Did the Department's request for documents turn an untimely refund claim into an audit that allowed older overpayments to be refunded?

Plain-English summary

Desire.Sante, LLC filed its refund claim for 2016 tax periods after New Mexico's three-year deadline, and the Department's request for supporting documents did not turn the review into an audit. The Administrative Hearings Office denied the disputed $51,750.11 refund.

The company filed a $105,534.95 claim on February 21, 2020 for reporting periods running from January 2016 through December 2018. The Department granted $53,784.84 for later periods but denied $51,750.11 for January through November 2016. The ruling did not decide the December 2018 month because the parties presented no evidence or argument about it, and that issue was treated as abandoned.

Section 7-1-26 generally permits a refund only within three years after the end of the calendar year in which the payment was originally due. For the 2016 payments, the final filing date was December 31, 2019. Desire.Sante filed on February 21, 2020 and did not prove that any listed extension or exception applied.

The company argued that the Department's request for substantiating records transformed the refund review into an audit. If overpayments and underpayments are found through a Department or managed audit covering multiple periods, Sections 7-1-26(H) and 7-1-29(D) can permit offsets and, in some circumstances, a refund. Desire.Sante reasoned that Department employees with “auditor” titles had examined its records and could have assessed any underpayment they found.

The hearing officer rejected that argument. A managed audit requires a written agreement initiated by the taxpayer and compliance with statutory requirements; none existed. An office or field audit requires the Department to issue a formal written commencement notice identifying the tax programs, periods, and start date; no such notice was issued. The employees' job titles did not replace those requirements.

The Department was entitled to request records to substantiate the refund claim itself. Its request was tailored to the periods Desire.Sante put at issue and did not claim to commence an audit. The possibility that the Department could assess tax discovered during its review also did not convert the substantiation request into an audit.

Because the audit-offset provisions and all other exceptions failed, the general limitation controlled.

Result: protest DENIED. The $51,750.11 claim for the 2016 periods remained barred as untimely.

What this means for you

A refund review is not automatically an audit

Providing records to prove your own refund claim does not, by itself, create the formal audit needed for special multi-period offset rules.

Audit labels depend on statutory steps

A managed audit needs a written taxpayer-Department agreement. A Department office or field audit needs a written commencement notice identifying its scope and start date.

Employee titles do not change the proceeding

The fact that Department personnel are called auditors does not make every records review an audit.

Track refund deadlines independently

The taxpayer bears the burden of filing within the statutory period. A later Department request for documentation does not revive an already expired claim.

Refund and assessment periods are separately governed

The possibility that a records review might reveal an assessable underpayment did not extend the refund deadline or establish an audit exception.

Common questions

Q: What was the deadline for the 2016 payments?
A: December 31, 2019, three years after the end of the calendar year in which those payments were due.

Q: When did Desire.Sante file?
A: February 21, 2020, after the three-year period expired.

Q: Why didn't the document request count as an office or field audit?
A: The Department issued no formal written notice identifying the tax programs, periods under audit, and audit commencement date.

Q: Was there a managed audit?
A: No. There was no written managed-audit agreement meeting the statutory requirements.

Q: How much of the overall claim did the Department grant?
A: It granted $53,784.84 for later periods and denied $51,750.11 for January through November 2016. The December 2018 issue was abandoned at the hearing.

Citations and references

Statutes:

• NMSA 1978, § 7-1-26(A)-(H) — refund claims, substantiation, the three-year limitation, exceptions, and audit-related overpayments
• NMSA 1978, § 7-1-29(D) (2017) — overpayment and underpayment offsets in a multi-period audit
• NMSA 1978, §§ 7-1-11.1 and 7-1-11.2 — managed audits and formal commencement of an office or field audit
• NMSA 1978, §§ 7-1-17 and 7-1-18 — assessments and general assessment limitation
• NMSA 1978, § 7-1B-8 (2019) — hearing timing

Cases:

• Kilmer v. Goodwin, 2004-NMCA-122 — refund deadlines prevent stale claims and place responsibility on the taxpayer to pursue them timely
• Sisters of Charity v. County of Bernalillo, 1979-NMSC-044 — untimely refund claims are barred by the statute of limitations

Name note

The Department's decision post identifies the taxpayer as “Desire.Santa, LLC.” The decision caption, body, and PDF filename identify it as “Desire.Sante, LLC,” which this page uses for the party name.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Desire.Santa, LLC
• Decision PDF: D&O 21-06

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 DESIRE.SANTE, LLC
6 TO THE DENIAL OF REFUND
7 ISSUED UNDER LETTER ID NO. L0452499120

8 v. AHO No. 21.01-003R, D&O No. 21-06

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On March 26, 2021, Hearing Officer Dee Dee Hoxie, Esq. conducted a videoconference

12 hearing on the merits of the protest to the denial of refund. The Taxation and Revenue

13 Department (Department) was represented by Peter Breen, Staff Attorney, who appeared by

14 telephone. Elvis Dingha, Auditor, also appeared by videoconference on behalf of the

15 Department. Desire.Sante, LLC (Taxpayer) was represented by its CPA, Norman Fristoe, who

16 appeared by videoconference with his consultant, Rebecca Bullard, for the hearing. Ms. Bullard,

17 Mr. Fristoe, and Mr. Dingha testified. The Hearing Officer took notice of all documents in the

18 administrative file. No exhibits were submitted.

19 The main issue to be decided is whether the Taxpayer is entitled to a refund for tax

20 periods from January 1, 2016 through November 30, 2016. The Hearing Officer considered all

21 of the evidence and arguments presented by both parties. Because the Taxpayer’s claim for

22 refund was filed beyond the three-year statute of limitations, the Hearing Officer finds in favor of

23 the Department. IT IS DECIDED AND ORDERED AS FOLLOWS:

24 FINDINGS OF FACT

Desire.Sante, LLC
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1 1. On June 5, 2020, under letter id. no. L0452499120, the Department issued a

2 partial denial of refund to the Taxpayer. The Taxpayer’s refund claim was denied for $51,750.11

3 for the tax periods from January 1, 2016 through November 30, 2016. The Taxpayer’s refund

4 claim was granted for $53,784.84 for the tax periods from December 31, 2016 through

5 November 30, 2018 1. [Admin. file L0452499120; Testimony of Mr. Dingha].

6 2. On June 30, 2020, the Taxpayer filed a timely written protest to the denial of

7 refund. [Admin. file protest].

8 3. On July 29, 2020, the Department acknowledged its receipt of the protest.

9 [Admin. file L1886385840].

10 4. On January 19, 2021, the Department filed a request for hearing with the

11 Administrative Hearings Office. [Admin. file request].

12 5. On February 12, 2021, a telephonic scheduling hearing was conducted, which was

13 within 90 days of the request as required by statute. [Admin. file].

14 6. On February 21, 2020, the Taxpayer filed a claim for refund for the tax periods

15 from January 31, 2016 through December 31, 2018 in the amount of $105,534.95. [Admin. file

16 L0452499120].

17 7. The Department requested additional documentation from the Taxpayer to

18 support its claim for refund. [Testimony of Ms. Bullard; Testimony of Mr. Fristoe; Testimony of

19 Mr. Dingha; Admin. file protest].

20 8. The Taxpayer provided additional documentation to the Department. [Testimony

21 of Ms. Bullard; Testimony of Mr. Fristoe; Testimony of Mr. Dingha; Admin. file protest].

1
The period ending December 31, 2018 was also denied because an amended return was not filed. The parties did
not present any evidence or argument regarding that month. That issue is deemed abandoned.
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1 9. The Department reviewed the documentation and determined that the tax periods

2 from 2016 were beyond the statute of limitations and should be denied, and it granted the refund

3 for the other tax periods2. [Testimony of Ms. Bullard; Testimony of Mr. Dingha; Admin. file

4 L0452499120].

5 10. The three-year period for filing a refund for payments due and made in 2016

6 ended on December 31, 2019. [Testimony of Mr. Dingha]. See also NMSA 1978, § 7-1-26

7 (2019).

8 11. The Taxpayer’s claim for refund was filed February 21, 2020, which was after the

9 three-year statute of limitations expired. [Admin. file L0452499120; Testimony of Mr. Dingha;

10 Testimony of Ms. Bullard].

11 DISCUSSION

12 Three-year statute of limitations.

13 A person may claim a refund within the time limits. See NMSA 1978, § 7-1-26 (A).

14 “Except as otherwise provided in Subsection G of this section, a credit or refund of any amount

15 may be allowed or made to a person: (1) only within three years after the end of the calendar

16 year” of certain events 3. NMSA 1978, § 7-1-26 (F) (emphasis added). One deadline is three

17 years 4 from when “the final determination of value occurs with respect to any overpayment that

18 resulted from a disapproval by any agency of the United States or the state of New Mexico or

19 any court of increase in value of a product subject to taxation under” various sections related to

20 oil and gas. NMSA 1978, § 7-1-26 (F) (1) (b). The Taxpayer does not allege and has not proven

2
Except for December 31, 2018.
3
Subsection G deals with claims for refund of the gasoline tax and does not apply to the Taxpayer’s claim. See
NMSA 1978, § 7-1-26 (G).
4
Here and throughout the rest of the decision, deadlines are the number of years from the end of the calendar year.
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1 that this provision applies to its claim for refund. Another deadline is three years from when

2 “property was levied”. NMSA 1978, § 7-1-26 (F) (1) (c). The Taxpayer does not allege and has

3 not proven that this provision applies to its claim for refund. Another deadline is three years

4 from when “an overpayment of New Mexico tax resulted from” an audit adjustment or

5 amendment to one’s federal return. NMSA 1978, § 7-1-26 (F) (1) (d). The Taxpayer does not

6 allege and has not proven that this provision applies to its claim for refund. The general deadline

7 is three years from when “the payment was originally due or the overpayment resulted from an

8 assessment”. NMSA 1978, § 7-1-26 (F) (1) (a). Exceptions to the general three-year limitation

9 are related to cases involving the denial of certain credits, to cases where the taxpayer has signed

10 a waiver of the statute of limitations on assessments, to cases where the tax was not paid within

11 three years of its due date or of the assessment date, and to cases where the taxpayer has been

12 assessed more than three years after the tax was due. See NMSA 1978, § 7-1-26 (F) (2) thru (5).

13 The Taxpayer does not allege and has not proven that any of these exceptions apply to its claim

14 for refund.

15 The Taxpayer argues that another exception applies and that the claim for refund should

16 be granted as overpayments found as a result of an audit under both Section 7-1-26 (H) and

17 Section 7-1-29. Claims for refund may be credited against underpayments found if

18 overpayments are found “as a result of an audit by the department or a managed audit covering

19 multiple periods”. NMSA 1978, § 7-1-26 (H). Both the underpayments and the overpayments

20 must be included in the tax periods covered by the audit. See id. “In an audit by the department

21 or a managed audit covering multiple reporting periods in which both underpayments and

22 overpayments of a tax have been made in different reporting periods,” those overpayments will

23 be credited against the underpayments if the taxpayer files a claim for refund of the

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1 overpayments. NMSA 1978, 7-1-29 (D) (2017) (also allowing for a refund if the overpayments

2 exceed the underpayments). The Taxpayer argues that its claim for refund of the 2016 tax

3 periods was transmuted into an audit when the Department requested documentation to

4 substantiate the claim for refund. The Taxpayer argues that the Department’s employees are

5 “auditors” and that any action taken by an “auditor” to examine a taxpayer’s records should be

6 considered an “audit”.

7 A managed audit is initiated by a taxpayer. See NMSA 1978, § 7-1-.11.1 (2003). It must

8 be a written agreement between the taxpayer and the Department, and it must meet several

9 statutory requirements. See id. The Taxpayer does not allege and has not proven that a managed

10 audit occurred. An office or field audit is an examination of a taxpayer’s records that is initiated

11 by the Department. See NMSA 1978, § 7-1-.11.2 (2007) (requiring the Department to issue a

12 formal written notice of commencement of audit)5. At a minimum, the notice must identify the

13 tax programs and periods under audit and indicate the date on which the audit is commenced.

14 See id. There is no evidence that the Department issued a formal written notice of audit

15 commencement to the Taxpayer. The job titles of the Department’s employees are not

16 dispositive to prove that their actions initiated an “audit” when the statutory requirements for

17 commencing an audit were not satisfied. See id.

18 The Taxpayer argues that the Department would have assessed it if underpayments made

19 in the 2016 tax periods were discovered as a result of the information that it provided.

20 [Testimony of Mr. Dingha]. The Taxpayer argues that this hypothetical, potential assessment

21 alone is sufficient to transform the Department’s request for substantiation into an audit. The

22 Taxpayer argues that is unfair to allow the Department to make a possible assessment unless it is

5
Notice of audit commencement can occur prior to or at the same time that the Department requests a taxpayer’s
records. See NMSA 1978, § 7-1-11.2.
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1 engaged in an audit, especially when the Department can go back more than three years. If the

2 Department determines that a taxpayer is liable for taxes in excess of $25.00, the Department

3 must assess. See NMSA 1978, § 7-1-17 (2007). There is no requirement that the determination

4 be made as a result of an audit. See id. Like a taxpayer’s claim for refund, the Department has a

5 general three-year limitation on making an assessment. See NMSA 1978, § 7-1-18 (2013)6.

6 Moreover, the Taxpayer invited scrutiny of its records when it filed a claim for refund. See

7 NMSA 1978, § 7-1-26 (B) and (C) (allowing the Department to request additional

8 documentation to prove a claim for refund).

9 The Department examines claims for refund as they are submitted. [Testimony of Mr.

10 Dingha]. The Department requested documentation on the 2016 tax period because it was

11 included in the Taxpayer’s claim for refund. [Testimony of Mr. Dingha]. The Department’s

12 request was reasonable, was tailored to the Taxpayer’s claim, and did not purport to commence

13 an audit. After it received the documentation from the Taxpayer, the Department reviewed the

14 claim in its entirety and determined that the 2016 tax periods were beyond the statute of

15 limitations. [Testimony of Mr. Dingha].

16 The Taxpayer failed to prove that any exception applied to its claim for refund.

17 Therefore, the general three-year limitation applied to the Taxpayer’s claim for refund. See id.

18 The Taxpayer’s payments were due in 2016, and the final date on which the Taxpayer could

19 make a claim for refund was December 31, 20197. The Taxpayer admits that its claim for refund

20 with respect to the 2016 tax periods occurred after the general three-year limitation had expired.

21 The statute of limitations prevents stale claims and effectively places the onus on the taxpayer to

6
Like claims for refund, there are exceptions to the general three-year limitation, such as fraud or substantial
underreporting. See NMSA 1978, § 7-1-18.
7
That is three years from the end of the calendar year 2016, when the payments were due.
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1 pursue their claim in a timely manner because the taxpayer is the one who can more easily keep

2 track of their claims for refund. See Kilmer v. Goodwin, 2004-NMCA-122, ¶ 16, 136 N.M. 440.

3 If the claim is not filed within the three-year statute of limitations, the claim is barred by the

4 statute. See NMSA 1978, § 7-1-26. See also Kilmer, 2004-NMCA-122. See also Sisters of

5 Charity v. County of Bernalillo, 1979-NMSC-044, ¶ 24-28, 93 N.M. 42 (holding that an

6 untimely filed claim for refund was barred by the statute of limitations).

7 CONCLUSIONS OF LAW

8 A. The Taxpayer filed a timely, written protest of the Department’s denial of refund and

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

10 B. The first hearing was set and held within 90 days of the request for hearing. See

11 NMSA 1978, Section 7-1B-8 (2019).

12 C. The Taxpayer filed its claim for refund of the 2016 tax periods beyond the three-year

13 statute of limitations. See NMSA 1978, § 7-1-26.

14 D. The Department did not commence an audit of the Taxpayer by requesting

15 substantiation of its refund claim. See id. See also NMSA 1978, § 7-1-11.2.

16 E. No exception to the general three-year limitation applied; therefore, the Taxpayer’s

17 claim for refund was properly denied. See NMSA 1978, § 7-1-26. See also Kilmer, 2004-NMCA-

18 122. See also Sisters of Charity, 1979-NMSC-044.

19 For the foregoing reasons, the Taxpayer’s protest IS DENIED.

20 DATED: April 7, 2021.

21 Dee Dee Hoxie
22 Dee Dee Hoxie
23 Hearing Officer

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Case No. 21.01-003R
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1 Administrative Hearings Office
2 P.O. Box 6400
3 Santa Fe, NM 87502

4 NOTICE OF RIGHT TO APPEAL

5 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this decision

6 by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date shown

7 above. If an appeal is not timely filed with the Court of Appeals within 30 days, this Decision and Order

8 will become final. Rule of Appellate Procedure 12-601 NMRA articulates the requirements of perfecting

9 an appeal of an administrative decision with the Court of Appeals. Either party filing an appeal shall file a

10 courtesy copy of the appeal with the Administrative Hearings Office contemporaneous with the Court of

11 Appeals filing so that the Administrative Hearings Office may begin preparing the record proper. The

12 parties will each be provided with a copy of the record proper at the time of the filing of the record proper

13 with the Court of Appeals, which occurs within 14 days of the Administrative Hearings Office receipt of

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

15 CERTIFICATE OF SERVICE

16 On April 7, 2021, a copy of the foregoing Decision and Order was submitted to the parties listed

17 below in the following manner:

18 Email Email

19 INTENTIONALLY BLANK
20
21 John Griego
22 Legal Assistant
23 Administrative Hearings Office
24 P.O. Box 6400
25 Santa Fe, NM 87502

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