Does interest on underreported New Mexico income tax begin on the original payment due date or only when the Department later notifies the taxpayer of the error?

Plain-English summary

Interest on Donna Marchak's $170 income-tax underpayment ran from the original April 2000 due date, not from the Department's May 2003 notice of her mistake. New Mexico's interest statute was mandatory and compensated the state for the time the tax remained unpaid.

Marchak timely filed her 1999 New Mexico personal income tax return and claimed a refund. She inadvertently claimed two personal exemptions when she was entitled to one, underreporting tax by $170.00.

The Department processed the return as filed and sent the requested refund in March 2000. After receiving information from the Internal Revenue Service, it found the error and notified Marchak in May 2003.

In August 2003, the Department assessed $170.00 of tax, $17.00 of penalty, and $85.10 of interest. Marchak paid the principal and protested part of the interest.

She did not contest the penalty or the interest from May 2003 through the August payment. Her dispute covered the interest from the original due date until she received notice.

Interest did not wait for Department notice

Section 7-1-67(A) required interest when tax was not paid by the due date, beginning the next day and continuing until payment. The decision treated the word “shall” as mandatory rather than discretionary.

Even a formal extension to pay did not stop interest under the cited statutes. Marchak's lack of awareness that she had underpaid likewise did not change the starting date.

The decision explained that interest was not a punishment. Marchak had the use of the $170 from April 2000 until August 2003, so interest compensated the state for that unpaid revenue.

New Mexico relied on self-reporting

The Department initially relied on Marchak's own return when issuing the refund. New Mexico's self-reporting system placed the duty on taxpayers to calculate and pay the correct amount by the statutory deadline.

The Department was not required to discover every return error immediately. Section 7-1-18(A) gave it three years from the end of the calendar year in which the tax was originally due to issue an assessment.

For Marchak's 1999 tax, the decision said that period ended December 31, 2003. The May 2003 notice was timely, and no statute authorized interest abatement merely because notice came near the end of the assessment period.

Result: protest DENIED. Interest remained due from April 2000 until payment in August 2003.

What this means for you

Individual income-tax filers

Review exemptions and other return inputs carefully. An innocent reporting mistake can create interest dating back to the original payment deadline.

Taxpayers who receive a delayed adjustment

The notice date may not control the interest start date. Under the statute applied here, interest followed the unpaid tax from its original due date.

Taxpayers expecting an agency to catch errors promptly

The self-reporting system puts the first responsibility on the filer. The Department's timely later discovery did not shift the cost of the delay to the state.

Common questions

Q: What caused the underpayment?
A: Marchak mistakenly claimed two personal exemptions instead of one.

Q: How much tax was underreported?
A: $170.00.

Q: When did interest begin?
A: The day after the original April 2000 due date.

Q: Did the Department's 2003 notice start the interest period?
A: No. Notice did not alter the statutory start date.

Q: Was the assessment timely?
A: Yes. The decision said the Department had through December 31, 2003, and gave notice in May 2003.

Citations and references

Statutes:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-13 — self-reporting and payment obligations
• NMSA 1978, § 7-1-13(E) — interest during payment extensions
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-18(A) — assessment limitations period
• NMSA 1978, § 7-1-67(A) — interest from original due date until payment

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: Donna C. Marchak
• Decision PDF: D&O 05-05

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
DONNA C. MARCHAK TO THE ASSESSMENT 05-05
OF PENALTY AND INTEREST ISSUED
UNDER LETTER ID NO. L0113782784

DECISION AND ORDER

On March 30, 2005, a formal administrative hearing on the above-referenced protest was

held in Santa Fe, Santa Fe County, New Mexico, before Margaret B. Alcock, Hearing Officer.

The Taxation and Revenue Department ("Department") was represented by Jeffrey W. Loubet,

Special Assistant Attorney General, who appeared in person. Donna C. Marchak (“Taxpayer”)

represented herself. By prior arrangement, Ms. Marchak entered her appearance by telephone

from Japan. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. In 2000, the Taxpayer filed a timely New Mexico personal income tax return for

the 1999 tax year, showing a refund due.

2. In completing her return, the Taxpayer inadvertently claimed two personal

exemptions instead of the one exemption to which she was entitled.

3. As a result of the error in claiming an extra exemption, the Taxpayer

underreported her New Mexico income tax by $170.00.

4. The Department processed the Taxpayer’s return as filed and sent her the refund

she requested on March 6, 2000.

5. In May 2003, after receiving information from the Internal Revenue Service, the

Department discovered the error on the Taxpayer’s return and notified her that she had

underreported her 1999 income tax by $170.00.

6. In August 2003, the Department assessed the Taxpayer for $170.00 of tax

principal, $17.00 of penalty, and $85.10 of interest.

7. The Taxpayer paid the $170.00 of tax principal and filed a timely protest to the

assessment of penalty and interest.

8. At the administrative hearing, the Taxpayer clarified that she was not protesting

the $17.00 of penalty assessed, nor was she protesting the interest that accrued between May

2003 (when she received notice of her liability for additional tax) and August 2003 (when the

additional tax was paid).

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the interest that accrued on

her underpayment of 1999 personal income tax between April 2000, the original due date of the

tax, and May 2003, the date the Taxpayer received the Department’s notice of her liability. The

Taxpayer acknowledges that she made a mistake when she completed her 1999 personal income

tax return and inadvertently claimed two exemptions instead of one. The Taxpayer contends,

however, that interest should not begin to accrue on her underpayment of tax until the date she

received notice of her error in May 2003.1

1
The Taxpayer also objects to paying additional interest because she does not believe the State of New
Mexico spends its tax revenues wisely. Whatever its merits, this argument presents an issue that is
beyond the hearing officer’s jurisdiction to consider.

2
NMSA 1978, § 7-1-17 provides that any assessment of taxes made 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 presumption of

correctness applies to the assessment of interest in this case, and it is the Taxpayer’s burden to

present evidence and legal arguments to justify an abatement.

At the hearing on her protest, the Taxpayer was unable to provide any legal authority to

support her argument concerning the accrual of interest, stating that her position is based on

common sense. The Department relies on NMSA 1978, § 7-1-67 to support its position that the

Taxpayer’s liability for interest began to accrue on April 15, 2000, the original due date of the tax,

and continued until August 2003, the date the tax was paid. Section 7-1-67(A) 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 use of 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). With limited

exceptions that do not apply here, the New Mexico Legislature has directed the Department to

assess interest whenever taxes are not 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).

3
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 Taxpayer made a mistake in

completing her 1999 income tax return. As a result of this error, the Taxpayer—rather than the

state—had the use of $170.00 of underreported tax for the period between April 2000 and August

2003. When a 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 Department notifies the taxpayer of

the underpayment.

New Mexico has a self-reporting tax system. There are insufficient government resources

available for the Department to continually audit every taxpayer to determine whether he or she has

fully complied with the state’s tax laws. For this reason, the law places the duty on taxpayers to

accurately determine and pay their taxes by 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). In this case, the Department relied on the

Taxpayer’s own representations when it processed her 1999 personal income tax return and issued

her a refund. Upon receiving additional information from the Internal Revenue Service in 2003, the

Department reevaluated the return and discovered the Taxpayer’s error.

While individual taxpayers are required to file one personal income tax return each year,

the Department is charged with the administration of more than 40 different tax programs and

receives thousands of tax filings each month. For this reason, NMSA 1978, § 7-1-18(A) gives the

Department three years from the end of the calendar year in which a tax is originally due to

4
determine whether the tax has been paid and issue an assessment. In this case, the Department

had until December 31, 2003 to notify the Taxpayer of her liability for 1999 income tax, plus any

related penalty and interest. The Taxpayer received actual notice of her liability in May 2003,

which was well within this statutory time frame. There is nothing in New Mexico tax law that

authorizes an abatement of interest when a taxpayer receives notice of her failure to properly

report and pay tax near the end—rather than at the beginning—of the three-year limitations

period set out in § 7-1-18.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the Department’s assessment of

interest on her underpayment of 1999 personal income tax, and jurisdiction lies over the parties and

the subject matter of this protest.

B. Pursuant to NMSA 1978, § 7-1-67(A), the Taxpayer is liable for the interest that

accrued from the first day following the day on which her 1999 personal income tax became due in

April 2000 until the date the underreported tax was paid in August 2003.

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

DATED April 4, 2005.

5