An immigrant couple's accountant wrongly told them cleaning income wasn't subject to gross receipts tax, and paying the back interest would be a hardship. Can the interest be waived?

Subject

Luis Tamayo & Amanda Llerena (D&O 98-33)

Plain-English summary

Luis Tamayo and Amanda Llerena came to the United States from Ecuador. To meet the employment requirements for permanent residency, they took work cleaning homes as independent contractors. Wanting to do everything by the book, they hired an accountant. They reported the cleaning income as business income on Schedule C of their federal returns — but, following their accountant's incorrect advice, they did not report or pay New Mexico gross receipts tax.

In late 1997 the Department assessed gross receipts tax, penalty, and interest on their 1994 receipts. Tamayo protested the penalty and interest, and — showing real good faith — contacted the Department himself to ask it to figure his 1995 and 1996 liability too, which produced four more assessments in March 1998. Because the couple had reasonably relied on their accountant, the Department abated every penalty. That left only the interest in dispute.

Hearing Officer Margaret B. Alcock denied the protest. Two arguments were rejected:

• "It was an honest mistake." Under Section 7-1-67, interest "shall" be paid on any tax not paid when due. Interest isn't a punishment — it compensates the state for the time value of money it was owed — so the reason for the late payment (here, bad professional advice) doesn't matter. The statute provides no exceptions.
• "Paying will be a financial hardship." The Department must apply the law even-handedly. Section 7-1-20 lets the Secretary compromise a tax only when there is a good-faith doubt about whether the tax is actually owed — not because the taxpayer can't afford to pay or would suffer hardship (Regulation 3 NMAC 1.6.14). So there was no authority to abate the interest.

What this means for you

• Interest on late tax cannot be waived for hardship. New Mexico can compromise a tax only when there's genuine doubt you owe it — never simply because paying is hard. Budget for the interest; it will not be forgiven on sympathy.
• Relying on a professional can save your penalty but not your interest. Good-faith reliance on an accountant is exactly what gets a negligence penalty abated — as it did here for the full penalty amount. Interest is separate and mandatory.
• Independent contractors owe gross receipts tax, even on modest service income. Cleaning homes, like any self-employed service work in New Mexico, is subject to gross receipts tax. Reporting it federally on Schedule C does not satisfy the state obligation.
• Coming forward voluntarily is still the right move. Tamayo proactively asked the Department to compute his later-year tax. That cooperation supports penalty abatement and avoids bigger problems, even though it doesn't erase interest.
• Vet advice about state tax specifically. An accountant comfortable with federal returns may miss a state-specific tax like New Mexico's gross receipts tax. The obligation to get it right ultimately rests with the taxpayer.

Key questions answered

Why were the penalties removed but not the interest?
The penalties were for negligence, and the couple's good-faith reliance on their accountant showed they were not negligent — so the Department abated them. Interest is not a penalty; it compensates the state for the time value of the unpaid tax, and Section 7-1-67 makes it mandatory with no exceptions.

Can the state waive interest because paying it is a hardship?
No. Section 7-1-20 allows the Secretary to compromise a tax only when there is a good-faith doubt about the taxpayer's liability. Inability to pay or financial hardship is not a basis to abate tax or interest (Regulation 3 NMAC 1.6.14).

Does hiring an accountant protect you if the advice is wrong?
It can protect you from a negligence penalty, because it shows good faith. It does not protect you from the interest, and it does not remove your underlying duty to pay the correct tax.

Did the couple dispute owing the gross receipts tax itself?
No. They protested only the penalty and interest. The penalties were abated; the interest was upheld.

Verbatim citations

Interest is mandatory (Section 7-1-67(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, without regard to any extension of time or installment agreement, until it is paid.... (emphasis added)

Why hardship is not a basis to abate the interest (Section 7-1-20):

The Department is required to apply the law even-handedly and cannot make exceptions based on individual circumstances. Section 7-1-20 NMSA 1978 provides that the Secretary of the Department may compromise an assessed tax when he has a good faith doubt as to the taxpayer's liability for payment of the tax. The Secretary may not abate an assessment based on the taxpayer's inability to pay the tax or on the fact that payment will create a hardship. See, Regulation 3 NMAC 1.6.14. Accordingly, the Department has no authority to abate interest in this case.

The holding (Conclusion of Law 2):

Pursuant to Section 7-1-67 NMSA 1978, interest was properly assessed against Mr. Tamayo and Ms. Llerna for the late payment of gross receipts tax due on income they earned during the period January 1994 through December 1996.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Luis Tamayo & Amanda Llerena
• Decision PDF: D&O 98-33

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
LUIS TAMAYO & AMANDA LLERENA 98-33
ID. NO. 02-348748-00 8
ASSESSMENT NOS. 2183277, 2234967,
2234966, 2234965 and 2234964

DECISION AND ORDER

This matter came on for formal hearing on May 27, 1998 before Margaret B. Alcock,

Hearing Officer. Luis Tamayo appeared on behalf of himself and his wife, Amanda Llerena.

Sam Adelo acted as a Spanish language interpreter for Mr. Tamayo. The Taxation and Revenue

Department ("Department") was represented by Monica M. Ontiveros, Special Assistant Attorney

General. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Mr. Tamayo and Ms. Llerena came to the United States from Ecuador.

2. In order to comply with the employment requirements to establish a legal

permanent residence in the United States, Mr. Tamayo and Ms. Llerena obtained work cleaning

homes. They performed this work as independent contractors rather than as employees.

3. In order to insure that he and his wife would be in compliance with all tax laws,

Mr. Tamayo consulted with an accountant.

4. Mr. Tamayo and Ms. Llerna reported their receipts from performing cleaning

services as business income on Schedule C to their federal income tax returns. Based on
incorrect advice received from their accountant, Mr. Tamayo and Ms. Llerna did not report or

pay New Mexico gross receipts tax on these receipts.

5. On October 17, 1997, the Department issued Assessment No. 2183277 to Mr.

Tamayo and Ms. Llerna for $665.66 gross receipts tax, $66.56 penalty and $299.54 interest due

on their cleaning receipts for the period January through December 1994.

6. On October 24, 1997, Mr. Tamayo filed a written protest to the assessment of

penalty and interest.

7. Realizing that he might be liable for gross receipts tax on income earned in

subsequent years, Mr. Tamayo contacted the Department and asked the Department to determine

his tax liability for 1995 and 1996.

8. On March 18, 1998, the Department issued the following assessments:

Assessment No. Report Period Tax PenaltyInterest

2234967 Jan.-June 1995 $386.64 $38.66 $154.66
2234966 July-Dec. 1995 $386.64 $38.66 $125.66
2234965 Jan.-June 1996 $361.34 $36.13 $ 90.34
2234964 July-Dec. 1996 $361.34 $36.13 $ 63.23

9. On March 31, 1998, Mr. Tamayo filed a written protest to the penalty and interest

assessed for 1995 and 1996.

10. The Department subsequently abated all penalties assessed based on the taxpayers'

reliance on the erroneous advice of their accountant.

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DISCUSSION

The sole issue in this case is whether Mr. Tamayo and Ms. Llerna are liable for interest

on their underpayment of gross receipts tax during the period January 1994 through December

1996.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of taxes

made by the Department is presumed to be correct, and it is the taxpayer's burden to overcome this

presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972).

Section 7-1-3(U) NMSA 1978 defines tax to include not only the amount of tax principal

imposed but also, unless the context otherwise requires, “the amount of any interest or civil

penalty relating thereto." Accordingly, the presumption of correctness of an assessment of taxes

also applies to the assessment of interest. See also, El Centro Villa Nursing Center v. Taxation

and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989).

Assessment of Interest. Section 7-1-67 NMSA 1978 governs the imposition of interest

on late payments of tax and provides, in pertinent part:

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,
without regard to any extension of time or installment agreement,
until it is paid.... (emphasis added)

Mr. Tamayo asks the Department to consider that his failure to pay gross receipts tax was

unintentional and that he made every effort to comply with pertinent tax laws by engaging an

accountant to advise him. The Department has taken this into account by abating the negligence

penalties assessed against Mr. Tamayo and his wife. The reason for a late payment of tax does

not, however, affect the imposition of interest. Unlike the assessment of penalty, the assessment

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of interest is not designed to punish taxpayers, but to compensate the state for the time value of

unpaid revenues. The legislature’s use of the word “shall” indicates that the assessment of interest

is mandatory rather than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169

(1977). Even taxpayers who contact the Department before a tax is due and obtain a formal

extension of time to pay the tax are liable for interest from the original due date of the tax to the

date payment is made. Section 7-1-13(E) NMSA 1978. The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to

the mandate of the statute.

Mr. Tamayo also asks the Department to consider that the assessment of interest will create

a financial hardship on his family. The Department is required to apply the law even-handedly and

cannot make exceptions based on individual circumstances. Section 7-1-20 NMSA 1978 provides

that the Secretary of the Department may compromise an assessed tax when he has a good faith

doubt as to the taxpayer's liability for payment of the tax. The Secretary may not abate an

assessment based on the taxpayer's inability to pay the tax or on the fact that payment will create a

hardship. See, Regulation 3 NMAC 1.6.14. Accordingly, the Department has no authority to abate

interest in this case.

CONCLUSIONS OF LAW

1. Mr. Tamayo filed timely written protests to Assessment Nos. 2183277, 2234967,

2234966, 2234965 and 2234964 pursuant to Section 7-1-24 NMSA 1978, and jurisdiction lies over

the parties and the subject matter of this protest.

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2. Pursuant to Section 7-1-67 NMSA 1978, interest was properly assessed against Mr.

Tamayo and Ms. Llerna for the late payment of gross receipts tax due on income they earned

during the period January 1994 through December 1996.

For the foregoing reasons, the Taxpayers' protest IS HEREBY DENIED.

DONE, this 6th day of June 1998.

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