If someone stops filing New Mexico income tax returns and the Department estimates the tax from IRS data, who has to prove fraud before a 50% penalty sticks — and is a prior history of filing enough to prove it?

Plain-English summary

Kent Carter ran a licensed construction business and, with his wife Gail, filed New Mexico personal income tax returns through 1993. After that they stopped filing for 1994–1998, even though the business kept paying gross receipts tax. Using income data shared by the IRS (a 1994 federal return showed about $50,000 of income), the Department estimated the couple's 1995–1998 income tax and issued four assessments totaling roughly $20,000 — tax, interest, and a 50% "fraud" penalty on each year. The Carters responded with a 15-page "tax-protester" document (challenging the Department's jurisdiction, the validity of the income tax, and so on), but then did not show up for their hearing.

The result was a split decision.

On the tax and interest, the Carters lost. An assessment is presumed correct under Section 7-1-17(C), and by not appearing they offered no evidence to rebut it. So they're liable for the estimated income tax and the interest.

On the 50% penalty, they won — it was abated. That penalty is a fraud penalty: whether under the older "intent to defraud the state" wording or the newer "willful intent to evade or defeat" wording, it requires proving the taxpayer meant to evade the tax. And critically, Section 7-1-78 puts that burden on the Department, which must prove it by clear and convincing evidence. The only proof the Department offered was that the Carters had filed in earlier years and then stopped. The Hearing Officer held that wasn't enough — without evidence about why they stopped or what they believed at the time, it didn't clearly and convincingly show an intent to evade. (The Department tried to add records of a frivolous lawsuit the Carters had filed, but that was excluded as late, thin, and — because it post-dated the tax due dates — not probative of their intent when the returns were due.)

What this means for you

If you've stopped filing and the Department estimates your tax

A no-show or a "the tax doesn't apply to me" protest won't beat the tax. Estimated assessments built from IRS data are presumed correct, and if you don't appear with real evidence, you'll be held liable for the tax and interest. Interest is fault-neutral and runs regardless.

The 50% fraud penalty is a much higher bar — for the state

Ordinary late-payment penalties (10%) are the taxpayer's burden to escape. But the 50% penalty for fraud or willful evasion flips the burden: the Department must prove intent to evade by clear and convincing evidence. Simply having filed before and then stopping does not, by itself, prove fraud. This is the same standard the Department did meet in a contemporaneous construction-fraud case (D&O 02-20) — the difference there was a mountain of evidence of concealment, which was missing here.

Don't read this as a win for "tax-protester" arguments

The couple's jurisdictional and "revoke my signature" theories carried no weight — those arguments are consistently rejected. What saved them from the extra penalty was purely the Department's failure to prove fraud, not the merits of their protest. They still owe the tax and interest.

Common questions

Q: The Department estimated my income tax from IRS data — can I just ignore it?
A: No. The estimate is presumed correct, and if you don't appear with evidence to rebut it, you'll be liable for the tax and interest. Non-filing and no-shows don't defeat the assessment.

Q: Who has to prove the 50% fraud penalty?
A: The Department does, and by clear and convincing evidence. Section 7-1-78 places the fraud burden on the state, unlike the ordinary negligence penalty, which the taxpayer must fight to abate.

Q: Isn't stopping to file after years of filing proof of fraud?
A: Not by itself. Without evidence of the taxpayer's intent at the time — why they stopped, what they believed — a prior filing history is not clear and convincing proof of willful evasion.

Q: Does this decision apply to my situation?
A: Not automatically. A Decision and Order resolves one taxpayer's protest on its own facts and the law in effect at the time. It illustrates how New Mexico allocates the burden on the fraud penalty, but your facts may differ.

Citations and references

Statutes:

• Section 7-1-17(C) NMSA 1978 — assessment presumed correct
• Section 7-1-69(B) (1995) / 7-1-69(C) (1997) NMSA 1978 — 50% penalty for intent to defraud / willful intent to evade or defeat tax
• Section 7-1-72 NMSA 1978 — criminal tax evasion (parallel "willful" standard)
• Section 7-1-78 NMSA 1978 — burden of proof on the state in fraud/corruption issues
• Section 7-2-12 NMSA 1978 — income tax due date; Section 7-1-3(U) — tax includes penalty and interest

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428 (presumption of correctness; taxpayer's burden)
• First National Bank in Albuquerque v. Abraham, 97 N.M. 288 (civil fraud proven by clear and convincing evidence)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kent R. and Gail K. Carter
• Decision PDF: D&O 02-32

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
KENT R. AND GAIL K. CARTER, NO. 02-32
PROTEST TO ASSESSMENT
NOS. 98094, 98095, 98096 AND 98097

DECISION AND ORDER

This matter came on for formal hearing on November 18, 1999 before Gerald B.

Richardson, Hearing Officer. Kent and Gail Carter, hereinafter, “Taxpayers”, failed to attend the

scheduled hearing after receiving notice of said hearing. The Taxation and Revenue Department,

hereinafter, “Department”, was represented by Mónica M. Ontiveros, Special Assistant Attorney

General. Subsequent to the hearing, the Department filed a Motion to Supplement the Record

and served a copy on the Taxpayers. The Taxpayers filed no response. Because of my concerns

that parties be prepared to present all relevant evidence at the time of the formal hearing, the

Motion to Supplement the Record is denied. Based upon the information and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Kent R. Carter holds a license under the name, Kent Carter Builders, from the New

Mexico Construction Industries Division of the Regulation and Licensing Department as a

general building contractor. The license was issued to him on January 21, 1985 and it remains an

active license.

2. The address of Kent Carter Builders as reflected in the records of the Construction

Industries division is PO Box 5033, Carlsbad, New Mexico, 88220.

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3. Kent Carter Builders has been registered with the Department under Taxpayer

Identification No. 02-007165-00 5 for purposes of reporting gross receipts, compensating and

withholding taxes since July 20, 1984.

4. Kent Carter Builders files monthly reports with the Department, reporting and paying

gross receipts taxes.

5. For tax years 1989, 1990, 1991 and 1992, Kent R. Carter filed New Mexico personal

income tax returns as a head of household, claiming one dependent, and reporting his income and

expenses from his construction business. In years in which he had sufficient income in excess of

expenses so as to owe personal income tax to the Department, he paid personal income tax.

6. For tax year 1993, Kent R. and Gail K. Carter filed a New Mexico resident personal

income tax return as married persons filing jointly and claiming two dependents. In that year, the

Carters reported and paid $213 in New Mexico personal income taxes to the Department.

7. The Taxpayers have not filed or reported personal income taxes to the Department for tax

years 1994, 1995, 1996, 1997 and 1998.

8. The Taxpayers did file a federal personal income tax return with the Internal Revenue

Service (“IRS”) in 1994. Through its information sharing agreement with the IRS, the

Department learned that the Taxpayers had reported $50,101 in federal adjusted gross income to

the IRS.

9. Using the information from the IRS, the Department adjusted upwards by 10% per year,

the Taxpayers’ federal adjusted gross income for tax years 1995-1998, gave them credit for the

standard federal deduction and for four exemptions to calculate an estimate of the amount of

personal income tax the Taxpayers owed the Department for tax years 1995-1998.

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10. Based upon these estimates, on July 16, 1999, the Department issued to the Taxpayer the

following assessments in the following amounts:

Assmt. No. Year Income Tax Penalty Interest Total

98094 1995 $ 1,681.00 $ 840.50 $ 819.49 $ 3,340.99
98095 1996 $ 2,385.00 $1,192.50 $ 804.94 $ 4,382.44
98096 1997 $ 3,279.00 $1,639.50 $ 614.81 $ 5,533.31
98097 1998 $ 4,487.00 $2,243.50 $ 168.26 $ 6,898.76

11. In response to the Department’s assessments, on August 13, 1999, the Department

received from the Taxpayers a 15 page document entitled “Notice of Defense, Demand to Quash

Notice of Amount Due For Lack Of Jurisdiction and Discharge for Fraud; Demand for

Adjudicatory Hearing of Record, if Denied”. This document purports to dispute the Taxpayers

liability for tax, including income tax, it disputes the Department’s personal and subject matter

jurisdiction over the Taxpayers, it disputes the validity of the federal income tax upon which the

New Mexico income tax is calculated, it alleges that the Department’s assessment was not

properly authorized or executed and generally it raises numerous defenses to the Department’s

assessments and demands that they be quashed. In the alternative, the Taxpayers demanded an

impartial adjudicatory special hearing of record to afford the Taxpayers an opportunity to learn

the basis for the assessment, to confront witnesses and to require the Department to substantiate

its claim of jurisdiction to tax and jurisdiction over the Taxpayers. The document also contains

administrative interrogatories, a demand to cease and desist collection activities, an affidavit

contesting jurisdiction, and a document purporting to revoke the Taxpayers’ signatures on

previously filed Federal W-4 forms, 1040 forms and state income tax forms.

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12. The Department treated this document as a valid protest to the assessments at issue herein

and on August 30, 1999 it wrote to the Taxpayers informing them that it was doing so and that

the matter had been referred to the Department’s Legal Services Bureau.

13. On October 7, 1999, the Department’s Hearing Officer mailed a letter by certified mail to

the Taxpayers informing them that a formal hearing of their protest would be held on November

18, 1999 at 9:00 A.M. at the Department’s offices in Santa Fe.

14. On October 22, 1999, Kent R. Carter signed for and acknowledged receipt of the certified

mail notice of the formal hearing in this matter.

15. The Taxpayers did not appear for the formal hearing.

DISCUSSION

Section 7-1-17(C) NMSA 1978 provides that “Any assessment of taxes or demand for

payment made by the department is presumed to be correct.” “Tax” is defined at Section 7-1-

3(U) NMSA 1978 to include the amount of any interest and penalty relating to taxes assessed

pursuant to the provisions of the Tax Administration Act unless the context of the statutory

provision requires otherwise. Thus, the presumption of correctness also attaches to the interest

and penalty portions of assessments unless there is something in the context of the statute at issue

to indicate otherwise. Because of the presumption of correctness, the burden of proof is upon

any taxpayer protesting an assessment to present evidence contesting the factual correctness of

the assessment or legal arguments challenging the legal basis of the assessment which clearly

overcome the presumption of correctness. Archuleta v. O’Cheskey, 84 N.M. 428, 504 P.2d 638

(Ct. App. 1972). Having failed to appear to present evidence or argument in support of their

protest, the Taxpayers have not met their burden of proof in this case and the presumption of

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correctness that attaches to the Department’s assessments establishes the Taxpayers’ liability for

personal income tax and interest.

With respect to the penalty assessed, the Taxpayers were assessed a penalty in the amount

of 50% of the tax assessed for tax years 1995 through 1998. The penalty statute was amended

during the years covered by the Department’s assessments, but under either version of the statute,

the event triggering the imposition of penalty is the “failure...to pay when due any amount of tax

required to be paid....” Thus, we must look to the due date for the taxes in question to determine

which version of the penalty statute to apply for a given tax year. Under the Income Tax Act,

Chapter 7, Article 2 NMSA 1978, taxes are due, “on or before the fifteenth day of the fourth

month following the end of the taxable year.” Section 7-2-12 NMSA 1978. Because the

Taxpayers reported and paid income taxes in the years in which they did report and/or pay taxes

on a calendar year basis, the Taxpayers’ tax payments were due on April 15 of the year following

the tax year. Because the payment of tax for the 1995 and 1996 tax years would have been due

on April 15, 1996 and 1997, respectively, the Taxpayers were assessed penalty pursuant to the

earlier version of the statute, § 7-1-69(B) NMSA 1978 (1995 Repl. Pamp.), which provided:

In the case of failure, with intent to defraud the state, to pay when
due any amount of tax required to be paid, there shall be added to
the amount fifty percent of the tax or a minimum of twenty-five
dollars ($25.00), whichever is greater, as penalty.
(emphasis added).

This provision was amended by Laws 1997, ch. 67, § 8, effective July 1, 1997, to read:

In the case of failure, with willful intent to evade or defeat any tax,
to pay when due any amount of tax required to be paid, there shall
be added to the amount fifty percent of the tax or a minimum of
twenty-five dollars ($25.00), whichever is greater, as penalty.
(emphasis added).

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Section 7-1-69(C) NMSA 1978 (1997 Cum. Supp.) This version of the penalty statute would be

applicable to the assessments for tax years 1997 and 1998.

Section 7-1-78 NMSA 1978 addresses the burden of proof in certain circumstances.

Specifically, it provides:

In any proceeding involving the issue of whether any person has
been guilty of fraud or corruption, the burden of proof in respect of
such issue shall be upon the director or the state.

The earlier version of the penalty statute, Section 7-1-69(B), imposed the 50% penalty in the case

of failure to pay “with intent to defraud the state”. Although as amended, the new version of the

50% penalty provision, § 7-1-69(C), does not specifically use the words “fraud” or “corruption”,

it does no violence to the concept of the statute to characterize it as a fraud penalty. It requires

that the failure to pay be due to a willful intent to evade or defeat a tax. This language closely

tracks the provisions of § 7-1-72 NMSA 1978, which provides a criminal penalty under the

following circumstances:

Any person who willfully attempts to evade or defeat any tax or the
payment thereof is, in addition to other penalties provided by law,
guilty of a felony and, upon conviction thereof, shall be fined not
less than one thousand dollars ($1,000) nor more than ten thousand
dollars ($10,000), or imprisoned not less than one year nor more
than five years, or both such fine and imprisonment, together with
the costs of prosecution. (emphasis added).

Because both the civil and criminal penalties for tax evasion now require a willful intent to evade

or defeat the payment of tax, it appears that the legislature was merely conforming the language

for the imposition of the civil and the criminal penalties for tax evasion. It is hard to discern any

real difference in the standard for the imposition of the penalty under either version of the 50%

penalty statute. Since the earlier version clearly refers to fraud, I believe that under either

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provision § 7-1-78 places the burden upon the Department to establish the propriety of its

assessment of the 50% penalty.

Section 7-1-78 does not specify the standard or degree of proof required for the state to

meet its burden of proof. The common law rule in New Mexico, however, is that proof of fraud

in a civil action must be established by clear and convincing evidence. First National Bank in

Albuquerque v. Abraham, 97 N.M. 288, 291, 693 P.2d 575 (1982). That standard will be

applied to determine whether the 50% penalty was properly assessed under the circumstances of

this case.

At the formal hearing, the only evidence the Department presented with respect to the

fraud penalty was that the Taxpayers had filed New Mexico personal income tax returns and paid

New Mexico income tax for tax years 1989 through 1993, and that from 1994 forward, they had

failed to file returns or report income tax even though Mr. Carter continued to report and pay

gross receipts tax on his construction business. From this, the Department infers that the

Taxpayers were familiar with the income tax filing requirements and their failure to continue to

file and report income taxes was due to a willful intention to evade or defeat the imposition of

tax.

As noted above, the Taxpayers failed to attend the formal hearing in this matter. Thus,

we have no testimony or other explanation in the record to explain their change of heart with

respect to filing and reporting income taxes with the Department. We do have their protest

document, which raises many of the standard “tax resister” arguments to the imposition of

income tax, but we do not have evidence as to when the Taxpayers became aware of these

arguments, whether they hold a sincerely held belief as to their validity, or any other

circumstances surrounding their failure to report and pay income taxes to the Department.

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Without more, this is insufficient to establish by clear and convincing evidence the Taxpayers’

intention to evade or defeat the imposition of New Mexico personal income taxes. After the

formal hearing was concluded, the Department sought to supplement the record with documents

from the United States District Court of the District of New Mexico showing that in early 1999,

the Taxpayers sued the Department for a declaratory judgment that the Department’s filing of a

lien violated their civil rights, that the Taxpayers’ suit had been dismissed and that the

Department had been awarded attorney’s fees pursuant to 42 U.S.C. 1988 as a prevailing party

based upon the frivolous nature of the Taxpayers’ lawsuit. This evidence was not admitted

because of my concerns that parties be prepared to present all relevant evidence at the time of the

formal hearing with respect to their position on any contested matter. The Department failed to

explain why this evidence was not presented at the time of the formal hearing. Even if it had

been admitted, it was too scanty to meet the clear and convincing evidence standard. The intent

of the Taxpayers with respect to their failure to report and pay state income taxes must be

determined at the time they failed to report and pay the tax. Thus, the dismissal of a lawsuit,

which occurred after the due date for the tax returns for any of the relevant tax periods would not

be probative of the intention of the Taxpayers and their understanding of the law with respect to

their obligation to report and pay income taxes at the time their return was due. For these

reasons, the Department has failed to meet its burden of showing by clear and convincing

evidence the Taxpayers’ intention to evade or defeat the imposition of New Mexico personal

income tax with respect to the tax assessments at issue.

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CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest, pursuant to § 7-1-24 NMSA 1978 to

Assessment Nos. 98094, 98095, 98096 and 98097 and jurisdiction lies over both the parties and

the subject matter of this protest.

2. The Taxpayers failed to present any evidence to overcome the presumption of

correctness which attached, pursuant to § 7-1-17 NMSA 1978, to the assessment of tax and

interest pursuant to Assessment Nos. 98094, 98095, 98096 and 98097 and thus those assessments

of tax and interest are presumptively correct.

3. The burden of proof with respect to the assessment of fraud penalty pursuant to § 7-1-

69(C) NMSA 1978 (1997 Cum. Supp.) and § 7-1-69(B) (1995 Repl. Pamp.), is upon the

Department.

4. The standard of proof with respect to the assessment of fraud penalty pursuant to § 7-

1-69(C) NMSA 1978 is clear and convincing evidence.

5. The Department has failed to meet its burden of proof with respect to the assessment

of fraud penalty.

For the foregoing reasons, the Taxpayers’ protest IS HEREBY GRANTED with respect

to the assessment of fraud penalty and IS HEREBY DENIED with respect to the assessment of

tax and interest.

DONE, this 30th day of December, 2002.

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