I forgot to report a retirement payout and only found out years later — can I avoid the interest and penalty?

Plain-English summary

In March 1991, Frank E. Ruybalid received a lump-sum disbursement from a retirement account. The paperwork showed federal tax had been withheld but no state tax, told him to keep it for tax purposes, and said a second form would arrive before January 31, 1992. Ruybalid then moved, never received that second form, forgot about the payout, and didn't hand the document to his tax preparer. His 1991 New Mexico personal income tax return was filed on time — but without the disbursement — so the state tax on that income went unpaid.

Years later, using IRS information-sharing data, the Department issued Assessment No. 645185 (October 1995): $190.24 in tax, $102.25 in interest, and $19.02 in penalty for 1991. Ruybalid paid the tax and protested only the interest and penalty. Hearing Officer Julia Belles denied the protest:

• The assessment was timely. Under § 7-1-18(A), the Department had three years from the end of the year the tax was due; the 1991 tax was due April 15, 1992, and the October 1995 assessment fell within that window.
• Interest is mandatory (§ 7-1-67). The tax was due April 15, 1992 but wasn't paid until November 24, 1995, so interest ran for that whole period. The presumption that an assessment is correct extends to interest, because "tax" includes related interest (§§ 7-1-17(C), 7-1-3(U)), and Ruybalid didn't carry his burden to show it was wrong.
• The Department's help on other matters didn't shift the duty. Ruybalid argued that because he'd resolved unrelated tax issues with Agent Dalton (who told him in 1994 those were settled), the Department should have flagged the 1991 problem then. But in a self-reporting system the responsibility to report income stays with the taxpayer; it doesn't move to the Department just because it was assisting with other issues. Had Ruybalid reported the income in the first place, there'd be no interest.
• The penalty stood — this was negligence (§ 7-1-69). Ruybalid knew no state tax had been withheld and that the payout had to be reported, and was careless in not giving the paperwork to his preparer. And Agent Dalton wasn't misleading him in 1994, because the Department itself wasn't yet aware of the 1991 omission.

What this means for you

Lump-sum retirement distributions are taxable income you must report

A retirement payout is taxable income, and state tax often isn't withheld even when federal tax is. If you take a distribution, make sure it lands on your state return — don't assume withholding covered it. Missing it means owing the tax plus interest, and possibly a penalty.

Give every tax document to your preparer — forgetting one is negligence

Ruybalid's return was wrong because he never handed his preparer the disbursement paperwork. A preparer can only report what you give them. Losing track of a document after a move — and knowing state tax wasn't withheld — was treated as negligence, which is exactly what triggers the penalty.

Interest is mandatory and runs until you pay

Interest accrues from the original due date until the tax is actually paid, no matter why it was late. Here it ran from April 1992 to November 1995. The only way to avoid interest is to report and pay correctly and on time in the first place.

The Department helping you on one issue doesn't make your other filings its job

Working with a Department agent to clear up one tax problem does not shift responsibility for the rest of your taxes onto the Department. Being told "your problems are resolved" refers to the matters actually under review — it isn't a clean bill of health for issues the Department doesn't yet know about.

The Department can find unreported income years later through IRS data

New Mexico shares information with the IRS. Income you leave off a state return can surface later through that data and generate an assessment within the limitations period. Report it up front rather than counting on it going unnoticed.

Common questions

Q: I forgot about a retirement payout and left it off my return. Can the interest be waived?
A: No. Interest under § 7-1-67 is mandatory on tax paid late, whatever the reason. It ran here from the 1992 due date until the tax was paid in 1995.

Q: State tax wasn't withheld from my distribution. Isn't that the payer's fault?
A: For your liability, no. In a self-reporting system you're responsible for reporting the income and paying any tax due. If withholding didn't cover it, you still owe the tax on time — and interest if it's late.

Q: I was working with the Department on other tax issues and was told they were resolved. Shouldn't they have caught this?
A: No. That resolution covered the matters under review, not a problem the Department didn't yet know about. Assisting you with other issues doesn't shift the duty to report all your income onto the Department.

Q: Why did I get a penalty and not just interest?
A: Because the omission was negligent. Ruybalid knew no state tax had been withheld and that the payout had to be reported, and was careless in not giving the paperwork to his preparer. Where a taxpayer isn't negligent, the penalty can be abated — but that wasn't the case here.

Citations and references

Statutes and regulations:

• § 7-1-17(C) NMSA 1978 — an assessment of tax is presumed correct; the taxpayer bears the burden of proving otherwise
• § 7-1-3(U) NMSA 1978 — "tax" is defined to include the amount of interest related to any tax, so the presumption of correctness extends to assessed interest
• § 7-1-18(A) NMSA 1978 — the Department may assess tax no later than three years from the end of the calendar year in which the tax was due
• § 7-1-67 NMSA 1978 — interest is imposed on any tax not paid when due, from the due date until it is paid
• § 7-1-69 NMSA 1978 — penalty for failure to pay tax due to negligence; Regulation TA 69:3 — defines negligence (failure of ordinary business care, inaction where action is required, inadvertence/carelessness/erroneous belief/inattention)
• § 7-1-24 NMSA 1978 — timely written protest of an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Frank E. Ruybalid
• Decision PDF: D&O 96-10

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
FRANK E. RUYBALID,
PROTEST TO ASSESSMENT NO. 645185. NO. 96-10

DECISION AND ORDER

This matter was scheduled for hearing before Julia Belles, Hearing Officer, on February

12, 1996. The hearing was reconvened on March 18, 1996. On both occasions Bridget A.

Jacober, Special Assistant Attorney General, represented the Taxation and Revenue Department

(Department) and Mr. Frank E. Ruybalid (Taxpayer) represented himself.

Based upon the evidence and arguments presented, IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer earned income in New Mexico and was subject to the New Mexico

personal income tax (PIT).

2. Around March 25, 1991, the Taxpayer received a lump sum disbursement from a

retirement account. The disbursement indicated that federal taxes were withheld but did not

indicate that any state taxes were withheld. The document stated that it should be retained for

tax purposes and that a separate form, also to be used for tax purposes, would be sent out before

January 31, 1992.

3. The Taxpayer moved between the time he received the disbursement and the time

he filed his 1991 and never received any other information concerning the disbursement.

4. The Taxpayer computed and timely filed his 1991 PIT without including the

amount received from the disbursement and, consequently, the state taxes on the disbursement

were not paid by the Taxpayer.

5. During the latter part of 1993 and the first part of 1994, the Taxpayer had various
   contacts with the Department's representative, Agent Dalton, concerning tax problems unrelated

to his 1991 PIT.

7. The Taxpayer finished resolving those problems in October 1994. Agent Dalton

told the Taxpayer that his tax problems were settled.

8. On October 27, 1995, the Department issued Notice of Assessment No. 645185

assessing $190.24 in personal income tax, $102.25 in interest and $19.02 in penalty for the 1991

tax year.

9. The Assessment was based upon information the Department received from the

Internal Revenue Service pursuant to an information sharing agreement. That information

revealed that the Taxpayer received the disbursement and that it should have been reported as

income when he filed his 1991 PIT.

10. The Taxpayer timely paid the tax portion of Assessment No. 645185 and on

November 24, 1995 timely filed a protest against the interest and penalty portions of the

assessment.

DISCUSSION

The Taxpayer disputes the interest and penalty that was calculated on the

assessment for the time period April 16, 1992 through October 27, 1995. Section 7-1-17(C)

NMSA 1978 (1995 Repl.) provides that there is a presumption of correctness which attaches to

any assessment of taxes by the Department. "Tax" is defined to include the amount of interest

related to any taxes. Section 7-1-3(U) NMSA 1978 (1995 Repl.). Therefore, the presumption

of correctness attaches to the assessment of interest as well, and the Taxpayer has the burden of

proving that the assessment of interest is incorrect.

The Taxpayer timely filed his 1991 PIT but did not include income from a lump sum

disbursement which he received in 1991. The Taxpayer received the disbursement in March of

1991. The information included with the disbursement showed that federal taxes were deducted

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from the disbursement, that state taxes were not deducted and told the Taxpayer that he should

keep the document for tax purposes. The Taxpayer was informed that another report, also for

tax purposes, would be mailed to him before January 31, 1992. The Taxpayer moved and did

not receive that report. The Taxpayer forgot about the disbursement and did not give his tax

preparer the document he received in March of 1991. The Taxpayer's 1991 PIT was filed

without including the disbursement as income. This case arises because the disbursement was

not included as income on the Taxpayer's 1991 PIT and, consequently, taxes were not paid on the

disbursement. The Taxpayer knew the state taxes weren't paid when he received the

disbursement but the Department did not inform the Taxpayer of the error until it issued Notice

of Assessment, No. 645185, in October of 1995.

The Taxpayer argued that he should be not charged interest and penalty because he had

been dealing with the Department on unrelated tax issues and was told his tax problems were

resolved. The Taxpayer started dealing with the Department, through its representative Agent

Dalton, concerning the unrelated tax issues during the latter months of 1993. His contact with

Agent Dalton on those issue continued through the early part of 1994. In October of 1994, the

Taxpayer was informed that those issues were resolved and he no longer had any tax liabilities.

The Taxpayer argued that he should not be charged interest and penalty because he was resolving

his tax problems and should have been informed of the problem with the 1991 disbursement at

that time. Instead, the Department took three and a half years to find that the disbursement was

not reported as income in 1991 and notify the Taxpayer of his liability.

The Department based the amount of its assessment upon information it received from

the Internal Revenue Service pursuant to the information sharing agreement between the

Department and the IRS. Section 7-1-18(A) NMSA 1978 (Repl. 1995) allows the Department

to assess taxes no later than three years from the end of the year that the tax was due. Since the

1991 personal income tax was due on April 15, 1992, the assessment was issued within the

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statute of limitations and is therefore timely.

Taxpayer did not meet his burden to show that the Department's imposition of interest

and penalty was incorrect. The Taxpayer's argument misapprehends the nature of our

self-reporting tax system. The responsibility to ensure the proper and timely reporting and

payment of taxes lies with the taxpayer. This responsibility does not shift to the Department

merely because it was assisting the Taxpayer in resolving unrelated tax liability. The Taxpayer

received the disbursement in March of 1991 and was aware that no state taxes were deducted and

that it needed to be reported as income. If the Taxpayer had properly determined and reported

his taxes in the first place, there would be no interest at issue. The interest on Assessment No.

645185 was properly assessed because the taxes on the disbursement were due on April 15, 1992

but were not paid until November 24, 1995. Section 7-1-67 NMSA 1978 (1995 Repl.).

In addition to the tax and interest, the Taxpayer was assessed a penalty. Penalty is

assessed when the failure to pay a tax is due to a taxpayer's negligence. Section 7-1-69 NMSA

1978 (1995 Repl.) Taxpayer "negligence" is defined in Regulation TA 69:3 to mean:

1) failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, careless, erroneous belief or
inattention.

The Taxpayer was negligent. The Taxpayer was aware that state taxes were not deducted

from the disbursement. The paperwork that Taxpayer received with the disbursement indicated

that it needed to be saved for tax purposes. The Taxpayer was careless in not giving all the

paperwork on that disbursement to his tax preparer. It appears that in October of 1994, when

Agent Dalton told the Taxpayer his tax problems were resolved, the Department was unaware of

the problem with the Taxpayer's 1991 PIT. Agent Dalton was not misleading the Taxpayer

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when he told the Taxpayer that his tax problems were resolved. The penalty on Assessment No.

645185 was correctly imposed because the Taxpayer showed negligence. Section 7-1-69

NMSA 1978 (1995 Repl.).

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CONCLUSIONS OF LAW

1. The Taxpayer timely filed a written protest, pursuant to Section 7-1-24 NMSA

1978 (1995 Repl.), to the interest and penalty portions of Assessment No. 645185 and, therefore,

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

2. The Department timely issued Assessment No. 645185.

3. The interest on Assessment No. 645185 was properly assessed because the taxes

on the disbursement were not timely paid.

4. The penalty on Assessment No. 645185 was properly assessed because the

Taxpayer was aware that state taxes on the disbursement needed to be paid but did not include

the disbursement as income in his 1991 PIT.

For these reasons, the Taxpayer's protest is hereby denied.

Done this 28th day of March, 1996.

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