Could a large taxpayer avoid penalty and interest when its CPA used the wrong ACH account number and a Department employee briefly reported no liability?

Plain-English summary

United Drilling owed penalty and interest after its CPA firm used the wrong account number for a $59,447.87 ACH tax payment and failed to correct the problem promptly. A temporary oral statement that the Department's system showed no liability did not excuse the later delay.

United Drilling's average monthly CRS payment exceeded $25,000, so it used the special payment methods in Section 7-1-13.1. It delegated monthly ACH transfers to its CPA firm, GGAS.

GGAS transmitted the October 2004 payment information early, but used an incorrect account number. The bank had manually corrected the same error on earlier transfers; this time, a substitute employee rejected the ACH item.

The CPA firm's employee noticed on both the November and December statements that the $59,447.87 debit had not cleared. In late December, a Department employee checked the system and said no October liability appeared.

The Department assessed the unpaid principal, penalty, and interest on January 11, 2005. GGAS later obtained a bank letter and cashier's check but did not mail the principal until March 4.

The state lacked use of the money

Section 7-1-67(A) made interest mandatory from the due date until payment. The special-payment system was designed to make funds immediately available to the state by the deadline.

United Drilling retained the $59,447.87 for more than three months. Interest compensated the state for that period and was not punishment.

The CPA firm's error was taxpayer negligence

The record established that GGAS, not the bank, originated the wrong account number. Its employee also failed to act after two bank statements showed no debit.

Regulation 3.1.11.10 included inadvertence, inattention, and failure to use ordinary business care in negligence. Section 7-1-69(A) therefore supported the penalty.

The temporary Department statement did not stop accrual

The Department employee's late-December statement appears to have been incorrect. But the January assessment supplied corrected information within two or three weeks.

GGAS still waited until sometime in February to contact the bank and until early March to pay. Those circumstances did not justify suspending either interest or penalty.

Past compliance did not authorize equitable relief

United Drilling also relied on its exemplary reporting history. The hearing officer found no statutory power to waive mandatory interest or a negligence penalty on that equitable ground.

Result: protest DENIED. Interest and penalty remained due on the late $59,447.87 CRS payment.

What this means for you

Businesses outsourcing electronic tax payments

Delegation to a CPA does not remove the taxpayer's exposure. Verify account data, monitor settlement, and investigate any missing debit immediately.

Tax staff seeing an uncleared ACH transaction

Do not assume timing explains a missing debit across multiple statements. Confirm status with the bank and agency and replace a rejected payment promptly.

Taxpayers receiving conflicting agency information

Later written assessments can correct earlier oral information. Continuing delay after receiving the corrected notice weakened the request for relief here.

Businesses with strong filing histories

Past compliance did not give the hearing officer authority to disregard the interest and penalty statutes for the failed payment.

Common questions

Q: Who entered the wrong account number?
A: United Drilling's CPA firm, GGAS.

Q: Why had earlier ACH transfers succeeded?
A: The bank had manually corrected the same account-number error before, but the usual employee was absent for this transfer.

Q: Did the Department initially report no liability?
A: Yes, an employee did so in late December, but the January assessment corrected that information.

Q: When did United Drilling pay the principal?
A: GGAS mailed it on March 4, 2005.

Q: Could exemplary compliance eliminate the charges?
A: No. The decision found no authority for an equitable waiver on that basis.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-13(E) — interest despite an extension
• NMSA 1978, § 7-1-13.1 — special payment methods
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-67(A) — mandatory interest on late-paid tax
• NMSA 1978, § 7-1-69(A) — negligence penalty
• Regulation 3.1.4.10 NMAC — deadline when state offices are closed
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Gandy v. Wal-Mart Stores, 117 N.M. 441, 872 P.2d 859 (1994)
• Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: United Drilling
• Decision PDF: D&O 05-19

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
UNITED DRILLING, INC. No. 05-19
ID NO. 02-047054-00 1; TO NOTICE OF
ASSESSMENT OF PENALTY AND INTEREST
ISSUED UNDER LETTER ID NO. L0103614976

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 13, 2005,

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

(“Department”) was represented by Bruce J. Fort, Special Assistant Attorney General. United

Drilling, Inc. (“Taxpayer”) was represented by Michael Andrews, a certified public accountant

with Gilmore, Gannaway, Andrews, Smith & Company, LLC. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a corporation doing business in New Mexico.

2. Because the Taxpayer’s average monthly payment of gross receipts,

compensating and withholding taxes (“CRS taxes”) exceeds $25,000, the Taxpayer is required

to pay its CRS taxes using one of the four payment methods set out in NMSA 1978, § 7-1-

13.1. These payment methods are designed to insure that tax funds are immediately available

to the state on or before the due date.

3. The Taxpayer has elected to make its monthly CRS tax payments by means of

automated clearing house (“ACH”) transfers and has delegated responsibility for making the
monthly transfers to Gilmore, Gannaway, Andrews, Smith & Co., LLC (“GGAS”), a firm of

certified public accountants.

4. Payment of CRS taxes for the October 2004 reporting period was due on or

before Thursday, November 25, 2004. Because state offices were closed on both November

25 and 26, 2004, the due date for the October payment was Monday, November 29, 2004, as

explained in Department Regulation 3.1.4.10 NMAC.

5. On November 17, 2004, Sue, a GGAS employee, transmitted the information

necessary for the state’s fiscal agent to initiate an ACH transfer of $59,447.87 on the effective

entry date in payment of the Taxpayer’s CRS taxes for the October 2004 reporting period.

6. On November 24, 2004, the state’s fiscal agent presented the ACH item in the

amount of $59,447.87 to the First National Bank at Roswell (“the Bank”) for payment.

7. On November 26, 2004, the Bank rejected the payment because the account

number provided was incorrect and did not belong to the Taxpayer.

8. When GGAS received the Taxpayer’s bank statement in late November 2004,

Sue noticed that the $59,447.87 ACH transfer had not cleared the Taxpayer’s account, but

assumed this was because it had been made so close to the statement’s closing date.

9. Upon receiving the next bank statement in December, Sue again noticed that

the ACH transfer had not cleared the Taxpayer’s account.

10. In late December 2004, Sue called the Department’s Roswell office and spoke

to Joe Salgado. In response to Sue’s inquiry, Mr. Salgado checked the Department’s system

and told her that the Taxpayer had no outstanding liability for the October 2004 reporting

period.

2

11. On January 11, 2005, the Department issued an assessment under Letter ID

L0103614976 assessing the Taxpayer for $59,447.87 of CRS taxes due for the October 2004

reporting period, plus interest and penalty.

12. After the Taxpayer received the assessment, Sue called Joe Salgado in the

Department’s Roswell office. As a result of that conversation, Sue understood that the

interest and penalty could be abated if the Bank sent the Department a letter stating that the

rejected ACH payment resulted from the Bank’s error rather than the Taxpayer’s error.

13. Sometime in February 2005, Sue contacted the Bank and asked its president

and managing officer to write a letter explaining the reason for the rejected payment. She also

asked the Bank to issue a cashier’s check to the Department in the amount of $59,447.87. The

Bank complied with Sue’s request and delivered the cashier’s check and letter of explanation

to GGAS’s offices in Roswell.

14. The Bank’s letter explained that the ACH information submitted contained an

incorrect account number and could not be processed. It further explained that this same error

had appeared on previous ACH transfers, but the error was caught and manually corrected by

the Bank. Unfortunately, the employee who usually processed ACH transactions was absent

on November 26, 2004 and her replacement was unable to correct the error on the ACH

transfer initiated in payment of the Taxpayer’s October 2004 CRS taxes.

15. On March 4, 2005, GGAS mailed a check for the full amount of tax principal

shown on the Department’s January 11, 2005 assessment to the Department by certified mail.

3

16. After receiving the check and the letter from the Bank, the Department

informed GGAS that there was no legal basis for abating the interest and penalty assessed

against the Taxpayer.

17. On April 8, 2005, GGAS filed a written protest of interest and penalty on

behalf of the Taxpayer.

DISCUSSION

The sole issue to be determined is whether the Taxpayer is liable for the interest and

penalty assessed on its late payment of CRS taxes for the October 2004 reporting period. In

its protest letter, the Taxpayer maintained that penalty and interest should be abated because

the Bank, rather than the Taxpayer, was at fault for the rejected ACH payment. At the

administrative hearing, the Taxpayer’s CPA acknowledged that the error did not originate

with the Bank, but with GGAS, whose employee entered the wrong account number when

transmitting the information necessary to authorize the ACH payment. The CPA argued,

however, that interest and penalty should be suspended as of the date that GGAS’s employee

was told by the Department that the Taxpayer had no outstanding liability for the October 2004

reporting period. He also asked the Hearing Officer to waive the assessment of penalty and

interest based on the Taxpayer’s exemplary reporting history.

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

4
presumption of correctness applies to the assessment of penalty and interest at issue in this

case, and it is the Taxpayer’s burden to present evidence and legal arguments to support an

abatement.

Assessment of Interest. 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....

The Legislature’s use of the word “shall” indicates that the provisions of the statute are

mandatory rather than discretionary. Gandy v. Wal-Mart Stores, 117 N.M. 441, 442, 872 P.2d

859, 860 (1994) (under rules of statutory construction, the words “shall” and “will” are

mandatory). 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).

The assessment of interest is not designed to punish taxpayers, but to compensate the

state for the time value of unpaid revenues. With regard to taxpayers subject to the special

payment requirements of NMSA 1978, § 7-1-13.1, the Legislature has mandated that tax

funds must be made immediately available to the state on or before the statutory due date. In

this case, the error made by the Taxpayer’s accounting firm denied the state the use of tax

revenues to which it was legally entitled for a period of more than three months. During this

period, the Taxpayer—rather than the state—had the use of this money, and interest was

5
properly assessed from the original due date of the tax until the date that payment was

received in March 2005.

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

Subsection A imposes a penalty of two percent per month or any fraction of a month, up to a

maximum of ten percent, that a taxpayer fails “due to negligence or disregard of rules and

regulations” to pay taxes or file required tax reports 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.

Here, the cause of the late payment was the inadvertent error made by GGAS’s employee

when she entered the Taxpayer’s account number and her inattention in failing to catch the

error in subsequent months. New Mexico case law confirms that penalties may properly be

assessed even when a taxpayer’s late payment is based on inadvertent error or unintentional

failure to pay the tax due. Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M.

12, 16, 878 P.2d 330, 334 (Ct. App. 1994) rev'd on other grounds by Blaze Construction Co.

v. Taxation & Revenue Department, 118 N.M. 647, 884 P.2d 803 (1994); El Centro Villa

Nursing Center v. Taxation & Revenue Department, 108 N.M. 795, 797-798, 779 P.2d 982,

1
As discussed at the administrative hearing, the penalty imposed by Subsection F of § 7-1-69 when
electronic payments are submitted without required information does not apply in this case because
the Department never requested corrected information from the Taxpayer.

6
984-985 (Ct. App. 1989). Based on both regulation and case law, the negligence penalty was

properly assessed.

The Taxpayer’s CPA maintains that the accrual of interest and penalty should be

suspended as of the date in December 2004 when GGAS was advised that the Department’s

system did not show a liability for the October 2004 reporting period. Although it appears

that GGAS was given incorrect information, it subsequently received corrected information in

the form of the Department’s January 11, 2005 assessment. GGAS received the assessment in

mid-January, only two or three weeks after Sue, GGAS’s employee, spoke to Joe Salgado in

the Department’s Roswell office. Nonetheless, Sue waited until sometime in February 2005

to contact the Bank to determine the cause of the rejected payment and waited until early

March 2005 before sending payment of the outstanding tax principal to the Department.

Given these circumstances, there is no basis for suspending the accrual of interest or penalty.

As its final argument, the Taxpayer asks that penalty be waived based on its exemplary

reporting history. This is not something the Department can consider. In State ex rel. Taylor

v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, the New Mexico Supreme Court

made the following observations concerning the power of administrative agencies:

Generally, the Legislature, not the administrative agency, declares the
policy and establishes primary standards to which the agency must
conform. See State ex rel. State Park & Recreation Comm'n v. New
Mexico State Authority, 76 N.M. 1, 13, 411 P.2d 984, 993 (1966). The
administrative agency's discretion may not justify altering, modifying or
extending the reach of a law created by the Legislature....

In this case, the Legislature has directed the imposition of interest on late tax payments and the

imposition of penalty whenever the late payment results from the taxpayer’s negligence. The

7
Legislature has not granted the Department or its hearing officer authority to waive penalty or

interest based on equitable grounds, including a taxpayer’s past reporting history.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the assessment of interest and

penalty issued under Letter ID L0103614976, 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 payment of the

interest that accrued between the due date of its October 2004 CRS taxes and the date payment

was made in March 2005.

C. Pursuant to NMSA 1978, § 7-1-69(A), the Taxpayer is liable for penalty on the

underpayment of taxes that resulted from GGAS’s use of an incorrect account number on the

ACH information provided to initiate payment of the Taxpayer’s 2004 CRS taxes.

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

DATED September 16, 2005.

8