Could New Mexico taxpayers avoid estimated-tax and negligence penalties when the Department mistakenly mailed an overpayment they had asked to apply to the next year?

Plain-English summary

Ronald and Paula Peterson owed penalties even though a Department clerical error started the problem. They cashed an unexpected $2,978 refund that should have been applied to their 2017 estimated payments, then failed to catch the missing credit when preparing the 2017 return.

The Petersons filed joint returns, which Ronald Peterson prepared personally. On their 2016 return, they reported a $2,978 overpayment and instructed the Department to carry it forward to 2017 estimated personal income tax.

A Department employee entered the hard-copy return into Gentax but failed to mark the carryforward election. The Department mailed the couple a $2,978 refund check in May 2017.

The Petersons had not expected a refund. They did not review their 2016 return, call or write the Department, or otherwise ask why the check arrived. They cashed it on June 12, 2017.

When preparing the 2017 return, Ronald Peterson also did not verify whether the $2,978 appeared in the estimated-payment account. The return claimed more estimated payments than the Department's records showed.

The Department assessed $2,978 tax, $297.80 civil negligence penalty, $98.02 estimated-payment underpayment penalty, and $51.81 interest. The Petersons paid the $2,978 principal with their protest. By the hearing, recalculated penalty and interest totaled $522.69.

The estimated-tax penalty was mandatory

Section 7-2-12.2 required quarterly estimated payments when sufficient tax was not withheld. The annual minimum was generally 90% of current-year tax or 100% of prior-year tax, whichever was less.

Because the refund had been cashed rather than credited forward, the Petersons' 2017 estimated payments fell below the statutory threshold. Section 7-2-12.2(G) required the underpayment penalty.

The taxpayers' own inattention was civil negligence

The AHO acknowledged that the Department made the initial and regrettable data-entry mistake. But New Mexico's self-reporting system still required the taxpayers to exercise ordinary care and determine the tax consequences of their actions.

Regulation 3.1.11.10 defined negligence to include inadvertence, inattention, and erroneous belief. Cashing a substantial, unexpected refund without checking the return or contacting the Department fit those definitions. The belief that any check sent by the Department was automatically theirs to keep was not reasonable on these facts.

The second missed opportunity occurred on the 2017 return. Verifying the estimated-payment account would have revealed that the carryforward had not occurred and could have avoided much of the later penalty and interest.

The Petersons did not establish any regulatory indicator of non-negligence.

Interest was accepted and recalculated

The Petersons conceded the tax principal and, at the hearing, conceded that interest was due. The remaining question was the correct calculation. The AHO accepted the protest auditor's post-hearing recalculation of $64.86.

Result: protest DENIED. The final outstanding liability was:

• $357.36 civil negligence penalty;
• $98.02 estimated-tax underpayment penalty; and
• $64.86 interest.

Total: $522.69.

What this means for you

Taxpayers electing to carry an overpayment forward

Confirm that the amount appears in the next year's estimated-payment account. Do not rely solely on the election shown on the filed return.

Anyone receiving an unexpected refund

Review the filed return and account transcript before cashing the check. If the refund conflicts with your instructions, ask the Department to explain it.

Self-preparers

Reconcile estimated payments to the Department's records before filing. A return prepared from the taxpayer's own assumptions may repeat an earlier processing error.

Taxpayers seeking penalty relief after an agency mistake

An agency error does not automatically remove penalty when reasonable review by the taxpayer could have identified and limited the problem.

Common questions

Q: Who made the first error?
A: A Department employee failed to enter the Petersons' instruction to apply the 2016 overpayment to 2017 estimates.

Q: Why were the Petersons still negligent?
A: They cashed a substantial check they did not expect without reviewing their return or asking the Department why it had been issued.

Q: Did they dispute the $2,978 tax principal?
A: No. They paid it with their protest.

Q: Why was there a separate estimated-tax penalty?
A: Once the $2,978 was refunded, their credited 2017 estimated payments fell below the mandatory minimum in Section 7-2-12.2.

Q: Could checking the 2017 account have helped?
A: Yes. The AHO noted that verifying the estimated-payment credit while preparing the 2017 return could have prevented much of the penalty and interest.

Q: What remained due after the tax payment?
A: $522.69 in civil penalty, underpayment penalty, and interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2-3 and 7-2-12 — personal income tax and annual return/payment deadline
• NMSA 1978, § 7-2-12.2(B), (D), and (G) — estimated payments and mandatory underpayment penalty
• NMSA 1978, § 7-1-69 (2007) — civil negligence penalty
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(X) — assessment presumption and tax definition covering penalty and interest
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and non-negligence indicators
• Regulation 3.1.6.13 NMAC — assessment presumption for penalty and interest

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to ascertain tax consequences in a self-reporting system
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error can constitute civil negligence
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”
• MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021 — burden after rebutting the assessment presumption

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Ronald and Paula Peterson
• Decision PDF: D&O 19-02

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF D&O # 19-02
RONALD A. & PAULA PETERSON
TO ASSESSMENTS ISSUED UNDER
LETTERS ID NOs. L1462116144 and L0007372592

v. AHO Case Number 18.11-276A

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

On December 6, 2018, Chief Hearing Officer Brian VanDenzen, Esq., conducted a merits

administrative hearing in the matter of the tax protest of Ronald & Paula Peterson (Taxpayers)

pursuant to the Tax Administration Act and the Administrative Hearings Office Act. At the

hearing, Ronald A. Peterson appeared representing Taxpayers. Staff Attorney Richard Pener

appeared, representing the opposing party in the protest, the Taxation and Revenue Department

(Department). Department protest auditor Mary Griego appeared as a witness for the

Department. Taxpayer Exhibit #1 (the protest letter) and Department Exhibits A (return

adjustment notice), B (assessment), C (screen print from GenTax), D (spreadsheet of liability as

of hearing date) and Supplement D (submitted with permission after the hearing to recalculate D)

were admitted into the record.

In quick summary, this protest involves Taxpayers’ 2016 and 2017 personal income returns

and estimated tax payments. In 2016, Taxpayers requested that their overpayment of $2,978.00 be

applied against their 2017 estimated payments. In error, rather than apply those payments

against Taxpayers’ 2017 estimated payments, the Department mailed Taxpayers a refund check

of $2,978.00 of 2016 personal income tax overpayment. Without reviewing their 2016 personal
income tax returns or consulting anyone at the Department about why they received the check

for $2,978.00, Taxpayers cashed the check. In 2017, this resulted in an underpayment of required

estimated payments, the return adjustment notice, and the notice of assessment. Taxpayers

protested the imposition of penalty in this case, arguing that it was the Department’s clerical

error rather than Taxpayers’ negligence that was responsible for the underpayment of 2017

personal income tax. Ultimately, after making findings of fact and discussing the issue in more

detail throughout this decision, the hearing officer finds that despite the Department’s initial and

unfortunate clerical error, Taxpayers’ protest must be denied. IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. On August 17, 2018, under letter id. no. L0007372592, the Department issued a

return adjustment notice to Taxpayers, indicating that Taxpayers still owed $3,423.59 in 2017

personal income tax because the Department’s records showed a lesser amount of estimated

payments than Taxpayers reported. [Department Ex. A].

2. On August 28, 2018, under letter id. no. L142116144, the Department assessed

Taxpayers for $2,978.00 in tax, $297.80 in civil negligence penalty, $98.02 in underpayment

penalty, $51.81 in interest, for a total assessment of $3,425.63 for the personal income tax year

ending December 31, 2017. [Department Ex. B].

3. On September 29, 2018, Taxpayers protested the Department’s return adjustment

notice and the assessment, specifically challenging the assessment of civil negligence penalty,

underpayment penalty, and interest. [Taxpayer Ex. #1].

In the Matter of the Protest of Ronald and Paula Peterson, page 2 of 11

4. Along with the September 29, 2018, protest letter, Taxpayers included a check for

$2,978.00 for their 2017 personal income taxes. [Administrative Record; Taxpayer Ex. #1;

Direct Testimony of Ronald Peterson].

5. On October 16, 2018, the Department’s protest office acknowledged receipt of a

valid protest.

6. On November 1, 2018, the Department filed a request for hearing in this matter

with the Administrative Hearings Office, an agency independent of the Taxation and Revenue

Department.

7. On November 2, 2018, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on December 6, 2018.

8. The December 6, 2018, hearing occurred within 90-days of the Department’s

acknowledgment of receipt of a valid protest.

9. Taxpayers filed joint personal income tax returns in 2016 and 2017. [Testimony

of Ronald Peterson].

10. Ronald Peterson personally prepared Taxpayers’ 2016 and 2017 personal income

tax returns, making him personally familiar and aware of the general details of the returns.

[Testimony of Ronald Peterson].

11. For personal income tax 2016, Taxpayers claimed an overpayment of $2,978.00

but requested that it be applied to their 2017 personal income tax estimated payments.

[Testimony of Ronald Peterson].

12. On or about May 26, 2017, Taxpayers received a check from the Department for

$2,978.00. [Testimony of Ronald Peterson].

In the Matter of the Protest of Ronald and Paula Peterson, page 3 of 11

13. Taxpayers did not check their 2016 personal income tax return to confirm whether

they were supposed to receive a check for $2,978.00 from the Department. [Testimony of Ronald

Peterson].

14. Taxpayers did not call, write, or otherwise inquire with the Department why it

received the $2,978.00 check. [Testimony of Ronald Peterson].

15. Taxpayers cashed the Department’s check for $2,978.00 on June 12, 2017.

[Testimony of Ronald Peterson].

16. When preparing Taxpayers 2017 personal income tax return, Mr. Peterson did not

verify whether their estimated payments in 2017 included the $2,978.00. [Testimony of Ronald

Peterson].

17. According to credible and knowledgeable Protest Auditor Mary Griego, it

appeared that while a Department employee in the revenue processing division entered

Taxpayers’ 2016 hard copy personal income tax return into Gentax, that employee made a

clerical data error in not marking that Taxpayers requested application of the overpayment to

2017 estimated payments.

18. After the hearing, and without objection of Taxpayer, Protest Auditor Mary

Griego carefully reviewed the calculation of interest to ensure it was correct and in compliance

with applicable law. [Department Ex. D and Supplemental to Ex. D].

19. The affidavit submitted by Protest Auditor Mary Griego explaining her method of

recalculation and the final numbers of outstanding interest are credible and persuasive.

[Department Ex. D and Supplemental to Ex. D].

In the Matter of the Protest of Ronald and Paula Peterson, page 4 of 11

20. As of the date of hearing, Taxpayer owed $357.36 in civil negligence penalty,

$98.02 in underpayment penalty, and $64.86 in interest for a total outstanding liability of

$522.69. [Department Ex. D and Supplemental to Ex. D].

DISCUSSION

With their protest letter, Taxpayers submitted payment for $2,978.00, conceding the

liability for the 2017 personal income tax principal. At hearing, Taxpayers conceded liability for

interest in this protest. To the extent there was questioning and discussion about interest with

Department Protest Auditor Mary Griego, it was related to ensuring that the calculation of

interest was correct rather than disputing whether interest was in fact due. The testimony of

Department Protest Auditor Griego, and in particular her submission of Supplemental

Department Ex. D, was highly credible. The hearing officer adopts Department Protest Auditor

Griego’s method and calculation of interest as reflected on Supplemental Department Ex. D as

the correct amount of outstanding interest. Only the assessed civil negligence penalty and

underreporting penalty remains in dispute in this protest.

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

presumed correct. Consequently, Taxpayers have 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). Accordingly, it is Taxpayers’ burden to present some countervailing

In the Matter of the Protest of Ronald and Paula Peterson, page 5 of 11
evidence or legal argument to show that they are entitled to an abatement, in full or in part, of the

assessment issued in the protest. See N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-

NMCA-099, ¶8. When a taxpayer presents sufficient evidence to rebut the presumption, the

burden shifts to the Department to show that the assessment is correct. 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.”). Under Section 7-2-12, the required tax return and any amount of tax due under

the return are due “on or before the fifteenth day of the fourth month following the end of the

taxable year”, which is April 15th of the next calendar year.

Where a taxpayer does not have any personal income tax withheld, that taxpayer is

required to make quarterly estimated payments of income tax under NMSA 1978, Section 7-2-

12.2 (2011). Under Section 7-2-12.2 (D), those quarterly estimated payments are due on “April

15, June 15, and September 15 of the taxable year and January 15 of the following taxable year.”

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

whichever is less. See NMSA 1978, § 7-2-12.2 (B). If taxpayers fail to timely make estimated

payments in amount sufficient to meet the requirements of Section 7-2-12.2 (B), then the

In the Matter of the Protest of Ronald and Paula Peterson, page 6 of 11
Department is required to assess an underreporting penalty under Section 7-2-12.2 (G). See

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

statutory use of the word “shall” makes the provision mandatory).

Additionally, 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.” In New

Mexico, inadvertent error constitutes civil negligence subject to penalty. See El Centro Villa

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

(inadvertent error constitutes civil negligence). In this case, Mr. Peterson candidly acknowledged

that when it received and cashed the refund check months after filing the 2016 personal income tax

return, Taxpayers did not think much of it (which amounts to inadvertence or inattention) and

In the Matter of the Protest of Ronald and Paula Peterson, page 7 of 11
believed that if the Department sent them a check they were entitled to cash it (which amounts to

erroneous belief).

Although sympathetic to Taxpayers’ frustration in light of the Department’s clerical error,

applying these legal standards to the facts of this case, Taxpayers owe both underpayment penalty

and civil negligence penalty. While the Department certainly made a regrettable error in this case,

Taxpayers own subsequent errors could have been prevented with some basic diligence and

review upon receipt of a fairly substantial check they were not expecting to receive. 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. Given Taxpayers’ duty under Tiffany Construction

Co., 1976-NMCA-127, ¶5, to ascertain the tax consequences of their actions/inactions, it was not

reasonable for Taxpayers (who personally prepared their own return) to simply cash an unexpected

refund check for $2,978.00 without reviewing their return in more detail or consulting with the

Department about the reason for the check. See In the Matter of the Protest of Errol Chaisson,

Taxation and Revenue Department D&O No. 05-12 (June 16, 2005) (Non-precedential

administrative decision where the hearing officer found it unreasonable for taxpayers to cash an

unwanted refund check without reviewing their return or consulting with the Department or a tax

professional). Further, when preparing the 2017 return, Taxpayers did not verify whether the

they had been credited with $2,978.00 against their required estimated payments. Catching the

error while preparing the 2017 personal income tax return would have allowed the Taxpayers to

avoid much of the assessed outstanding penalty and interest in this case.

As a result of cashing the $2,978.00 refund check, that amount was not available to apply

to Taxpayers’ 2017 personal income tax estimated payments and Taxpayers’ 2017 estimated

In the Matter of the Protest of Ronald and Paula Peterson, page 8 of 11
payments fell below the mandatory minimum threshold established by 7-2-12.2 (B).

Consequently, Section 7-2-12.2 (G), requires imposition of underpayment penalty. And because

of Taxpayers inadvertent error and erroneous belief in cashing the refund check, Taxpayers met

the definition of civil negligence penalty under Section 7-1-69 subjecting them to penalty.

Taxpayers were not able to establish any of the nonnegligence factors that would allow for

abatement of either penalty.

CONCLUSIONS OF LAW

A. Taxpayers 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. Taxpayer did not overcome the presumption of correctness on the assessed tax,

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

(2013), and Regulation 3.1.6.13 NMAC. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84

N.M. 428; See also N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8;

see also MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003 NMCA 21, ¶13, 133 N.M. 217

D. 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. Taxpayers did not

meet this reasonable duty when they cashed the refund check without reviewing their 2016

personal income tax return or consulting with the Department.

In the Matter of the Protest of Ronald and Paula Peterson, page 9 of 11
E. Under Section 7-2-12.2 (G)’s mandatory “shall” language, Taxpayer is liable for

underpayment penalty. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-

NMSC-013, ¶22, 146 N.M. 24.

F. Under Section 7-1-69’s mandatory “shall” language, Taxpayer is liable for civil

negligence penalty because of Taxpayers’ inadvertent error and erroneous belief 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.

For the foregoing reasons, the Taxpayer’s protest IS DENIED. IT IS ORDERED that

Taxpayer is liable for $357.36 in civil negligence penalty, $98.02 in underpayment penalty, and

$64.86 in interest for a total outstanding liability of $522.69.

DATED: January 9, 2019.

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

In the Matter of the Protest of Ronald and Paula Peterson, page 10 of 11
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 timely 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 proper with the Court of Appeals,

which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

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

CERTIFICATE OF SERVICE

On January 9, 2019, a copy of the foregoing Decision and Order was submitted to the

parties listed below in the following manner:

First Class Mail and Email Interoffice Mail and Email

INTENTIONALLY OMITTED

John Griego
Legal Assistant
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Ronald and Paula Peterson, page 11 of 11