If a New Mexico Department employee reviews your income tax return and tells you it looks correct, can the state still charge you penalty and interest when the return turns out to be wrong?

Plain-English summary

Joseph Apodaca's negligence penalty was wiped out because a Department employee reviewed his income tax return and told him it looked correct — but he still had to pay interest on the underpaid tax, because interest is mandatory regardless of fault. Protest GRANTED IN PART and DENIED IN PART.

In March 2000, Mr. Apodaca filled out his 1999 New Mexico personal income tax return and claimed a $16,000 deduction available only to people over 65 whose adjusted gross income falls below a set amount. His income was too high to qualify, but he did not catch that — even though the deduction table appeared in the Department's 1999 PIT instructions. Before filing, he took the return to the Department's Albuquerque office and asked a front-desk employee to review it. The employee did not check his adjusted gross income against the deduction limit, told him everything looked correct, and he filed it. The next year the Department caught the error, disallowed the deduction, and in August 2001 assessed $1,383 more tax plus penalty and interest. By the hearing, $168.30 of penalty and $363.05 of interest remained at issue.

The penalty is abated — the employee affirmatively misled the taxpayer

Section 7-1-69 imposes a penalty when a taxpayer's failure to pay is "due to negligence," and Regulation 3.1.11.10 NMAC defines negligence to include careless or erroneous mistakes. The hearing officer agreed Mr. Apodaca was negligent in making the initial error: had he read the 1999 instructions, he would have known he did not qualify. But Regulation 3.1.11.11 NMAC lists situations showing a taxpayer was not negligent, including where the taxpayer "was affirmatively misled by a department employee." Here, the employee was "equally negligent" — anyone familiar with the over-65 deduction should have caught the error simply by checking the reported income — and by telling Mr. Apodaca the return was fine, the employee misled him into filing it. That established a basis for abating the $168.30 penalty.

Interest is mandatory — it cannot be abated

Section 7-1-67 says interest "shall be paid" on tax not paid when due. "Shall" makes interest mandatory (State v. Lujan), and interest is not a punishment but compensation to the state for the time value of unpaid revenue — so the reason for the underpayment is irrelevant. Because Mr. Apodaca underpaid his 1999 tax and had use of those funds, interest was properly assessed and could not be waived.

There was no undue delay

Mr. Apodaca argued the Department took too long (16 months) to catch the error. Section 7-1-18(A) gives the Department three years from the end of the year the tax is due to assess, and the August 2001 assessment fell well inside that window. The hearing officer noted the Department processes hundreds of thousands of returns each year; the timing was not unreasonable.

Result: protest GRANTED IN PART and DENIED IN PART. The $168.30 penalty was abated; the interest remained due.

What this means for you

A Department employee's review can shield you from a penalty — but get it documented

If a Department employee affirmatively reviews your return and tells you it is correct, Regulation 3.1.11.11 NMAC can support abating a negligence penalty if the return later proves wrong. Keep a record of who reviewed it and when.

That same review will not save you from interest

Interest under Section 7-1-67 is mandatory and is not tied to fault. Even if a penalty is abated because you were misled, you still owe interest on any tax that was paid late.

You are still responsible for reading the instructions

The over-65 (and similar) deductions have income limits printed in the PIT instructions. The taxpayer here was found negligent for missing the limit; the penalty was excused only because a Department employee then okayed the mistake.

Assessment delay within the statute is not a defense

The Department generally has three years under Section 7-1-18(A) to assess income tax. A gap of many months before it catches an error is not "undue delay" and does not reduce what you owe.

Common questions

Q: What tax was involved?
A: New Mexico personal income tax for 1999 — $1,383 of additional tax after an over-65 deduction was disallowed.

Q: Why was the penalty abated?
A: A Department employee reviewed the return and told Mr. Apodaca it looked correct without checking his income against the deduction limit. Regulation 3.1.11.11 NMAC treats a taxpayer "affirmatively misled by a department employee" as not negligent.

Q: Why wasn't the interest abated too?
A: Interest under Section 7-1-67 is mandatory and compensates the state for the time value of the unpaid tax; it is not excused by fault or by being misled.

Q: Was the taxpayer negligent at all?
A: Yes — the hearing officer found he was negligent in claiming a deduction his income was too high to allow. The penalty was excused only because the employee then misled him.

Q: Did the 16-month delay help him?
A: No. Section 7-1-18(A) allowed three years to assess, and the assessment was well within that period.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69 — negligence penalty (2% per month, up to 10%)
• NMSA 1978, § 7-1-67 — interest on late-paid taxes ("shall be paid")
• NMSA 1978, § 7-1-18(A) — three-year period to assess
• NMSA 1978, § 7-1-17 — a Department assessment is presumed correct
• NMSA 1978, § 7-1-3 — "tax" includes related interest and civil penalty
• NMSA 1978, § 7-1-24 — period to file a protest
• Regulation 3.1.11.10 NMAC — definition of taxpayer negligence
• Regulation 3.1.11.11 NMAC — situations indicating no negligence, including being "affirmatively misled by a department employee"

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Joseph Apodaca
• Decision PDF: D&O 02-09

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
JOSEPH APODACA No. 02-09
ASSESSMENT NO. 481214

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 9, 2002, before Margaret B.

Alcock, Hearing Officer. Joseph Apodaca (“Taxpayer”) represented himself. The Taxation and

Revenue Department ("Department") was represented by Javier Lopez, Special Assistant Attorney

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

FOLLOWS:

FINDINGS OF FACT

1. In March 2000, the Taxpayer filled out a 1999 New Mexico personal income tax

return (“PIT-1”).

2. On Schedule PIT-ADJ to the PIT-1, the Taxpayer claimed a $16,000 deduction

available to persons who are over the age of 65 and whose adjusted gross income falls below a

specified dollar amount.

3. Although a table showing the deduction allowed for each income level was set out in

the Department’s 1999 PIT instructions, the Taxpayer failed to realize that his adjusted gross income

was too high to allow him to take the deduction.

4. The Taxpayer took his completed Forms PIT-1 and PIT-ADJ to the Department’s

Albuquerque office and asked one of the employees at the front desk to review his return to insure it

was filled out correctly.

5. The employee who reviewed the forms did not check the adjusted gross income

reported on the PIT-1 to verify that the Taxpayer was entitled to the deduction he had claimed on the

PIT-ADJ. Instead, the employee told the Taxpayer that everything appeared to be correct,

whereupon the Taxpayer filed his return with the Department.

6. The following year, the Department discovered the error in the Taxpayer’s 1999 PIT

return and disallowed the deduction he had mistakenly claimed on his PIT-ADJ.

7. On August 8, 2001, the Department issued Assessment No. 481214 to the Taxpayer

for $1,383.00 of additional 1999 personal income tax, plus penalty and interest.

8. On August 14, 2001, the Taxpayer filed a written protest to the assessment of penalty

and interest.

9. As of the date of the April 9, 2002 hearing, the amount remaining in dispute was

$363.05 of interest and $168.30 of penalty.

DISCUSSION

At issue is whether the Taxpayer is liable for the interest and penalty assessed on his

underpayment of New Mexico income tax for calendar year 1999. The Taxpayer believes he should

be excused from payment for the following reasons: (1) the Department employee who reviewed his

return failed to catch the error he made on his 1999 PIT-ADJ; and (2) it took the Department sixteen

months to discover the Taxpayer’s error and issue an assessment.

Section 7-1-17 NMSA 1978 provides that any assessment of tax by the Department is

presumed to be correct. Section 7-1-3 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." See also, El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the Department’s assessment

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of interest and penalty is presumed to be correct, and it is the Taxpayer’s burden to present evidence

showing he is entitled to an abatement.

Assessment of 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 ten percent, when a

taxpayer fails “due to negligence or disregard of rules and regulations” to report or pay taxes in a

timely manner. Taxpayer negligence for purposes of assessing penalty is defined in Regulation

3.1.11.10 NMAC as:

A. failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;

B. inaction by taxpayers where action is required;

C. 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 situations where the taxpayer proves that he “was affirmatively misled by a

department employee.”

In this case, the Taxpayer was negligent in completing his 1999 personal income tax return. I

take administrative notice that the Department's 1999 PIT Form Packet, which is a public record of

the Department, explains the income limitations for claiming the over-65 deduction on Schedule

PIT-ADJ. Page 16 of the packet sets out a deduction table that lists the amount of the deduction

allowed for specific income levels. If the Taxpayer had read these instructions, he would have

known he did not qualify for the $16,000 deduction he claimed.

Even though the Taxpayer made the initial error on his 1999 PIT return, the Department

employee who reviewed the return was equally negligent in failing to catch the error. As a result, the

employee misled the Taxpayer into believing his return was correct. The Taxpayer had gone to the

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Department before filing his return and asked the employee to review the return to insure it was

completed correctly. Anyone familiar with the Department’s PIT forms and the restrictions on the

over-65 deduction should have caught the error on the Taxpayer’s return: it was simply a matter of

checking the amount of adjusted gross income reported on the PIT-1 to be sure it did not exceed the

amount allowed to support the deduction claimed on the PIT-ADJ. Because the employee failed to

do this and told the Taxpayer everything looked fine, he went ahead and filed his return with the

Department. Based on these facts, the Taxpayer has established a basis for abating the penalty of

$168.30 assessed against him.

Assessment of Interest. Section 7-1-67 governs the imposition of interest on late payments of

tax and provides, in pertinent part:

A. If a tax imposed is not paid on or before the day on which it becomes due,
interest shall be paid to the state on that amount from the first day following the
day on which the tax becomes due, without a regard to any extension of time or
installment agreement, until it is paid... (emphasis added).

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, 560 P.2d 167 (1977). 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. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. Accordingly, the reason for a late

payment of tax is irrelevant to the imposition of interest. Even taxpayers who obtain a formal

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

payment is made. See, Section 7-1-13(E) NMSA 1978.

The Taxpayer argues that he should be excused from payment of interest because the

Department waited an unreasonable period of time to notify the Taxpayer of the error on his 1999 PIT

return. In fact, there was no undue delay. Pursuant to Section 7-1-18(A) NMSA 1978, the Department

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has three years from the end of the calendar year in which a tax is due to issue an assessment.

Assessment No. 481214 was issued to the Taxpayer in August 2000—sixteen months after the due

date of his 1999 PIT return—and was well within the limitations period provided by the legislature.

The Taxpayer also must realize that while he is responsible for filing a single PIT return with the

Department, the Department must review and process hundreds of thousands of PIT returns each

year, in addition to corporate income tax returns and the monthly returns filed under the state’s

various business tax programs. Given these circumstances, the Department’s August 2000

assessment was not unreasonably delayed.

In this case, the Taxpayer underreported income taxes due to the state. As a result, the

Taxpayer—not the state—had use of those tax funds. While one could argue that the rate of interest

is high in comparison with current market rates, that is a matter within the discretion of the

legislature. The Department does not have authority to substitute its own judgment for that of the

legislature in setting the rate of interest to be imposed. Section 7-1-67 NMSA 1978 requires interest

to be paid at the rate of 15 percent per annum for any period of time during which the state is denied

the use of the funds to which it is legally entitled. Accordingly, interest was properly assessed against

the Taxpayer and there is no basis for abatement.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 481214 pursuant to

Section 7-1-24 NMSA 1978, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer was misled by the Department employee who reviewed his 1999 PIT

return and is entitled to abatement of the penalty assessed against him.

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3. The Department’s August 2000 assessment was issued within the statutory time limit

set by the New Mexico Legislature.

4. The Taxpayer is liable for payment of interest on his late payment of 1999 personal

income taxes.

For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND DENIED IN

PART. The Department is ordered to abate the $168.30 of penalty assessed against the Taxpayer. The

Taxpayer remains liable for payment of interest.

DATED April 11, 2002.

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