Could interest be limited to one year because the Department found an income-tax mismatch near the end of its three-year assessment period?

Plain-English summary

Daniel C de Baca owed interest for the full three years that $294 of 2001 personal income tax remained unpaid. The Department's discovery of the mismatch near the end of its assessment period did not limit interest to one year or change the statutory 15% rate then in effect.

De Baca timely filed his 2001 New Mexico return. In 2005, the Department compared it with federal income information through a tape match and found that he had underreported state tax.

After receiving an advisement letter, de Baca paid the $294 principal on April 7, 2005. The Department assessed the same principal plus interest four days later. It imposed no penalty.

De Baca protested interest, arguing that the Department waited too long and that he should pay only one year's accrual. He also argued that 15% did not reflect market rates.

Interest ran from the original due date

Section 7-1-67(A) required interest from the first day after tax became due until payment. The statute was mandatory and applied even when a taxpayer received an extension.

Had the return been correct, New Mexico would have received the $294 in April 2002. De Baca instead had use of the money until April 2005, so interest compensated the state for the full delay.

The rate was fixed by statute

Section 7-1-67(B) set the interest rate at 15% per year, computed daily. The Department lacked discretion to substitute a market rate by regulation or individual decision.

The assessment was timely

New Mexico's self-reporting system placed the initial duty to calculate and pay the tax on de Baca. Section 7-1-10 required the Department to assess liabilities over $10, and Section 7-1-18 supplied the assessment period.

The decision calculated the Department's deadline as December 31, 2005 for tax due April 15, 2002. The April 2005 assessment was timely.

Neither the limitations statute nor the interest statute reduced interest merely because the Department acted toward the end rather than the beginning of the permitted period.

Result: protest DENIED. Interest at 15% ran from the original 2002 due date until the April 2005 payment.

What this means for you

Taxpayers discovering an old underpayment

Interest may reach back to the original due date, not the date the Department detects or assesses the mismatch.

Taxpayers waiting for agency review

The self-reporting system places responsibility on the filer before any audit or information match. Agency delay within the statutory period did not shift the interest cost to the state.

Taxpayers disputing an interest rate

The rate applied in this decision was set by the statute then in effect. Neither the Department nor hearing officer could replace it based on prevailing market rates.

Common questions

Q: How much tax was underpaid?
A: $294 for the 2001 tax year.

Q: How was the error found?
A: A tape match compared the New Mexico return with federal income information.

Q: Was a penalty assessed?
A: No.

Q: Why did three years of interest apply?
A: The tax remained unpaid from April 2002 until April 2005, and Section 7-1-67 required interest throughout.

Q: Could the Department lower the 15% rate?
A: No. The decision said the Legislature fixed that rate and the Department had no discretion to change it.

Citations and references

Statutes:

• NMSA 1978, § 7-1-10 — duty to assess tax liabilities over $10
• NMSA 1978, § 7-1-13 — self-reporting obligation
• NMSA 1978, § 7-1-13(E) — interest despite an extension
• NMSA 1978, § 7-1-18 — assessment limitation period
• NMSA 1978, § 7-1-67(A)-(B) — mandatory interest and 15% annual rate
• NMSA 1978, § 12-2A-4(A) — "shall" and "must" express a duty

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: Daniel C de Baca
• Decision PDF: D&O 05-20

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
DANIEL C DE BACA No. 05-20
TO NOTICE OF ASSESSMENT OF INTEREST
ISSUED UNDER LETTER ID NO. L1903548927

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 22, 2005,

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

("Department") was represented by Elizabeth K. Korsmo, Special Assistant Attorney

General. Daniel C de Baca (“Taxpayer”) represented himself. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a resident of Santa Fe, New Mexico.

2. On April 13, 2002, the Taxpayer filed his 2001 New Mexico personal

income tax return with the Department.

3. In 2005, the Department ran a “tape match” to compare the information

reported on the Taxpayer’s 2001 New Mexico income tax return with information the

Department received from the Internal Revenue Service concerning the income reported

on the Taxpayer’s 2001 federal return.

4. As a result of the tape match, the Department discovered a discrepancy

between the income the Taxpayer reported on his federal and New Mexico returns,

resulting in an underreporting of New Mexico income tax for 2001.

5. On April 1, 2005, the Department sent the Taxpayer a “Tapematch

Mismatch Advisement Letter” notifying him of the amount of estimated tax, penalty, and

interest due as a result of the discrepancy.

6. On April 7, 2005, the Taxpayer paid the additional tax principal shown on

the advisement letter.

7. On April 11, 2005, the Department assessed the Taxpayer for $294 of

additional 2001 personal income tax, plus interest. No penalty was assessed.

8. The same day, the Taxpayer filed a written protest to the assessment, stating

that he had already paid the amount of tax principal shown, but was protesting the

assessment of interest.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the full amount of

interest that accrued on his underpayment of 2001 personal income tax between April

2002, the original due date of the tax, and April 2005, the date the additional tax was paid.

The Taxpayer maintains that the Department waited too long to issue its assessment and

believes he should be required to pay only one year’s accrued interest. The Taxpayer also

argues that the 15 percent interest rate is too high and does not reflect market rates.

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….

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B. Interest due to the state…shall be at the rate of fifteen percent a
year, computed on a daily basis…. (Emphasis added).

The Legislature’s 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). 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 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 Taxpayer underreported

his 2001 taxable income. Although the error was unintentional, the fact remains that if the

Taxpayer had completed his return correctly, the State of New Mexico would have

received an additional $294 tax payment in April 2002. Instead, the Taxpayer—rather

than the state—had the use of this money for the three-year period between April 2002

and April 2005, the date the additional tax was paid. Although the Taxpayer believes the

15 percent rate of interest is too high, that is the statutory rate set by the Legislature, and

the Department does not have discretion to change it by rule or regulation.

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The Taxpayer also complains that the Department took too long to notify him of

his liability for additional tax. New Mexico has a self-reporting tax system, however, and

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). 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 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, 2005 to notify the Taxpayer of

his liability for additional 2001 income tax, which was due on April 15, 2002. Nothing in

§ 7-1-18 or § 7-1-67 provides 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 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

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

issued under Letter ID L1903548927, and jurisdiction lies over the parties and the subject

matter of this protest.

B. The Department’s assessment was issued within the three-year limitations

period provided in NMSA 1978, § 7-1-18.

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C. Pursuant to the statutory requirements of NMSA 1978, § 7-1-67, the

Taxpayer is liable for interest on the amount of his underpaid tax at the rate of 15 percent a

year, calculated from the first day following the day on which his 2001 personal income tax

became due and continuing until the date the tax was paid.

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

DATED September 27, 2005.

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