Did taxpayers owe interest on a 1999 New Mexico income-tax underpayment when the Department mailed assessments to an incorrectly entered street address and they learned of the debt almost three years later?

Plain-English summary

Edwin L. and Lucinda A. Shellenberger owed $164.38 of interest even though the Department's address-entry error prevented them from receiving the first two assessments. Interest on their income-tax underpayment began the day after the original due date, not when they eventually received actual notice.

The Shellenbergers reported 1999 federal adjusted gross income of $60,543 and claimed a $6,000 deduction for persons age 65 and older.

The instructions said the $6,000 deduction was available only in a lower income band and that taxpayers with federal adjusted gross income above $51,000 received no deduction. Edwin Shellenberger did not read those instructions or ask anyone to review the return.

Disallowing the deduction produced $381.00 of additional tax. The Department mailed assessments in October 2000 and July 2001, but its system listed the street as Northgate Drive instead of Northridge Drive. The taxpayers did not receive them.

A February 2003 statement of account reached the Shellenbergers despite carrying the same incorrect street name. They investigated and paid on March 5, 2003: $381.00 of tax, $164.38 of interest, and $38.10 of penalty.

They requested a $202.48 refund of interest and penalty. The Department abated and effectively refunded the penalty, leaving only the $164.38 interest dispute.

Interest followed the unpaid tax

Section 7-1-67(A) required interest from the first day after tax was due until it was paid. The decision treated that rule as mandatory.

Although the deduction error was honest and involved no intent to defraud, the taxpayers had use of the unpaid $381 from April 16, 2000 through March 5, 2003. Interest compensated the state for that period.

The wrong address did not change the starting date

New Mexico's self-reporting system required taxpayers to calculate and pay the correct tax by the statutory deadline. The interest statute measured from that deadline rather than from the date an assessment was received.

Section 7-1-18(A) gave the Department through December 31, 2003 to assess the 1999 tax. The Shellenbergers received actual notice in February 2003, within that period.

The decision found no provision allowing interest abatement because a Department key-entry error delayed delivery of the assessment. Whether notice came early or late within the assessment window, interest continued from the original due date to payment.

Result: protest DENIED. The $164.38 interest refund was not allowed.

What this means for you

Taxpayers claiming age-based deductions

Check the income phaseout in the correct filing-status table. Here, income over the stated ceiling eliminated the deduction entirely.

Taxpayers who have not received expected mail

Monitor account balances independently when possible. An agency address error may delay notice without stopping statutory interest.

Taxpayers disputing interest

Separate penalty relief from interest relief. The Department abated the penalty here but the mandatory interest rule still applied.

Self-preparers

Read the line instructions and have another person review eligibility-sensitive deductions before filing.

Common questions

Q: What caused the $381 underpayment?
A: The taxpayers claimed a $6,000 over-65 deduction even though their income exceeded the stated eligibility limit.

Q: Why did they miss the original assessments?
A: The Department entered Northgate Drive instead of their correct Northridge Drive address.

Q: Was the penalty refunded?
A: Yes. The Department abated the $38.10 penalty.

Q: Was the interest refunded?
A: No. The $164.38 interest remained due.

Q: When did interest run?
A: From April 16, 2000, the day after the original due date, through March 5, 2003, the payment date.

Citations and references

Statutes:

• NMSA 1978, § 7-1-10 — assessment of tax liability over $10
• NMSA 1978, § 7-1-13 — self-reporting and payment obligations
• NMSA 1978, § 7-1-13(E) — interest during payment extensions
• NMSA 1978, § 7-1-18(A) — assessment limitations period
• NMSA 1978, § 7-1-67(A) — interest from original due date until payment

Cases cited:

• 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: Edwin L. and Lucinda A. Shellenberger
• Decision PDF: D&O 04-15

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
EDWIN L. & LUCINDA A. SHELLENBERGER No. 04-15
TO DENIAL OF CLAIM FOR REFUND OF INTEREST
PAID ON 1999 PERSONAL INCOME TAX ASSESSMENT

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on December 6, 2004,

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

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

L. and Lucinda A. Shellenberger (“Taxpayers”) were represented by Edwin L. Shellenberger.

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

FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers are residents of Albuquerque, New Mexico.

2. In March 2000, Edwin Shellenberger prepared a 1999 New Mexico Personal

Income Tax return (“PIT-1”) for his wife and himself and filed it with the Department.

3. On Line 5 of their 1999 Form PIT-1, the Taxpayers reported federal adjusted

gross income of $60,543.

4. On Line 6 of Form PIT-ADJ, Schedule of Additions and Deductions, the

Taxpayers claimed a $6,000 deduction for persons age 65 and older. This deduction was
then carried over to Line 9 of the Taxpayer’s PIT-1, resulting in a $6,000 decrease in their

New Mexico taxable income.

5. The Department’s 1999 PIT instruction packet included line-by-line

instructions for completing Forms PIT-1 and PIT-ADJ. The instructions for Line 6 of the

PIT-ADJ (at page 16) advised taxpayers as follows:

If you are 65 or older...you may be eligible for a deduction of up to
$8,000 based on your filing status and federal adjusted gross income
(from line 5 of Form PIT-1). From the table below, find the column
that corresponds to your filing status and the row that includes your
federal adjusted gross income. Read across to the amount in the last
column to determine the amount of any deduction available. On a joint
return, if both husband and wife were 65 or older or blind at the end of
the tax year, the amount shown in the table would apply to each
taxpayer.

6. As set out in the table on page 16 of the instruction packet, the deduction of

$6,000 ($3,000 each) claimed by the Taxpayers in this case was only available to taxpayers

whose federal adjusted gross income was between $42,000 and $45,000. Taxpayers whose

federal adjusted gross income exceeded $51,000 were not entitled to claim any deduction.

7. Mr. Shellenberger did not take the time to read the instructions pertaining to

the over-65 deduction when completing the Taxpayers’ 1999 tax return and did not ask his

wife or anyone else to review the return to be sure it was prepared correctly.

8. Because the Taxpayers’ 1999 federal adjusted gross income exceeded the

$51,000 income limit for claiming the over-65 deduction, the Department disallowed the

$6,000 deduction the Taxpayers claimed on Line 6 of Form PIT-ADJ.

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9. On October 27, 2000, and again on July 20, 2001, the Department mailed the

Taxpayers an assessment for $381 of additional personal income tax due as a result of the

Taxpayers’ disallowed deduction, plus interest and penalty.

10. The Taxpayers’ address had been incorrectly entered into the Department’s

computer system as 8513 Northgate Drive NE, Albuquerque, NM 87111. The Taxpayer’s

correct address in Albuquerque is 8513 Northridge Drive NE, Albuquerque, NM 87111.

11. As a result of this error, the Taxpayers did not receive the assessments issued

in 2000 and 2001.

12. In February 2003, the Department’s February 18, 2003 Statement of Account

was delivered to the Taxpayers, although it also had the incorrect address of Northgate Drive.

13. After receiving the Statement of Account and becoming aware of the

assessment issued against them, the Taxpayer contacted the Department to determine the

basis for the liability.

14. On March 5, 2003, the Taxpayers paid the assessment in full, including

$381.00 of tax principal, $164.38 of interest, and $38.10 of penalty.

15. On September 18, 2003, the Taxpayers filed an Application for Tax Refund

requesting a refund of the $202.48 of interest and penalty paid on the assessment.

16. On October 2, 2003, the Department denied the Taxpayer’s refund claim.

17. On October 7, 2003, the Department abated the $38.10 penalty assessed

against the Taxpayers, which effectively granted their request for refund of that amount.

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18. On December 28, 2003, the Taxpayers filed a written protest to the denial of

their request for refund of the $164.38 of interest paid on the Department’s assessment.

DISCUSSION

The issue to be decided is whether the Taxpayers are liable for payment of the

$164.38 of interest that accrued on the Taxpayers’ underpayment of 1999 personal income

tax between April 15, 2000, the original due date of the tax, and March 5, 2003, the date the

additional tax was paid. The Taxpayers maintain that interest should not be imposed because

the Department mailed its original assessment to the wrong address, and the Taxpayers did

not learn of their liability for additional tax until February 2003. In effect, the Taxpayers

argue that interest should not begin to accrue until the date they received actual notice of

their error in calculating the amount of 1999 personal income taxes due to the state.

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).

It is a well settled rule of statutory construction that the word "shall" indicates that the

provisions of the statute are mandatory rather than discretionary. State v. Lujan, 90 N.M.

103, 105, 560 P.2d 167, 169 (1977). See also, NMSA 1978, § 12-2A-4(A) of the Uniform

Statute and Rule Construction Act (the words “shall” and “must” express a duty, obligation,

requirement or condition precedent). With limited exceptions that do not apply here, the

New Mexico Legislature has directed the Department to assess interest whenever taxes are not

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timely paid. 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 assessment of interest is not designed to punish taxpayers, but to compensate the

state for the time value of unpaid revenues. In this case, the Taxpayers made a mistake when

they claimed a $6,000 deduction on their 1999 Form PIT-ADJ. Although this was an honest

mistake made without any intent to defraud the government, the fact remains that the State of

New Mexico would have received an additional $381 tax payment if the Taxpayers had

completed their return correctly. As a result of the Taxpayers’ error, they—rather than the

state—had the use of this money for the three-year period between April 16, 2000, the day

following the original due date of the tax, and March 5, 2003, the day the additional tax was

paid. While the Taxpayers argue that the 15 percent interest rate set out in NMSA 1978, § 7-

1-67 is excessive in comparison with current market rates, that is a matter within the sound

discretion of the legislature. The Department has no authority to substitute its judgment for

that of the legislature when assessing interest on late payments of tax.

The Taxpayers also argue that the Department’s error in sending its assessment to the

wrong address should excuse the Taxpayers from the payment of interest. This argument is

based on a misunderstanding of New Mexico’s self-reporting tax system. Taxpayers have a

legal obligation to report and pay their taxes on or before the statutory due date. NMSA 1978,

§ 7-1-13; See also, 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). When a

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taxpayer fails to make timely payment of taxes due to the state, NMSA 1978, § 7-1-67(A)

imposes interest “from the first day following the day on which the tax becomes due...until it is

paid.” The language of the statute makes it clear that interest on an underpayment of tax begins

to run from the original due date of the tax—not the date the taxpayer receives notice of the

underpayment.

The Department is charged with enforcing the state’s tax laws. NMSA 1978, § 7-1-10

requires the Department to assess any taxpayer who is liable for tax in excess of $10.00, and

NMSA 1978, § 7-1-18(A) gives the Department three years from the end of the calendar year

in which the tax was originally due to issue the assessment. In this case, the Department had

until December 31, 2003 to notify the Taxpayers of their liability for 1999 income tax, which

was due on April 15, 2000. While it is certainly regrettable that the Department’s key entry

error delayed delivery of the Department’s assessment of additional tax, the Taxpayers

received actual notice of their liability within the time frame provided by the legislature.

Nothing in § 7-1-18 or § 7-1-67 allows for the abatement of interest when the Department

issues its assessment at the end—rather than at the beginning—of the three-year limitations

period. In either case, Section § 7-1-67(A) requires interest to be paid from the first day

following the day on which the tax was due until the day it is paid.

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest to the denial of their claim for

refund of interest assessed and paid on their underpayment of 1999 personal income tax, and

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

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2. Pursuant to NMSA 1978, § 7-1-67(A), the Taxpayers are liable for payment of

the $164.38 of interest that accrued between April 16, 2000, the day following the original due

date of their 1999 income tax, and March 5, 2003, the day the additional $381 of tax was paid.

3. The Taxpayers received actual notice of the Department’s assessment within the

three-year limitations period set out in NMSA 1978, § 7-1-18(A), and the Department’s initial

error in sending the assessment to the wrong address does not affect the accrual of interest on

the Taxpayers’ underpayment of tax.

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

DATED December 9, 2004.

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