 10