What penalty and interest relief applied when a first-year New Mexico resident's preparer miscalculated Form PIT-B and a Department examiner gave the preparer conflicting advice?

Plain-English summary

Maggie M. Martinez received a $16.90 penalty abatement because she reasonably relied on her longtime tax preparer, but she still owed interest on a $169 underpayment. The preparer's incorrect first-year-resident calculation caused the original error, while conflicting advice from different Department examiners did not excuse continued nonpayment.

Martinez moved from Texas to New Mexico in March 1999. Her preparer, also a first-year New Mexico resident, prepared both of their 1999 returns without reading the Department's instructions.

Instead of reporting full federal adjusted gross income on Form PIT-1 and then allocating income on Form PIT-B, the preparer put only New Mexico-earned income on the PIT-1.

When the Department found the federal-state discrepancy in 2003, the preparer created PIT-B forms. She reported the income columns correctly but ignored the instruction to calculate tax on total income and then apply the New Mexico income percentage. She instead computed tax only on the New Mexico income.

Different examiners reached different results

The examiner handling the preparer's own return incorrectly accepted that calculation and said she owed no additional tax.

Martinez's examiner corrected her calculation. The notice said 81.1% of her income was New Mexico income and described tax of $744 less $562 reported on the original return.

Martinez and her preparer chose to believe the more favorable examiner without reviewing the forms or consulting a qualified adviser. The Department ultimately assessed $169.00 of additional tax plus penalty and interest.

Immediately before the hearing, the protest auditor again walked them through the calculation. Martinez then accepted the $169 principal and withdrew that part of her protest.

Interest remained mandatory

Section 7-1-67 required interest from the original due date until payment. The conflicting examiner advice did not cause the original underpayment, which arose from the preparer's failure to follow the instructions.

Once Martinez received the 2003 discrepancy notice, the conflict itself called for further inquiry. She could have read the instructions or sought qualified advice but did neither. She also rejected a detailed March 2004 explanation from the protest auditor.

The Department warned that interest would continue during the protest and that paying principal would stop further accrual. Martinez chose not to pay while waiting for the hearing.

Those facts left no basis to abate interest, which remained due from April 15, 2000 until payment.

Reasonable preparer reliance removed the penalty

Section 7-1-69(A) imposed penalty for negligence, while Regulation 3.1.11.11 NMAC recognized reasonable reliance on competent tax counsel or an accountant after full disclosure.

The decision found Martinez's reliance on the preparer she had used for years reasonable for penalty purposes. The Department's counsel agreed. The $16.90 penalty was therefore abated even though interest remained.

Result: protest GRANTED IN PART and DENIED IN PART. Penalty abated; tax principal and interest upheld.

What this means for you

First-year New Mexico residents

Follow the sequence on PIT-1 and PIT-B: report the federal income figure as instructed, calculate the applicable tax, and then apply the New Mexico allocation percentage under the form's method.

Taxpayers receiving conflicting agency advice

Investigate the conflict rather than choosing the more favorable answer. Review the written instructions and obtain qualified advice tied to your own facts.

Taxpayers relying on a preparer

Reasonable reliance may affect negligence penalty without changing statutory interest. The two charges have different purposes and standards.

Taxpayers protesting an assessment

Consider paying the conceded or disputed principal to stop interest while preserving a refund remedy if the protest succeeds.

Common questions

Q: What mistake did the preparer make?
A: She calculated tax only on New Mexico income instead of using the PIT-B allocation method described in the instructions.

Q: How much additional tax was assessed?
A: $169.00.

Q: Why did examiner advice not eliminate interest?
A: It did not cause the original error, and Martinez failed to investigate once she knew the examiners disagreed.

Q: Why was the penalty abated?
A: The decision found that Martinez reasonably relied on her longtime preparer.

Q: How much penalty was removed?
A: $16.90.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-13(B) — self-reporting tax obligations
• NMSA 1978, § 7-1-13(E) — interest during payment extensions
• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-67 — interest on late-paid tax
• NMSA 1978, § 7-1-69(A) — negligence penalty
• Regulation 3.1.11.11 NMAC — reasonable reliance on a tax adviser

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. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Maggie M. Martinez
• Decision PDF: D&O 04-10

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
MAGGIE M. MARTINEZ No. 04-10

ASSESSMENT OF TAXES ISSUED
UNDER LETTER ID L1863806976

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 10, 2004, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Lewis J. Terr, Special Assistant Attorney General. Maggie M. Martinez (“Taxpayer”)

represented herself. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 2000, the Taxpayer asked her tax preparer, Martha Rodriguez, to prepare the

Taxpayer’s federal Form 1040 and New Mexico Form PIT-1 to report personal income taxes due for

the 1999 tax year.

2. The Taxpayer was a first-year resident of New Mexico in 1999, having moved to

New Mexico from the state of Texas in March 1999.

3. Ms. Rodriguez was also a first-year resident of New Mexico in 1999.

4. New Mexico's Form PIT-1 directs taxpayers to report their federal adjusted gross

income, exactly as reported on their federal return, on Line 5 of the PIT-1. First-year residents are then

directed to use Form PIT-B, Allocation and Apportionment Schedule, to allocate their income between

New Mexico and non-New Mexico sources.

5. Ms. Rodriguez did not read the Department’s instructions. Instead, she simply assumed

that first-year residents should include only the income they earned in New Mexico as “federal adjusted

gross income” on Line 5 of the PIT-1, and that is the way she prepared both the Taxpayer’s New

Mexico return and her own New Mexico return.

6. In 2003, the Department discovered the discrepancy between the federal adjusted

gross income the Taxpayer and Ms. Rodriguez reported on their 1999 federal income tax returns and

the federal adjusted gross income shown on their New Mexico income tax returns.

7. In June 2003, the Department sent separate notices to the Taxpayer and Ms.

Rodriguez concerning the discrepancy between their federal and state income. Different tax

examiners were assigned to the two cases.

8. When Ms. Rodriguez called the tax examiner assigned to her case, she was told that

she needed to file a Form PIT-B to allocate and apportion her income between New Mexico source

income and non-New Mexico source income.

9. Ms. Rodriguez subsequently prepared Forms PIT-B for both herself and the

Taxpayer.

10. Ms. Rodriguez correctly reported total federal adjusted gross income in column 1 of

the PIT-B and New Mexico income in column 2. However, she ignored the instructions on Line 13

to divide New Mexico income by federal income and apply the resulting percentage to the amount of

tax due on total income. Instead, she calculated the tax based solely on the income earned in New

Mexico.

11. The tax examiner assigned to Ms. Rodriguez’s case accepted the PIT-B as filed and

incorrectly told Ms. Rodriguez that no additional tax was due.

2

12. The tax examiner assigned to the Taxpayer’s case did not accept the Taxpayer’s PIT-

B as filed. Instead, she corrected Ms. Rodriguez’s calculations by determining the tax due on the

total amount of the Taxpayer’s federal adjusted gross income (less exemptions and deductions) and

then multiplying this amount by the percentage of income the Taxpayer earned in New Mexico

during tax year 1999.

13. In September 2003, the Taxpayer’s examiner sent her a notice stating that as a first-

year resident, “the PIT-B allocation would show 81.1% of your income was New Mexico income,

with a tax due of $744, less the $562 reported on your original NM return.”

14. The Taxpayer and Ms. Rodriguez did not understand why the tax examiner assigned

to Ms. Rodriguez accepted her PIT-B while the tax examiner assigned to the Taxpayer determined

that additional tax was due.

15. They decided that Ms. Rodriguez’s tax examiner must be right and the Taxpayer’s

tax examiner must be wrong. They did not consult with a certified public accountant or other tax

advisor in making this decision, nor did they go back and read the Department’s instructions to

Forms PIT-1 and PIT-B concerning the method that first-year residents must use to report their state

income tax.

16. On October 10, 2003, the Department assessed the Taxpayer for $169.00 of tax

principal, representing the underreporting created by the Taxpayer’s erroneous method of computing

her 1999 state income taxes, plus penalty and interest.

17. On November 5, 2003, the Taxpayer filed a written protest to the Department’s

assessment.

18. On November 12, 2003, the Department’s protest office sent a letter to the Taxpayer

acknowledging receipt of her protest. The letter advised the Taxpayer that interest on the amount of

3
tax principal in dispute would continue to accrue during the protest and advised the Taxpayer as

follows: “You may make payment on a protested assessment to stop the accrual of interest and

penalty. Upon resolution of the protest, you may claim a refund for any portion of the protested

assessment resolved in your favor.”

19. The Taxpayer decided not to make any payment of the tax principal assessed in order

to stop the accrual of additional interest.

20. On March 26, 2004, the protest auditor assigned to the Taxpayer’s protest sent the

Taxpayer a letter explaining the method New Mexico used to calculate tax on the income of first-

year residents and the reasons for the adjustments made to the Taxpayer’s 1999 return.

21. Because the Taxpayer still believed that the tax examiner assigned to Ms.

Rodriguez’s case must be right, she refused to accept the explanation provided by the protest auditor.

22. Immediately prior to the August 10, 2004 hearing on the Taxpayer’s protest, she and

Ms. Rodriguez met privately with the Department’s attorney and protest auditor. During that

meeting, the protest auditor again explained the statutory method for calculating the New Mexico

income tax liability of first-year residents and showed the Taxpayer exactly where the errors were

made in the preparation of her 1999 Forms PIT-1 and PIT-B.

23. As a result of that meeting, the Taxpayer acknowledged her liability for the

additional tax principal assessed and withdrew her protest to this amount of the assessment.

DISCUSSION

In her original protest, the Taxpayer questioned the method the Department used to

recalculate her 1999 New Mexico income tax liability. At the August 10, 2004 hearing on her

protest, the Taxpayer conceded that the Department's methodology was correct. The Taxpayer

4
continues to dispute the Department's assessment of penalty and interest, arguing that she was misled

by the erroneous advice given by the tax examiner assigned to review Ms. Rodriguez’s 1999 New

Mexico tax return.

NMSA 1978, § 7-1-17(C) provides that any assessment of tax by the Department is

presumed to be correct. NMSA 1978, § 7-1-3 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 assessment issued to the

Taxpayers is presumed to be correct, and it is the Taxpayers’ burden to present evidence and legal

argument to show that they are entitled to an abatement.

NMSA 1978, § 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 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, 105, 560 P.2d 167, 169 (1977). The legislature has

directed the Department to assess interest whenever taxes are not timely paid. The assessment of

interest is not designed to punish taxpayers, but to compensate the state for the time value of unpaid

revenues. 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, NMSA 1978, § 7-1-13(E).

The Taxpayer argues that the Department should not be allowed to collect the interest

assessed because she was misled by the erroneous advice the Department’s tax examiner gave to Ms.

5
Rodriguez concerning preparation of Form PIT-B. There are several problems with this argument.

First, there is no dispute that the original underreporting of the Taxpayer’s 1999 New Mexico

income tax liability resulted from Ms. Rodriguez’s own errors and her failure to carefully read the

Department’s instructions. Accordingly, the interest that accrued between April 2000 (the original

due date of the tax) and June 2003 (the date the Taxpayer received the Department’s audit letter)

cannot be attributed to any advice given or action taken by the Department. Beginning in June 2003,

the Taxpayer was on notice that there might be an error in her 1999 New Mexico tax return. While it

is undisputed that the advice the Taxpayer received from her tax examiner conflicted with the advice

received by Ms. Rodriguez, this did not excuse the Taxpayer from further inquiry. New Mexico has

a self-reporting tax system, and it is the obligation of taxpayers, who have the most accurate and direct

knowledge of their activities, to determine their tax liabilities and accurately report those liabilities to

the state. See, NMSA 1978, § 7-1-13(B); Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16,

17, 558 P.2d 1155, 1156 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977).

In this case, the Taxpayer made no attempt to determine which of the Department’s tax

examiners was correct. Had the Taxpayer done so, either by reviewing the Department’s instructions

or by consulting with a qualified tax advisor, she would have discovered the error in the return

prepared by Ms. Rodriguez. Instead, the Taxpayer chose to engage in wishful thinking. She simply

decided that the more favorable conclusion reached by Ms. Rodriguez’s tax examiner was the correct

one and rejected her examiner’s determination that additional tax was due. The Taxpayer also chose

to ignore the March 2004 letter from the Department’s protest auditor explaining the statutory

method used to calculate tax on the income of first-year residents. Finally, even after being advised

that interest would continue to accrue during the pendency of the protest, the Taxpayer decided not

to make a payment to stop the accrual of additional interest, preferring to wait for the outcome of the

6
hearing. Given these facts, there is no basis for finding that the Taxpayer should be excused from

paying the full amount of interest due on her underpayment of 1999 income tax.

Assessment of Penalty. NMSA 1978, § 7-1-69 governs the imposition of penalty. Subsection

A 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” to pay taxes due to the state. Regulation

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

including “reasonable reliance on the advice of competent tax counsel or accountant as to the

taxpayer’s liability after full disclosure of all relevant facts.” Here, the Taxpayer relied on the advice

of her tax preparer, who the Taxpayer had worked with for several years. This reliance justifies the

abatement of penalty, a conclusion with which the Department’s counsel agreed at the administrative

hearing.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the personal income tax, penalty, and

interest assessed under Letter ID 1863806976, and jurisdiction lies over the parties and the subject

matter of this protest.

2. The Taxpayer underreported $169.00 of personal income tax due for the 1999 tax year,

and interest was properly assessed against her pursuant to NMSA 1978, § 7-1-67.

3. The Taxpayer reasonably relied on her tax preparer, and the errors made in calculating

the Taxpayer’s 1999 income tax were not due to the Taxpayer’s negligence.

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

PART. The Department is ordered to abate the penalty assessed in the amount of $16.90. The

Taxpayer remains liable for interest accrued during the period April 15, 2000, the original due date of

the tax, until the date that payment is made.

7
DATED August 12, 2004.

8