My underreporting was an honest blunder and I can't afford to pay more. Can the state forgive the penalty and interest on my back gross receipts tax?

Subject

Mark Sisson (D&O 98-39)

Plain-English summary

Mark Sisson ran two sole proprietorships in Hobbs: Industrial Precision Instruments, which repaired oil-and-gas metering devices (it closed in December 1992), and ABC Builders, a general contractor. In 1996 the Department audited both. Because neither business had complete records, the auditor reconstructed the numbers from bank statements, the Schedule C of Sisson's federal returns, building permits, invoices, and the gross receipts tax filings. The audit found large underreported receipts (over $21,000 for the instruments business, over $263,000 for ABC Builders) and deductions that lacked proper nontaxable transaction certificates (NTTCs).

The two 1996 assessments added up to roughly $15,600 in gross receipts tax, about $1,600 in penalty, and nearly $7,900 in interest. Sisson didn't dispute the tax — he couldn't, without records — and was paying it off at $400 a month. He protested only the penalty and interest, saying the underreporting was unintentional and he simply couldn't afford more.

Hearing Officer Gerald B. Richardson was sympathetic but denied both protests:

• Inability to pay is not a basis to compromise tax. Under Section 7-1-20, the Department can compromise a tax only when there's a good-faith doubt about liability — not because the taxpayer can't afford it (Regulation 3 NMAC 1.6.14). Neither the Secretary nor the Hearing Officer can abate a liability for hardship.
• Interest is mandatory. Section 7-1-67 says interest "shall" be paid on late tax, with no exceptions, so the reason for the delay is irrelevant.
• The penalty stood because Sisson was negligent. Penalty under Section 7-1-69 requires only negligence, not intent to defraud. New Mexico is a self-reporting system, and Section 7-1-10 requires every taxpayer to keep books adequate to compute tax. Sisson's inadequate records and his misunderstanding of the NTTC rules were negligence — and his own protest letters, which called the underpayment a "blunder on my part," were an admission of exactly the inattention the penalty targets.

The Order stressed that finding negligence did not mean Sisson acted in bad faith — the penalty exists to give every taxpayer an incentive to keep good records and learn the rules, so that underreporting isn't a free bet against the odds of an audit.

What this means for you

• Keep records good enough to compute your tax — the law requires it. Section 7-1-10 makes adequate bookkeeping a legal duty. If your records are so thin that an auditor has to rebuild your receipts from bank statements and permits, expect a negligence penalty on top of the tax.
• "I didn't mean to" is not a defense to the penalty. The penalty is for negligence, not fraud. Honest carelessness — poor systems, not knowing the rules — is enough to trigger it. Only genuine good-faith reasonableness avoids it.
• Watch what you put in writing. Sisson's own letters calling his underpayment a "blunder" were treated as an admission of negligence. Describe your situation carefully in a protest.
• Can't afford to pay is not a reason to abate. New Mexico can only compromise a tax when it genuinely doubts you owe it. Hardship gets you an installment plan, not forgiveness of penalty or interest.
• Know the certificate rules before you claim a deduction. Deductions unsupported by NTTCs get disallowed, and not understanding that requirement is itself part of what makes the failure negligent.

Key questions answered

Sisson didn't intend to underreport — why was he penalized?
Because the penalty under Section 7-1-69 is for negligence, not fraud. Failing to keep adequate records and to understand the NTTC requirements is negligence, and his own "blunder" admission confirmed it. Intent to cheat is not required.

Can the Department forgive tax because a taxpayer can't afford it?
No. Section 7-1-20 permits compromise only when there is a good-faith doubt about the taxpayer's liability. Inability to pay is not a basis to compromise or abate tax, penalty, or interest — though it can support an installment agreement, as it did here.

Why couldn't the interest be waived even though the failure was innocent?
Section 7-1-67 makes interest mandatory on any late tax, with no exceptions. It compensates the state for the time value of money, so the reason for late payment doesn't matter.

What made the recordkeeping "negligent"?
Sisson lacked systems to track his revenues accurately and didn't understand the documentation needed to support deductions. New Mexico's self-reporting system charges every taxpayer with the duty to ascertain the tax consequences of their actions; failing to do so is negligence.

Verbatim citations

Inability to pay is not a basis to compromise tax (Section 7-1-20 / Regulation 3 NMAC 1.6.14):

The secretary may not compromise a taxpayer's liability because of the taxpayer's inability to pay. The secretary may not compromise a taxpayer's liability solely because of the threat of litigation or as an expedient means of disposing of a controversy unless the secretary has a good faith doubt as to the liability.

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 the failure was negligent, supporting the penalty:

Mr. Sisson's own protest letters acknowledge that the underpayment of taxes was a "blunder on my part." That alone is an admission of inadvertence, inattention or lack of ordinary business care sufficient to establish negligence. Mr. Sisson's failure to understand the statutory requirements for claiming a deduction from tax and his failure to maintain adequate business systems to accurately keep track of his revenues for tax reporting purposes also amounts to negligence.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mark Sisson
• Decision PDF: D&O 98-39

Original ruling text

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

IN THE MATTER OF THE PROTESTS OF
MARK SISSON, D/B/A/ INDUSTRIAL
PRECISION INSTRUMENTS, ID. NO.
02-073892-00 7, PROTEST TO ASSESSMENT NO. 98-39
NO. 2092127 AND MARK SISSON, D/B/A/
ABC BUILDERS, ID. NO. 02-205335-00 0,
PROTEST TO ASSESSMENT NO. 2089978

DECISION AND ORDER

This matter came on for formal hearing on July 13, 1998 before Gerald B.

Richardson, Hearing Officer. Mark Sisson, the owner of Industrial Precision Instruments,

and of ABC Builders, represented himself at the hearing. The Taxation and Revenue

Department, hereinafter, “Department”, was represented by Monica M. Ontiveros,

Special Assistant Attorney General. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Industrial Precision Instruments was a sole proprietorship, located in

Hobbs, New Mexico, which repaired metering devices used in the oil and gas industry. It

ceased doing business in December, 1992.

2. ABC Builders is a sole proprietorship engaged in general contracting

located in Hobbs, New Mexico.

3. In 1996 the Department audited Industrial Precision Instruments and ABC

Builders. Neither business had complete records and the Department auditor resorted to

using the bank records, Schedule C of Mr. Sisson’s federal personal income tax returns,

building permits, invoices and the gross receipts tax filings by the businesses to conduct

the audits.

4. With respect to Industrial Precision Instruments, the Department’s audit

disallowed $6,107.73 in deductions claimed from gross receipts tax because the Taxpayer

did not have a proper non-taxable transaction certificate to support its claim of deduction.

The Department’s audit also concluded that the business had underreported gross receipts

during the audit period by $21,851.78.

5. Based upon the Department’s audit findings, on December 13, 1996 the

Department mailed Assessment No. 2092127 to Industrial Precision Instruments,

assessing $1,431.25 in gross receipts tax, $153.34 in penalty and $2,654.11 in interest for

the reporting periods of January, 1990 through December, 1992.

6. On January 8, 1997, Mr. Sisson filed a timely, written protest of

Assessment No. 2092127 with the Department, protesting penalty and interest only. .

7. With respect to ABC Builders, the Department’s audit concluded that the

business had underreported gross receipts during the audit period by $263,344.49.

8. Based upon the Department’s audit findings, on December 2, 1996 the

Department mailed Assessment No. 2089978 to ABC Builders, assessing $14,185.50 in

gross receipts tax, $1,451.50 in penalty and $5,209.33 in interest for the reporting periods

September, 1992 through June, 1996.

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9. On January 8, 1997 Mr. Sisson mailed the Department a letter purporting

to protest the penalty and interest portion of Assessment No. 2989978. That letter

became a timely protest to the assessment when, on February 17, 1997 the Department

granted Mr. Sisson a retroactive extension of time to file a protest to Assessment No.

2089978.

10. Mr. Sisson is presently paying $400 per month, in accordance with an

installment agreement with the Department, to pay the unprotested tax principal portions

of the two assessments under protest. Mr. Sisson cannot afford to pay more than he is

presently paying.

DISCUSSION

The only issues to be determined herein is whether the Department properly

assessed penalty and interest with respect to its assessments against ABC Builders and

Industrial Precision Instruments. Mr. Sisson believes that the amount of tax principal

assessed against his businesses was higher than it should have been, but he acknowledged

that he did not have the business records or other documentation to establish this and so

he determined that it would not be productive to protest the tax principal of those two

assessments. He is presently making payments, pursuant to an installment agreement

with the Department, to pay those liabilities. His protest of the penalty and interest is

really based upon his position that he cannot afford to pay more than he is at present, that

his underreporting of tax was unintentional, and he is asking for forgiveness of the

penalty and interest on that basis.

While I have no doubt whatsoever that Mr. Sisson is a person of good character

who did not intentionally underreport his taxes, and I am not unsympathetic to the

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hardship the payment of the interest and penalties, in addition to the tax principal, places

on Mr. Sisson and his family, this does not provide a basis for the abatement of the

interest and penalties assessed, as will be further explained below.

Section 7-1-20 NMSA 1978 is the provision of the Tax Administration Act

which governs the Department’s authority to compromise taxes which have been

assessed. In pertinent part, it provides that:

A. At any time after the assessment of any tax, if the
secretary in good faith is in doubt of the liability for the
payment thereof, the secretary may, with the written
approval of the attorney general, compromise the asserted
liability for taxes by entering with the taxpayer into a
written agreement that adequately protects the interest of
the state. (emphasis added)

Thus, the Department’s authority to compromise taxes must be based upon a good faith

doubt as to a taxpayer’s liability under the law for the payment of the taxes at issue.

Regulation 3 NMAC 1.6.14, makes it clear that a taxpayer’s inability to pay, or the

expediency of compromising taxes to dispose of litigation is not a basis for the

compromise of taxes if there is not a good faith doubt as to the legal basis for the tax

assessment. It provides:

The secretary may compromise the assessed liability of a
taxpayer by entering into a written closing agreement only
if and when there is a good faith doubt as to the liability.
The written agreement must adequately protect the interests
of the state and be approved by the attorney general. The
secretary may not compromise a taxpayer’s liability
because of the taxpayer’s inability to pay. The secretary
may not compromise a taxpayer’s liability solely because of
the threat of litigation or as an expedient means of
disposing of a controversy unless the secretary has a good
faith doubt as to the liability.

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Nor can this Hearing Officer abate tax liabilities based upon a taxpayer’s inability

to pay. If any relief can be granted, it must be upon the basis of a legal infirmity in the

basis of the assessed liability. It must also be noted that Section 7-1-17(C) NMSA 1978

provides for a presumption of correctness, which attaches to any assessment of tax by the

Department. Thus, it is incumbent upon a protesting taxpayer to prove that the

assessment is either incorrect or not in accordance with law. Because Mr. Sisson does

not dispute the correctness of the underlying tax assessment nor the manner of calculating

the among of interest or penalty assessed, the only other basis to set aside the assessments

of penalty and interest is if they are not in accordance with law.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax

deficiencies and provides as follows:

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).

It is a well settled rule of statutory construction that the use of the word "shall" in a statute

indicates that the provisions are intended to be mandatory rather than discretionary, unless a

contrary legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d

167 (1977). Applying this rule to Section 7-1-67, the statute requires that interest be paid to

the state on any unpaid taxes and no exceptions to the imposition of interest are

countenanced by the statute. Thus, it doesn't matter why taxes were not paid in a timely

manner. Interest is imposed any time that taxes are not paid when they are due, and for the

period of time that they are unpaid.

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The imposition of penalty is governed by the provisions of NMSA 1978, Section 7-
1-69(A)(1995 Repl. Pamp.), which imposes a penalty of two percent per month, up to a
maximum of ten percent:
In the case of failure, due to negligence or disregard of rules and regulations,
but without intent to defraud, to pay when due any amount of tax required to
be paid or to file by the date required a return regardless of whether any tax
is due,....

This statute imposes penalty based upon negligence (as opposed to a willful or fraudulent

intent) for failure to timely pay tax. Thus, there is no contention that the failure to report

and pay taxes was based upon any conscious attempt by Mr. Sisson to underreport taxes.

What remains to be determined is whether Mr. Sisson’s businesses were negligent in failing

to report their taxes properly. Taxpayer "negligence" for purposes of assessing penalty is

defined in Regulation 3 NMAC 1.11.10 as:

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, carelessness, erroneous
belief or inattention.

In this case the Taxpayer's failure to report and pay taxes properly was based upon

Mr. Sisson’s failure to have sufficient systems for accounting for his business revenues so

as to fully report his taxable gross receipts and his apparent lack of understanding about the

necessary documentation (non-taxable transaction certificates) necessary to support

deductions claimed from tax. Section 7-1-10 NMSA 1978 provides in pertinent part that,

“every taxpayer shall maintain books of account or other records in a manner that will

permit the accurate computation of state taxes...” New Mexico also has a self-reporting tax

system which requires that taxpayers voluntarily and accurately report and pay their tax

liabilities to the state. Because of this, the case law is well settled that every person is

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charged with the reasonable duty to ascertain the possible tax consequences of his actions,

and the failure to do so has been held to amount to negligence for purposes of the

imposition of penalty pursuant to Section 7-1-69 NMSA 1978. Tiffany Construction Co. v.

Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M.

255, 561 P.2d 1348 (1977). In this case several grounds exist for determining that the

underpayment of taxes was based upon negligence for purposes of the imposition of

penalty. Mr. Sisson’s own protest letters acknowledge that the underpayment of taxes was a

“blunder on my part.” That alone is an admission of inadvertence, inattention or lack of

ordinary business care sufficient to establish negligence. Mr. Sisson’s failure to understand

the statutory requirements for claiming a deduction from tax and his failure to maintain

adequate business systems to accurately keep track of his revenues for tax reporting

purposes also amounts to negligence. Thus, adequate grounds exist to support the

assessment of penalty in this case.

Although the imposition of penalty is intended to penalize taxpayers who fail to

report and pay taxes in a timely manner, there are sound policy reasons behind the

imposition of penalty. A self-reporting tax system relies upon taxpayers accurately

reporting their tax liabilities to the government. There are insufficient government

resources to audit every taxpayer periodically to otherwise assure tax compliance. The

imposition of penalty provides taxpayers with an incentive to understand the tax

consequences of their actions and to accurately report their taxes. Otherwise, if the only

consequence of an audit and determination of underpayment of tax was the payment of the

tax which was owed, it would always advantage a taxpayer to simply underreport taxes and

to pay them if they were found out. None of this is meant to imply that Mr. Sisson

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underreported taxes in any manner intended to take advantage of the limited resources of

the state to audit taxpayers and with any intention to escape legitimate taxation. It merely

demonstrates the policy behind the legislature’s enactment of a penalty provision to provide

an incentive to taxpayers to ensure the proper reporting and payment of taxes.

CONCLUSIONS OF LAW

1. Mr. Sisson filed timely, written protests to Assessment Nos. 2089978 and

2092127 and jurisdiction lies over both the parties and the subject matter of this protest.

2. Interest was properly imposed pursuant to Section 7-1-67 NMSA 1978 for

the late payment of gross receipts taxes.

3. Mr. Sisson was negligent in failing to properly report the taxes for ABC

Builders and Industrial Precision Instruments and penalty was properly imposed pursuant to

Section 7-1-69 NMSA 1978.

For the foregoing reasons, Mr. Sisson’s protests ARE HEREBY DENIED.

DONE, this 15th day of July, 1998.

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