If a paid tax preparer's mistake caused you to underpay New Mexico income tax, can the interest on the unpaid tax be waived?

Plain-English summary

Tim and Diane Gonzales filed their 1992 New Mexico income tax return on time, prepared by a paid preparer. The preparer accidentally left off $18,491.65 of Mr. Gonzales's wages, so no tax was paid on that income — and instead of owing a balance, the couple got a $592 refund. In 1994 the IRS caught the error on the federal return; the couple agreed and paid the extra federal tax, penalty, and interest. But no one told them to also amend their New Mexico return, and they didn't. In 1996, a Department "tape match" — a periodic computer comparison of federal and state data — turned up the discrepancy, and the Department assessed $1,083.21 in state income tax plus penalty and interest for 1992.

The Department abated the penalties, and the couple didn't dispute the tax itself. Their only challenge was to the interest. The Hearing Officer denied that challenge:

• Interest is mandatory. Section 7-1-67 says interest "shall" be paid on unpaid tax at 15% a year until it's paid, with no exceptions. "Shall" is mandatory (§ 12-2-2(I); State v. Lujan). Interest is not a penalty — it compensates the state for the time it went without money that was due, so it can't be waived just because the underpayment was innocent or the preparer was at fault.
• The preparer's error doesn't excuse the interest. The couple relied on their preparer, who both made the original mistake and later failed to tell them to amend the state return. That may explain how it happened, but the interest is still owed.
• The Department had no duty to warn them sooner. The couple argued that because New Mexico "piggybacks" on federal returns and the Department can access IRS data, it should have alerted them in 1994. Not so: IRS information isn't sent to the Department automatically; the Department learns of it only through periodic tape matches. There was no showing it knew (or should have known) of the error before the 1996 match, and no duty to hunt for it or notify the couple.

What this means for you

Interest can't be waived, even for an innocent mistake

This is the central, recurring New Mexico rule: interest on underpaid tax is mandatory and non-negotiable. A preparer's error, your own lack of awareness of the debt, or years passing before anyone notices — none of it reduces the interest. The Department can (and here did) abate penalties for a non-negligent taxpayer, but interest at the statutory rate keeps running until the tax is paid, because it's the price of the state not having its money on time.

Fix the state return when the IRS changes your federal one

The trap here was that the IRS caught the federal error but no one flagged the state side. If the IRS adjusts your income, your New Mexico return almost certainly needs the same fix. Amend it and pay promptly — the sooner you pay, the less interest accrues. Waiting for the Department to find it through a tape match only lets interest build.

Don't count on the Department to notice quickly

New Mexico's income tax borrows figures from your federal return, but the state and IRS are separate systems. The Department doesn't get real-time IRS data; it catches mismatches through periodic tape matches that can run years after the fact. That delay won't reduce your interest, and the Department has no duty to notify you earlier. The responsibility to correct your return is yours.

Accountants and tax professionals

Set client expectations clearly: § 7-1-67 interest is mandatory and cannot be abated on equitable or reliance grounds, even where penalties are abated. When a federal RAR or IRS adjustment lands, promptly amend the New Mexico return and pay — interest accrues from the original due date regardless of when the Department discovers the deficiency, and there is no Department duty of early notice.

Common questions

Q: My preparer made the mistake, not me. Why do I owe interest?
A: Because interest isn't a penalty for wrongdoing — it compensates the state for the time it went without the tax. Section 7-1-67 makes it mandatory with no exceptions, so who caused the error doesn't matter. (The penalties, which are fault-based, were abated.)

Q: I didn't even know I owed the tax. Shouldn't that count?
A: The Hearing Officer acknowledged it's unpleasant to pay interest on a debt you didn't know about, but the statute still requires it. Interest runs from the original due date until the tax is paid.

Q: The IRS found the error in 1994. Why didn't the Department tell me then?
A: The Department doesn't automatically receive IRS data. It learns of federal changes through periodic tape matches, which here happened in 1996. It had no duty to find the error sooner or to notify you.

Q: How do I stop interest from growing?
A: Pay the tax as soon as you know about it. If the IRS changes your federal return, amend your New Mexico return and pay right away rather than waiting for the state to catch it.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates New Mexico's mandatory-interest rule, but your facts may differ.

Citations and references

Statutes:

• § 7-1-67 NMSA 1978 — interest on a tax deficiency "shall" be paid to the state at 15% per year from the day after the tax becomes due until it is paid; no exceptions are provided
• § 12-2-2(I) NMSA 1978 — in construing statutes, "shall" and "must" are mandatory unless inconsistent with manifest legislative intent

Case cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — the word "shall" is mandatory rather than discretionary unless a contrary legislative intent is clearly demonstrated

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Tim and Diane Gonzales
• Decision PDF: D&O 97-21

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
TIM AND DIANE GONZALES No. 97-21
PROTEST TO ASSESSMENT NO. 683334

DECISION AND ORDER

This matter came on for formal hearing on May 12, 1997, before Ellen Pinnes, Hearing

Officer. Tim and Diane Gonzales ("the Taxpayers"), appeared on their own behalf. The

Taxation and Revenue Department ("the Department") was represented by Bruce J. Fort, Special

Assistant Attorney General.

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers submitted a timely return for New Mexico personal income tax for

2. That return was prepared for them by Rosebella Lineberry, a paid tax preparer.

3. In preparing the Taxpayers' state and federal income tax returns for 1992, Ms.
   Lineberry inadvertently failed to report $18,491.65 of income received by the Taxpayers as

wages paid to Mr. Gonzales. Accordingly, no tax was paid on this income. Instead of paying a
balance due for 1992 tax, as they would have been required to do if the omitted income had been

included in the return, the Taxpayers received a refund of $592 from the Department. Although
they were surprised to receive such a large refund, the Taxpayers did not question it at the time.

3. In 1994, the federal Internal Revenue Service (IRS) discovered the error in reporting

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the Taxpayers' income on their federal tax return. The IRS assessed the additional federal tax

due, plus penalty and interest. The Taxpayers concurred in the assessment and paid the amounts

determined to be owed.

4. Neither the IRS nor Ms. Lineberry advised the Taxpayers that they should also amend

their New Mexico tax return to report the omitted income and pay taxes thereon. The Taxpayers

did not take any action to correct the error in their state return.

5. In 1996, the Department discovered the discrepancy between the income reported to

the IRS and the amount shown on the Taxpayers' state tax return for 1992 through a computer

check, known as a "tape match", comparing information reported to state and federal tax

authorities.

6. On October 17, 1996, the Department issued Assessment No. 683334 for $1,083.21

in personal income taxes for 1992, plus penalty and interest.

7. The Taxpayers filed a timely protest of the assessment by their form protest dated

November 7, 1996.

8. The Department has abated penalties assessed against the Taxpayers.

9. The Taxpayers do not contest their liability for the tax. Their challenge is only as to

interest imposed.

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DISCUSSION

The Taxpayers protest the imposition of interest on two grounds. One is that the failure

to make timely payment of the tax owed was due to the error of their paid tax preparer, for which

they should not be penalized. The Taxpayers also argue that the Department should have

notified them of their duty to amend their state tax return and pay the additional state tax in 1994,

when the error was discovered by the IRS, rather than waiting until nearly two years later to

contact them regarding the error.

Liability for interest on tax deficiencies
Section 7-1-67 NMSA 1978 provides for the imposition of interest on tax deficiencies:
A. If any tax imposed is not paid on or before the day on which it becomes due, interest shall be
paid to the state on such amount from the first day following the day on which the tax
becomes due ... until it is paid ... .

B. Interest due to the state under Subsection A ... shall be at the rate of fifteen percent a
year ... . (Emphasis added.)

It is a well settled rule of statutory construction that the word "shall" is mandatory rather

than discretionary, unless a contrary legislative intent is clearly demonstrated. State v. Lujan, 90

N.M. 103, 560 P.2d 167 (1977). The New Mexico Legislature has expressly reiterated this

general rule in §12-2-2(I) NMSA 1978 (in construing statutory provisions, the words "shall" and

"must" are to be construed as mandatory unless this would be inconsistent with manifest
legislative intent or repugnant to the context of the statute).

Section 7-1-67 requires that interest, at the rate of fifteen percent per year, be imposed on
the amount of any unpaid tax. No exceptions to this rule are provided for. Interest is intended

to compensate the state for the time-value of money which was not paid when it was due. It may
be unpleasant to pay interest on monies owed, particularly where the taxpayer is for some time

unaware of the existence of the debt, as was the case here. However, interest is not a penalty for
late payment. It is, rather, a means of making a creditor whole through reimbursement for not

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having had the use of the money during the time it remained unpaid.

The Taxpayers here relied on their paid tax preparer to properly determine and report

their state and federal tax liability. That person erred in erroneously reporting the Taxpayers'

income. This error was compounded by her later failure to advise the Taxpayers, when the error

was discovered, that their state return should be amended as well as the federal one. The

Department has abated the penalties originally assessed against the Taxpayers. However, the

interest assessed is mandated by statute and cannot be abated.

Department's failure to give earlier notice of error
The Taxpayers also challenge the assessment of interest on the grounds that the

Department should have informed them earlier that they owed additional state income tax. They

reason that, since New Mexico income tax returns "piggyback" on federal tax information, and

the Department has access to information from the IRS, the Department had a duty to notify them

promptly when the IRS discovered the error on the Taxpayers' 1992 income tax return.

The Taxpayers misapprehend the nature of the relationship between the state and federal

tax systems and tax agencies. New Mexico's personal income tax returns "piggyback" on federal

returns in the sense that information from the federal return is transferred to the state return to

begin the process of determining the amount of state tax due. Also, the Department performs

periodic "tape matches" in which information reported to the IRS is compared with information

reported to the state.

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Contrary to the Taxpayers' apparent belief, information regarding New Mexico taxpayers

is not transmitted to the Department when it is received by the IRS. Rather, the Department

becomes aware of such information only through mechanisms such as these periodic tape

matches. There is no showing either that the Department was aware of the error in the

Taxpayers' 1992 state tax return before the time of the 1996 tape match, or that it should have

been. Nor was there any duty on the Department's part to identify such an error or advise the

Taxpayers of its existence.

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely protest of Assessment No. 683334. Jurisdiction thus

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

2. The Taxpayers do not contest the assessment insofar as it is for income tax owed.

The validity of those taxes therefore is not before the hearing officer for decision.

3. The Department has abated penalties assessed against the Taxpayers. The validity of

the penalties therefore is not before the hearing officer for decision.

4. The Taxpayers underpaid personal income tax for 1992 and interest was properly

imposed on the deficiency at the statutory rate of fifteen percent per year.

For the foregoing reasons, the Taxpayers protest of interest assessed on the tax deficiency

IS HEREBY DENIED.

DONE, this 9th day of June, 1997.

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