Must New Mexico settle a state income tax bill on the same ability-to-pay terms the taxpayer got from the IRS, and does an attorney's advice not to file excuse the late-filing penalty?

Plain-English summary

New Mexico was not required to settle a taxpayer's state income tax on the same ability-to-pay terms he negotiated with the IRS, and his attorney's advice not to file did not excuse the late-filing penalty. Protest DENIED.

Howard Bancroft was embroiled in divorce litigation in the 1990s that raised questions about his filing status (single or married) and his right to claim his children as dependents. On his attorney's advice, he chose not to file federal or state income tax returns for 1992, 1993, and 1994 until those issues were resolved. He requested a federal filing extension from the IRS but did not request one from New Mexico or make estimated payments. The IRS eventually determined he had to file as a single person without the dependents, assessed additional federal tax, and then entered a settlement with him that accounted for his ability to pay.

In 2000, the Department learned of the federal adjustments, found Bancroft had never filed New Mexico returns for those years, and assessed state income tax, penalty, and interest. After crediting the New Mexico tax his employer had withheld, 1992 dropped to zero (and was no longer at issue), leaving $146.98 for 1993 and $724.82 for 1994 in dispute.

New Mexico could not match the IRS "ability to pay" settlement

Bancroft argued the Department had to settle with him on the same terms as the IRS. The hearing officer explained that federal and state compromise authority are different. Under 26 U.S.C. § 7122, the IRS may weigh a taxpayer's ability to pay. New Mexico law does not grant that latitude: Section 7-1-20 permits a settlement only where the Secretary has a good-faith doubt about the taxpayer's liability for the tax assessed, and Regulation 3.1.6.14 expressly forbids compromising a liability because of inability to pay or merely to avoid the threat of litigation. Federal tax law does not override state law here — New Mexico courts have repeatedly refused to import federal tax rules into state disputes (El Centro Villa, State v. Long, Mountain States Telephone, Sutin, Thayer & Browne). Because there was no good-faith doubt about Bancroft's liability, no settlement was available.

The negligence penalty was proper

Section 7-1-69 imposes a penalty for failing to file or pay when due because of negligence. Regulation 3.1.11.11 lists circumstances that show a taxpayer was not negligent, including reasonable reliance on competent tax counsel's or an accountant's advice "as to the taxpayer's liability" after full disclosure. Bancroft's reliance did not fit: there was no evidence his attorney advised him about his actual tax liability, only that he should wait to file. And his belief that his federal extension also extended his state deadline failed on its own terms — Section 7-1-13 honors a federal extension only if a copy of the approved extension is attached to a filed New Mexico return, and Bancroft never filed one. Continuing not to file or make estimated payments for five to six years, even after the IRS finalized his liability, was negligent.

Result: protest DENIED. New Mexico was not obligated to match the IRS settlement, and the negligence penalty on the 1993 and 1994 returns was upheld.

What this means for you

A federal "offer in compromise" does not bind New Mexico

The IRS can settle a tax debt based on your ability to pay. New Mexico cannot. The Department may compromise a state tax only when it genuinely doubts whether you owe it — not because paying would be a hardship. Getting a favorable IRS deal does not entitle you to the same treatment on your state taxes.

Waiting out a dispute is not a reason to skip filing

Even if your filing status or another issue is unresolved, you must still file your New Mexico return (or a proper extension) and pay or estimate the tax. Sitting on unfiled returns for years is treated as negligence, and the penalty follows.

A federal extension only helps if you follow the state's rule

New Mexico will honor an approved federal filing extension — but only if you attach a copy to a filed New Mexico return. An extension you never document on a state return you never file does nothing for you.

"My lawyer told me to" excuses a penalty only in narrow circumstances

The reliance-on-advice defense works when a competent tax professional advised you about your actual tax liability after you disclosed all the facts. Advice about litigation strategy — or general advice to "wait" — is not advice about your tax liability and will not defeat a negligence penalty.

Common questions

Q: What tax was at issue?
A: New Mexico personal income tax for 1992, 1993, and 1994. After crediting withheld tax, the 1992 year went to zero and $146.98 (1993) and $724.82 (1994) remained in dispute, including penalty and interest.

Q: Why couldn't the Department settle like the IRS did?
A: Section 7-1-20 lets New Mexico compromise a tax only where there is a good-faith doubt about the taxpayer's liability. Unlike the IRS under 26 U.S.C. § 7122, it may not settle based on inability to pay, and Regulation 3.1.6.14 confirms that limit.

Q: Doesn't federal tax law control?
A: No. New Mexico courts consistently decline to apply federal tax rules to state tax disputes unless they find them persuasive; the state's settlement statute controls here.

Q: Why didn't the attorney's advice excuse the penalty?
A: The non-negligence defense in Regulation 3.1.11.11 requires reliance on professional advice about the taxpayer's liability after full disclosure. There was no evidence the attorney advised Bancroft about his tax liability — only that he delay filing.

Q: Didn't his federal extension cover the state returns?
A: No. Under Section 7-1-13, New Mexico honors a federal extension only if a copy is attached to a filed New Mexico return. Bancroft never filed the state returns, so the extension gave him nothing.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-20 — the Department may enter a settlement only where the Secretary has a good-faith doubt as to the taxpayer's liability
• NMSA 1978, § 7-1-69 — negligence penalty (2% per month, up to 10%) for failing to file or pay when due
• NMSA 1978, § 7-1-13 — New Mexico honors a federal filing extension only if a copy of the approved extension is attached to the state return
• 26 U.S.C. § 7122 — federal authority to compromise tax liabilities, which may consider ability to pay
• Regulation 3.1.6.14 NMAC — the Secretary may not compromise a liability because of inability to pay, or solely to avoid litigation
• Regulation 3.1.11.10 NMAC — definition of taxpayer negligence
• Regulation 3.1.11.11 NMAC — non-negligence includes reasonable reliance on competent counsel's advice as to liability after full disclosure

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• State v. Long, 121 N.M. 333, 911 P.2d 227 (Ct. App.), cert. denied, 121 N.M. 119, 908 P.2d 1387 (1995)
• In re Rates & Charges of Mountain States Telephone & Telegraph Co., 104 N.M. 36, 715 P.2d 1332 (1986)
• Sutin, Thayer & Browne v. Revenue Division of the Taxation and Revenue Department, 104 N.M. 633, 725 P.2d 833 (Ct. App. 1984), cert. denied, 102 N.M. 293, 694 P.2d 1358 (1985)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Howard L. Bancroft, III
• Decision PDF: D&O 01-29

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
HOWARD L. BANCROFT, III No. 01-29
ASSESSMENT NOS. 612890, 612891, 612892

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 26, 2001, before

Margaret B. Alcock, Hearing Officer. Howard L. Bancroft, III (“Taxpayer”) represented himself.

The Taxation and Revenue Department ("Department") was represented by Bridget A. Jacober, Special

Assistant Attorney General. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During the 1990s, the Taxpayer was involved in litigation arising out of his divorce.

2. One of the issues in litigation concerned the Taxpayer’s status as a single or married

taxpayer and his right to claim his children as dependents for federal income tax purposes.

3. On the advice of his attorney, the Taxpayer decided not to file federal or state income

tax returns for 1992, 1993 and 1994 until these issues were resolved.

4. The Taxpayer applied to the Internal Revenue Service (“IRS”) for an extension of

time to file his federal income tax returns.

5. The Taxpayer did not request an extension of time from the Department, nor did he

make estimated payments to cover any tax liability that might be due.

6. The IRS ultimately determined that the Taxpayer was required to file his 1992, 1993

and 1994 income tax returns as a single person and was not entitled to claim his children as

dependents. Based on these findings, the IRS assessed the Taxpayer for additional tax due.

7. The Taxpayer subsequently entered into a settlement agreement with the IRS that

took into account his ability to pay the assessment and other equitable considerations.

8. In 2000, the Department received information from the IRS concerning the

adjustments made to the Taxpayer’s federal income tax returns. The Department checked its records

and discovered that the Taxpayer had failed to file New Mexico income tax returns for the years at

issue and had also failed to request an extension of time to file or make estimated payments of tax

due for those years.

9. On June 29, 2000, the Department issued the following assessments to the Taxpayer,

reflecting personal income tax, penalty and interest for tax years 1992, 1993 and 1994:

Assessment No. Tax Year Total Amount Due

612890 1992 $ 756.87
612891 1993 $1,216.38
612892 1994 $1,560.96

10. On July 24, 2000, the Taxpayer filed a written protest to the assessment.

11. The Taxpayer subsequently provided the Department with copies of his W-2 forms

for 1992, 1993 and 1994 showing that New Mexico income tax had been withheld from the

Taxpayer’s wages.

12. After crediting the Taxpayer with the taxes withheld by his employer, the total

amount remaining in dispute (with interest accrued through November 15, 2001) is as follows:

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Assessment No. Tax Year Total Amount Due

612890 1992 $ 0
612891 1993 $146.98
612892 1994 $724.82

Due to these adjustments, the Taxpayer’s liability for Assessment No. 612890 is no longer at issue

and will not be addressed in this decision.

DISCUSSION

The Taxpayer raises the following issues in support of his protest: (1) the Department should

be required to settle with the Taxpayer on the same terms he settled with the IRS; and (2) the

Taxpayer should be excused from payment of penalty because his decision not to file New Mexico

personal income tax returns was based on the advice of his attorney.

Settlement. The Taxpayer maintains that the Department is required to settle with him on

the same terms he settled his federal tax liability with the IRS. 26 U.S.C. § 7122 governs

compromises of federal tax liabilities and gives the IRS the authority to consider a taxpayer’s ability

to pay in determining whether settlement is appropriate. New Mexico law does not give the

Department the same latitude to compromise state taxes. Section 7-1-20 NMSA 1978 limits the

Department’s settlement authority to situations where the secretary has a “good faith” doubt as to a

taxpayer’s liability for the tax assessed. Regulation 3.1.6.14 NMAC specifically states that the

Secretary “may not compromise a taxpayer’s liability because of the taxpayer’s inability to pay.”

Nor may the Secretary enter into a settlement “solely because of the threat of litigation or as an

expedient means of disposing of a controversy”.

The Taxpayer argues that federal tax law should override state tax law. The Taxpayer has

not provided any legal authority to support his position and, in fact, none exists. To the contrary,

New Mexico courts have consistently rejected taxpayers’ attempts to apply federal law to state tax

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disputes. In El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 797,

779 P.2d 982, 984 (Ct. App. 1989), the New Mexico Court of Appeals refused to apply the standard of

negligence used to impose penalty under the Internal Revenue Code, finding that the provisions of the

federal statute were inconsistent with the provisions of Section 7-1-69 NMSA 1978. See also, State

v. Long, 121 NM 333, 911 P.2d 227 (Ct. App.), cert. denied, 121 N.M. 119, 908 P.2d 1387 (1995)

(in tax cases, New Mexico courts follow federal law only to the extent they find that law persuasive);

In re Rates & Charges of Mountain States Telephone & Telegraph Co., 104 N.M. 36, 43, 715 P.2d

1332, 1339 (1986) (New Mexico's Corporate Income Tax Act does not incorporate or adopt the

Internal Revenue Code and Treasury Regulations); Sutin, Thayer & Browne v. Revenue Division of

the Taxation and Revenue Department, 104 N.M. 633, 635, 725 P.2d 833, 835, (Ct. App. 1984), cert.

denied, 102 N.M. 293, 694 P.2d 1358 (1985) (the Department was correct in denying a request for

refund based on a federal income tax credit not recognized under state law).

Under New Mexico law, the only basis for entering into a settlement agreement is the

existence of a good faith doubt as to the Taxpayer’s liability for the tax in dispute. There is no

evidence to support such a good faith doubt in this case.

Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty. Subsection A

imposes a penalty of two percent per month, up to a maximum of 10 percent:

in the case of failure due to negligence or disregard of rules and regulations,
but without intent to evade or defeat any tax, to pay when due any amount of
tax required to be paid ... or to file by the date required a return....

Taxpayer "negligence" is defined in Regulation 3.1.11.10 NMAC 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;

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3. inadvertence, indifference, thoughtlessness, carelessness, erroneous
   belief or inattention.

Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent, including proof that “the failure to pay tax or to file a return was caused by reasonable

reliance on the advice of competent tax counsel or accountant as to the taxpayer’s liability after full

disclosure of all relevant facts”.

In this case, the Taxpayer testified that he believed the extension of time he received from the

IRS would also extend the time for him to file his state income tax returns. New Mexico will honor

extensions of time to file federal income tax returns “provided that a copy of the approved federal

extension of time is attached to the taxpayer’s New Mexico income tax return....” Section 7-1-13

NMSA 1978. The Taxpayer did not meet this requirement because he never filed New Mexico income

tax returns for 1993 and 1994 and never provided the Department with a copy of an approved federal

extension of time to file. The Department only discovered that the Taxpayer was delinquent in

payment of his state income tax after receiving information from the IRS, at which point the Taxpayer’s

tax returns and tax payments were five to six years overdue.

The Taxpayer argues that he comes within the nonnegligence provisions of Regulation

3.1.11.11 NMAC because his failure to file state income tax returns was based on his attorney’s advice

not to file until the tax issues in his pending litigation were resolved. The regulation is limited,

however, to situations where the failure to file or pay “was caused by reasonable reliance on the advice

of competent tax counsel or accountant as to the taxpayer’s liability...” (emphasis added). In this case,

there is no evidence the Taxpayer’s attorney gave him advice concerning his liability for federal or state

income tax. In addition, once the IRS made a final determination of the Taxpayer’s federal income tax

liability for 1993 and 1994 and issued an assessment against him, there was no reason for the Taxpayer

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to further delay the filing of his state income tax returns. The Taxpayer’s continued failure, over a

period of five or six years, to file state income tax returns or make estimated payments to cover the tax

ultimately determined to be due was negligent.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 612891 and 612892,

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

2. The Department is not required to enter into a settlement agreement for payment of

the Taxpayer’s 1993 and 1994 New Mexico personal income tax on the same terms the Taxpayer

settled his federal income tax liability for those years.

3. The Taxpayer was negligent in failing to file income tax returns or pay income tax due

for 1993 and 1994, and penalty was properly assessed under Section 7-1-69 NMSA 1978.

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

DATED October 30, 2001.

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