If the state wrongly applies my income tax refund to someone else's tax bill, can I get it back years later or just stop paying my current taxes to make up for it?

Plain-English summary

A taxpayer who believed the state had wrongly seized his income tax refund still lost, because he filed his formal refund claim after the three-year deadline and because withholding his current taxes as "self-help" is not allowed. Protest DENIED.

Satya Deb Misra was one of four partners in the Redwood Lodge Partnership, which owned and operated a motel in Farmington from November 1983 to May 1985. The partnership registered for New Mexico's combined reporting system (CRS) taxes — gross receipts, compensating, and withholding — but the registration listed incorrect addresses. On May 31, 1985, Misra gave the other partners written notice that he was ending his interest and responsibility for the business. He did not send that notice to the Department, and neither he nor the other partners updated the registration to remove his name, so the Department's records continued to show him as a responsible partner.

In June 1992, the Department applied Misra's $373.03 personal income tax refund for 1991 to the partnership's outstanding CRS assessments. He called the number on the notice and explained he had left the partnership in 1985; believing it would be straightened out, he never filed anything in writing and never got the refund. Frustrated, in 1994 he filed his 1993 income tax return without paying, trying to offset what he saw as the Department's wrongful seizure. After being assessed, he paid the 1993 tax plus $55.50 in penalty and interest. In April 1996 he filed a formal refund claim for $1,258.32 covering various payments toward the partnership's CRS liabilities. The Department refunded $829.79, leaving two items in dispute: the $373.03 offset and the $55.50 penalty and interest.

The $373.03 refund claim was too late

The hearing officer did not decide whether the offset was actually wrong — she did not have to. Even assuming it was, the June 1992 offset was an involuntary payment, and Section 7-1-26 required a refund claim to be filed within three years of the end of the calendar year the payment was made. That gave Misra until December 31, 1995. His formal claim was not filed until April 8, 1996, so it was properly denied as time-barred. (Misra pointed to earlier 1994 requests that would have been within the period, but there was no evidence he filed a timely protest when the Department failed to act on them, so his only option was to refile within the three years — which he missed.)

"Self-help" — withholding current taxes — is not allowed

Misra argued he was entitled to withhold his 1993 income taxes to recoup the earlier offset. The hearing officer rejected that: a taxpayer must keep filing and paying all taxes currently due regardless of a dispute over an earlier period. He had two proper remedies for the offset — a written protest within 30 days under Section 7-1-24, or a refund claim within three years under Section 7-1-26 (with 90 days to protest a denial or inaction). Because he used neither and instead withheld current tax, the $55.50 penalty and interest were properly assessed.

The Department did not have to spell out his remedies in the offset notice

Misra noted that the 1992 offset letter did not explain how to protest. The hearing officer acknowledged it would have been helpful but held the Department was not legally required to include remedy information there. Section 7-1-17(B)(2) requires a notice of assessment to briefly state the taxpayer's remedies (and a similar rule applies to jeopardy assessments under Section 7-1-59), but the Tax Administration Act imposes no such requirement on a refund-offset notice under Section 7-1-29(C). She also noted that the Department's 1991 personal income tax instructions — a public record — did describe the available remedies.

Result: protest DENIED; the $373.03 refund was time-barred and the $55.50 penalty and interest stood.

What this means for you

Act within the deadlines when the state applies your refund to another bill

If the Department offsets your refund against a liability you dispute, the clock is running. You generally have 30 days to file a written protest, or three years to file a claim for refund. Missing both — even while you try to resolve it informally — can permanently bar the money, no matter how strong your underlying position.

Phone calls do not preserve your rights; put it in writing

Misra called and believed the problem would be fixed, but informal calls are not a protest or a refund claim. To protect a disputed amount, file the written protest or refund claim the statutes require, and keep proof of the date.

Never stop paying current taxes to "even the score"

Withholding taxes you currently owe to make up for a past dispute is "self-help," and New Mexico law does not allow it. You will owe penalty and interest on the withheld tax on top of the original dispute. Pay what is currently due and pursue the old dispute through the proper channel.

Keep your business registration current — especially when you leave

Because the partnership's registration was never updated to remove Misra, he stayed on the Department's records as responsible for its taxes for years. When you leave or dissolve a business, notify the Department and update the registration, not just your partners.

Common questions

Q: The offset was wrong — why didn't that matter?
A: The hearing officer never decided whether it was wrong, because it did not change the outcome. The refund claim was filed after the three-year deadline in Section 7-1-26, so it was barred regardless of the merits.

Q: I called and explained the situation. Isn't that enough?
A: No. A phone call is not a written protest or a formal refund claim. Only the statutory remedies — a 30-day protest or a three-year refund claim — preserve your rights, and Misra used neither in time.

Q: Can I just withhold my current taxes until the state returns money it wrongly took?
A: No. That is "self-help," which is not allowed. You must keep paying current taxes, and you will owe penalty and interest if you don't, even while an earlier dispute is unresolved.

Q: Shouldn't the offset notice have told me how to fight it?
A: The law requires remedy information in a notice of assessment, not in a refund-offset notice. The hearing officer said it would have been helpful, but the Department was not legally required to include it — and its income tax instructions described the remedies.

Citations and references

Statutes:

• NMSA 1978, § 7-1-26 — no credit or refund allowed unless claimed within three years of the end of the calendar year the payment was due or made
• NMSA 1978, § 7-1-24 — a taxpayer may file a written protest within 30 days of a notice
• NMSA 1978, § 7-1-17(B)(2) — a notice of assessment is not effective unless it briefly informs the taxpayer of available remedies
• NMSA 1978, § 7-1-29(C) — application (offset) of a refund against other liabilities
• NMSA 1978, § 7-1-59 — jeopardy assessments (also require remedy information)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Satya Deb Misra
• Decision PDF: D&O 01-05

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
SATYA DEB MISRA No. 01-05
ID NO. 01-195060-00-9
DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 18, 2001, before Margaret

B. Alcock, Hearing Officer. Satya Deb Misra (“Taxpayer”) represented himself. The Taxation and

Revenue Department ("Department") was represented by Bruce J. Fort, Special Assistant Attorney

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

FOLLOWS:

FINDINGS OF FACT

1. From November 1983 through May 1985, the Taxpayer was one of four partners in

the Redwood Lodge Partnership, which owned and operated a motel in Farmington, New Mexico.

2. Upon formation, the partnership registered with the Department for payment of gross

receipts, compensating and withholding taxes under the Department’s combined reporting system

(“CRS taxes”).

3. The registration form listed the names and addresses of two of the partners, including

that of the Taxpayer, but the addresses of the partners, and of the motel itself, were incorrect.

4. On May 31, 1985, the Taxpayer gave the other three partners written notice that he

was dissolving the partnership, stating: “As of this date, my sharing of any profit or losses, as well

as, any responsibility, whatsoever, relating to Redwood Lodge Motel and Restaurant ends.”

5. The Taxpayer did not send a copy of the notice concerning his dissolution of the

partnership to the Department.

6. Although the other partners continued to operate the motel in Farmington, neither

they nor the Taxpayer changed the partnership’s registration with the Department to show that the

Taxpayer was no longer a partner in the business.

7. On June 15, 1992, the Taxpayer received a letter from the Department notifying him

that his 1991 New Mexico income tax refund in the amount of $373.03 had been applied to

outstanding CRS assessments against Redwood Lodge.

8. The June 15, 1992 letter did not provide the Taxpayer with information on how he

could protest the Department’s application of his refund, and the Taxpayer did not know he had to

submit something to the Department in writing.

9. The Taxpayer called the telephone number shown on the 1992 letter and spoke with

someone in Albuquerque. The Taxpayer explained that he had withdrawn from the Redwood Lodge

Partnership in May 1985 and was not responsible for the partnership’s CRS taxes.

10. Based on this conversation, the Taxpayer believed everything would be straightened

out, but he never received his 1991 income tax refund from the Department.

11. In 1994, the Taxpayer filed his 1993 New Mexico personal income tax return without

payment of the taxes shown to be due. He withheld payment because he believed his 1991 refund

had been unlawfully applied to the CRS taxes of Redwood Lodge.

12. After receiving an assessment from the Department, the Taxpayer paid his 1993

income taxes, along with penalty and interest in the amount of $55.50.

13. On April 8, 1996, the Taxpayer filed a claim for refund of $1,258.32, which covered

a number of payments the Taxpayer had made on the CRS liabilities of Redwood Lodge. Included in

the refund claim was the $373.03 applied from the Taxpayer’s 1991 personal income tax refund and

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the $55.50 of penalty and interest the Taxpayer was assessed and paid for the late payment of his

1993 personal income taxes.

14. The Taxpayer’s claim for refund was denied, and the Taxpayer filed a protest, which

was acknowledged by the Department on September 9, 1996.

15. The Department subsequently granted $829.79 of the Taxpayer’s refund claim,

leaving $428.53 in dispute: the $373.03 applied from the Taxpayer’s 1991 tax refund and the $55.50

of penalty and interest on the late payment of his 1993 personal income taxes.

DISCUSSION

The issue to be addressed is whether the Taxpayer is entitled to refunds of $373.03,

representing the 1991 personal income tax refund the Department applied against the CRS liabilities

of Redwood Lodge, and $55.50, representing the penalty and interest the Taxpayer was assessed on

his late payment of 1993 personal income taxes.

Refund of 1991 Personal Income Taxes. In 1992, the Taxpayer filed his 1991 New Mexico

personal income tax return claiming a refund of $373.03. The Department granted his refund, but

then applied the refund to outstanding assessments against Redwood Lodge Partnership. The

Taxpayer maintains the Department erred in offsetting his refund against the partnership’s liabilities

because he had withdrawn from the partnership in May 1985. The Department argues that the

liability to which the refund was applied arose during May 1985, prior to the Taxpayer’s withdrawal.

For purposes of this protest, there is no need to determine whether the liability at issue arose

before or after the Taxpayer withdrew from the partnership. Even assuming the Department’s offset

was erroneous, the Taxpayer’s April 8, 1996 claim for refund was not filed until after expiration of

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the limitations period set out in Section 7-1-26 NMSA 1978. In April 1996, that statute provided as

follows:

[N]o credit or refund of any amount may be allowed or made to any
person unless as the result of a claim made by that person as provided in
this section:

(1) within three years of the end of the calendar year in which:
(a) the payment was originally due or the overpayment
resulted from an assessment by the department pursuant to Section 7-1-17
NMSA 1978, whichever is later;

In this case, the 1992 application of the Taxpayer’s 1991 income tax refund served as an involun-tary

payment of various CRS assessments issued by the Department against Redwood Lodge. Pursuant to

Section 7-1-26, the Taxpayer had until December 31, 1995—three years from the end of the calendar

year in which the payment was made—to file a claim for refund. Because the Taxpayer’s April 8,

1996 refund claim was not filed within the limitations period in Section 7-1-26 NMSA 1978, it was

properly denied by the Department.1

Penalty and Interest on Late Payment. The Taxpayer requested a refund of the penalty

and interest assessed on his late payment of 1993 personal income taxes. The Taxpayer filed a

timely 1993 return, but did not include payment because he believed the Department had wrongfully

applied his tax refunds from previous years. The Taxpayer subsequently paid the tax, plus accrued

penalty and interest in the amount of $55.50. The Taxpayer is now seeking a refund of the penalty

and interest, asserting that he was entitled to withhold payment of his 1993 income taxes as a method

of recouping the Department’s wrongful offset of his refunds from prior years.

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The Taxpayer’s April 8, 1996 letter states that he also requested refunds on October 17, 1994 and November 4,
1994, which would have been within the three-year statutory period. There is no evidence, however, that the
Taxpayer filed a timely protest to the Department’s failure to act on those claims as required by Section 7-1-26
NMSA 1978. In the absence of a protest, the Taxpayer’s only option was to refile the claim within the three-year
period provided in Section 7-1-26. The claim filed in April 1996 did not meet this requirement.

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Although the Taxpayer’s frustration is understandable given his many attempts to resolve the

matter of the offsets with the Department, taxpayers may not employ “self-help” to recover what

they believe to be an overpayment of tax for earlier periods. The Taxpayer had two options for

recovering his personal income tax refunds: (1) pursuant to Section 7-1-24 NMSA 1978, the

Taxpayer could have filed a written protest within thirty days of receiving notice that his refund was

being applied to Redwood Lodge’s CRS assessments; or (2) pursuant to Section 7-1-26 NMSA 1978,

the Taxpayer could have filed a claim for refund within three years of the end of the calendar year in

which his refund was applied to those assessments. If the Department denied or failed to take action

on the refund request, the Taxpayer had ninety days to file a written protest.

With regard to the first option, the Taxpayer testified that the June 15, 1992 letter notifying

him of the offset of his 1991 income tax refund did not include information on how to protest the

Department’s action. As a result, the Taxpayer made his objections to the Department’s action by

telephone, rather than by filing a written protest. Although it would have been helpful for the

Department to advise the Taxpayer of his statutory remedies, it was not legally required to do so.

Section 7-1-17(B)(2) NMSA 1978 provides that a notice of assessment of taxes issued by the

Department is not effective unless it includes information “briefly informing the taxpayer of the

remedies available to the taxpayer.” A similar requirement applies to jeopardy assessments under

Section 7-1-59 NMSA 1978. The Tax Administration Act does not require information concerning

taxpayer remedies to be included with any other notices issued by the Department, including notices

of refund offsets under Section 7-1-29(C) NMSA 1978. Nonetheless, I take administrative notice

that the Department’s 1991 personal income tax instructions set out the remedies available to

taxpayers in some detail. The instructions, which are a public record of the Department, informed

taxpayers that they could dispute a tax assessment, a payment of tax, or the application of any

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provision of the Tax Administration Act by filing a written protest or, where appropriate, by filing a

claim for refund. The instructions also advised taxpayers to request a hearing on any refund that was

not granted within 120 days.

In this case, the Taxpayer did not exercise either of the statutory remedies available to him.

Instead, he attempted to recoup what he believed to be an erroneous offset by withholding payment

of his 1993 income taxes. Such action is not authorized by New Mexico’s tax laws. A taxpayer

must continue to file and pay all taxes currently due to the state, regardless of any dispute he may

have concerning taxes for earlier tax periods. For this reason, penalty and interest was properly

assessed against the Taxpayer for late payment of his 1993 taxes and no refund is due.

Summary. This case results from a series of miscommunications between the Taxpayer and

the Department, including the following:

At the time the Redwood Lodge Partnership was registered with the Department,

incorrect information was entered into the Department’s records concerning the addresses of the

Farmington motel and the individual partners. At the hearing, the Taxpayer acknowledged that it

was possible one of his partners provided the Department with the incorrect addresses. As a result of

the error, the Taxpayer did not receive notice of the various assessments against the partnership for

which he was later held liable.

When the Taxpayer dissolved the partnership in May 1985, he did not notify the

Department. Although taxpayers have an obligation to insure that their tax registration is correct,

neither the Taxpayer nor any of the other partners took the steps necessary to remove the Taxpayer’s

name from the partnership’s registration. Because of this oversight, the Taxpayer continued to be

shown on the Department’s records as an active partner responsible for the partnership’s unpaid

taxes.

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The Taxpayer exchanged numerous telephone calls and correspondence with various

Department employees. Based on these exchanges, the Taxpayer believed everything would be

straightened out and his money would be returned. None of the Department employees with whom

he spoke advised the Taxpayer that he had to file a written protest to the Department’s actions or file

a formal claim for refund of taxes already paid. Nor, it appears, did the Taxpayer read the taxpayer

remedies contained in the Department’s personal income tax instructions or realize—until it was too

late—that he had to take specific action to preserve his right to dispute the offset of his tax refunds.

Due to this combination of circumstances, it has taken several years to resolve the issue of

the Taxpayer’s liability for taxes assessed against Redwood Lodge. Fortunately, the Taxpayer has

now received $829.79 of the $1,258.32 refund he requested. Unfortunately, the limitations period in

Section 7-1-26 NMSA 1978 bars consideration of his claim for refund of the $373.03 the

Department withheld and offset in June 1992. Nor is the Taxpayer entitled to recover the $55.50 in

interest and penalty assessed on his late payment of 1993 personal income taxes.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of his claim for

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

2. The Taxpayer's claim for refund of $373.03, representing the 1991 personal income tax

refund applied against liabilities of Redwood Lodge in June 1992, is barred by the limitations period set

out in Section 7-1-26 NMSA 1978.

3. The Taxpayer is liable for the $55.50 of penalty and interest assessed for late payment

of his 1993 personal income taxes and the Taxpayer is not entitled to a refund of this amount.

For the foregoing reasons, the Taxpayer's protest is DENIED.

DATED April 25, 2001.

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