Could a contractor defeat reconstructed CRS assessments by saying records were lost and the business stopped, despite federal returns and later CRS filings?

Plain-English summary

Richard Sanchez Construction did not disprove a $369,047.46 combined-reporting-system assessment based on federal business receipts and reasonable estimates for years without records. Sanchez's claim that the business stopped after 2000 conflicted with his own later CRS filings and registration history.

Sanchez registered the construction business for gross receipts, compensating, and withholding taxes in March 1998. For 1998 through 2000, he either did not file monthly CRS returns or filed zero returns, while federal Schedule C returns showed more than $700,000 of business receipts in each year.

He later filed 2001 returns reporting withholding and $214,150.32 of gross receipts for February through April, without payment. He continued filing zero CRS returns during 2002 and did not cancel the business registration until May 2004.

The Department sent audit notices and record requests to the registered address, attempted telephone contact, and delivered papers under the door after seeing Sanchez's registered vehicle at the property. Sanchez produced no business records.

The final audit assessment covered March 1998 through May 2003 and totaled $369,047.46, including interest.

The first three years used actual federal receipts

The 1998-2000 portion was not estimated. It used the Schedule C business receipts from Sanchez's federal returns.

At the hearing, Sanchez acknowledged that those figures were accurate to the best of his knowledge and had no basis to challenge the tax for those periods.

Missing later records justified estimation

Sections 7-1-10(A) and 7-1-11(C) required Sanchez to maintain records permitting accurate tax computation and make them available for inspection.

He said records were lost through divorce and home foreclosure, but could not consistently recall when those events occurred. Even accepting the loss, he made no attempt to reconstruct the records or obtain bank statements.

With no actual books for the later audit periods, and no 2001 or 2002 state or federal income-tax returns, the Department used the average of receipts reported for the prior three years. The decision found that method reasonable.

The business-closure claim conflicted with filed returns

Sanchez testified that he stopped construction work after 2000. But his own 2001 CRS filings reported $214,150.32 of receipts, and he continued filing business returns in 2002.

Those documents contradicted both his no-income claim and his statement that no state or federal return was required for 2001. The late 2004 cancellation further undermined the asserted 2000 closure.

Section 7-1-17(C) presumed the assessment correct, and Sanchez provided no credible evidence or records overcoming it.

Result: protest DENIED. The $369,047.46 assessment stood.

What this means for you

Contractors and cash-flow businesses

File monthly CRS returns that match the business's books and federal reporting. Repeated zero returns alongside substantial Schedule C receipts can trigger large audit adjustments.

Taxpayers who lose records

Reconstruct them from banks, customers, vendors, payroll providers, and filed returns. Simply stating that records disappeared did not prevent estimation here.

Businesses that cease operations

Close registrations promptly and keep proof of the final activity date. Continued returns and an open registration can contradict a later claim that the business stopped years earlier.

Taxpayers challenging estimated receipts

Produce transaction-level or bank evidence showing the estimate is wrong. General testimony did not overcome the assessment's presumption of correctness.

Common questions

Q: Were the 1998-2000 receipts estimated?
A: No. They came from Sanchez's federal Schedule C returns, and he acknowledged their accuracy.

Q: Why did the Department estimate the later receipts?
A: Sanchez produced no books or records, and no state or federal income-tax returns were filed for 2001 or 2002.

Q: What contradicted the claim that business ended in 2000?
A: 2001 CRS returns reported $214,150.32 of receipts, later CRS returns continued, and the registration remained open until 2004.

Q: Could lost records excuse the estimate?
A: No. Sanchez did not reconstruct them or even obtain bank statements.

Q: What was the final assessment amount?
A: $369,047.46, including interest.

Citations and references

Statutes:

• NMSA 1978, § 7-1-10(A) — duty to maintain records permitting accurate tax computation
• NMSA 1978, § 7-1-11(C) — duty to make records available for inspection
• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• Torridge Corp. v. Commissioner of Revenue, 84 N.M. 610, 506 P.2d 354 (Ct. App. 1972)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Richard Sanchez
• Decision PDF: D&O 05-21

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
RICHARD SANCHEZ CONSTRUCTION
CRS NO. 02-361127-00 8 No. 05-21
TO NOTICE OF ASSESSMENT OF TAXES
ISSUED UNDER LETTER ID NO. L1829415936

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 26, 2005,

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

("Department") was represented by Lewis J. Terr, Special Assistant Attorney General. Richard

Sanchez Construction was represented by its owner, Richard Sanchez (“Taxpayer”). At the

close of the hearing, the record was left open until October 11, 2005 to allow the submission

of additional documentation. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In March 1998, the Taxpayer registered his construction business with the

Department for payment of gross receipts, compensating, and withholding taxes, which are

required to be paid monthly under the Department’s combined reporting system (“CRS”).

2. During 1998, 1999, and 2000, the Taxpayer either failed to file monthly CRS

returns or filed returns reporting zero gross receipts. The Taxpayer’s federal income tax

returns reported business receipts in excess of $700,000 for each of those years.

3. Beginning in March 2000 and continuing through April 2001, the Taxpayer

filed CRS returns reporting withholding tax due.

4. The returns the Taxpayer filed for the months of February, March, and April

2001 also reported gross receipts in the total amount of $214,150.32. No payment was

included with those returns.

5. In June 2001, the Taxpayer filed an application for nontaxable transaction

certificates (“NTTCs”) and received fifteen NTTCs from the Department.

6. In April 2002, the Department notified the Taxpayer that he had been selected

for audit. The audit notice was mailed to the Taxpayer at 9405 Riverfront Drive, NW,

Albuquerque, NM 87114, the address shown on his CRS registration with the Department and

on the CRS returns the Taxpayer filed with the Department.

7. The auditor subsequently spoke to the Taxpayer’s wife, who provided the

auditor with copies of the joint federal income tax returns the Taxpayer and his wife filed for

tax years 1998 and 1999.

8. In May 2002, the Taxpayer filed a CRS return for April 2002 reporting no

receipts and no tax due.

9. Because the Department’s audit was delayed, the Department issued

provisional assessments to the Taxpayer at the end of 2002 for reporting periods March 1998

through December 2002. Because the Taxpayer had not reported any gross receipts for these

periods, the amount of gross receipts tax assessed was based on average receipts for the

construction industry.

10. In January 2003, the Taxpayer filed CRS returns for the months of May

through December 2002. Each of those returns reported no receipts and no tax due.

2

11. In October 2003, the audit was reassigned to another auditor. On October 20,

2003, a second notice of audit was mailed by certified mail to the Taxpayer at the Riverfront

Drive address shown on his registration certificate, together with a letter setting out the type of

records the Taxpayer was required to produce for the Department’s examination.

12. The audit notice and letter were returned to the Department by the United

States Postal Service as unclaimed.

13. The auditor attempted to contact the Taxpayer by telephone, but no one

returned the auditor’s calls.

14. On June 12, 2003, the auditor drove to the Taxpayer’s Riverfront Drive

address, taking another Department employee with her as a witness. The auditor noted that a

vehicle with a New Mexico license plate registered to the Taxpayer was in the driveway, but

no one answered the door to the house. The auditor then pushed copies of the audit notice and

letter concerning the records needed for the audit under the door.

15. The auditor did not receive any response from the Taxpayer and no records

were ever produced for audit.

16. The auditor then proceeded to determine the Taxpayer’s liability for CRS taxes

based on the 1998 and 1999 federal income tax returns previously provided by the Taxpayer’s

wife and on third party records obtained from the Internal Revenue Service, including the

Taxpayer’s 2000 federal income tax return.

17. Because the Taxpayer did not file state or federal income tax returns for 2001

or 2002, gross receipts for those years were determined based on the average of receipts

reported on the Taxpayer’s income tax returns for the previous three years.

3

18. On May 26, 2004, the Taxpayer telephoned the Department and cancelled the

CRS registration for his construction business.

19. On June 16, 2004, the Department issued an assessment under Letter ID

L1829415936, assessing the Taxpayer for gross receipts, compensating, and withholding taxes

for reporting periods March 1998 through May 2003. The total amount of the assessment,

including interest, was $369,047.46.

20. The assessment was mailed to the Riverfront Drive address and was returned to

the Department by the United States Postal Service as unclaimed.

21. In July 2004, one of the Department’s senior revenue agents called the

Taxpayer concerning the provisional assessments the Department had issued in 2002. The

agent noticed that an audit assessment had recently been issued for the same reporting periods

and provided the Taxpayer with a copy of that assessment.

22. The Department subsequently abated the 2002 provisional assessments against

the Taxpayer’s construction business, which had been superceded by the 2004 audit

assessment.

23. On July 13, 2004, the Department received the Taxpayer’s written protest to

the June 16, 2004 audit assessment.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the CRS taxes assessed

against his construction business for the period March 1998 through May 2003. The Taxpayer

argues first, that the figures the Department used as the basis for the assessment were only

estimates and second, that he was no longer engaged in the construction business after 2000

4
and should not have been assessed for reporting periods after that date. There is a statutory

presumption that any assessment of tax made by the Department is correct. NMSA 1978, § 7-

1-17(C). Accordingly, it is the Taxpayer’s burden to establish that the Department's

assessment is incorrect and should be abated in full or in part.

The Taxpayer objects to the Department’s method of determining his CRS liability,

arguing that it was based on estimates. While this was true of the provisional assessments issued

in 2002—and later abated—the assessment at issue in this case was based on the business

receipts reported on Schedule C to the Taxpayer’s 1998, 1999, and 2000 federal income tax

returns. At the administrative hearing, the Taxpayer acknowledged that the amounts reported on

his federal returns are accurate to the best of his knowledge and that he did not have any basis

for challenging the taxes assessed for reporting periods March 1998 through December 2000.

Taxable receipts for reporting periods January 2001 through May 2003 were determined by

averaging the receipts the Taxpayer reported for the prior three years. This was done because the

Taxpayer failed to provide any records from which actual receipts could be determined.

NMSA 1978, § 7-1-10(A) requires every person to "maintain books of account or

other records in a manner that will permit the accurate computation of state taxes...." NMSA

1978, § 7-1-11(C) states that taxpayers “shall upon request make their records and books of

account available for inspection at reasonable hours to the secretary or the secretary's

delegate.” At the administrative hearing, the Taxpayer claimed that he was unable to provide

any records concerning his construction business because those records were lost as a result of

his divorce and the foreclosure of his house on Riverfront Drive in Albuquerque. Upon

questioning, the Taxpayer could not recall when he and his wife separated. Nor could he recall

5
when the foreclosure took place, first testifying that it was in 2002 and later stating that it

occurred in 2003. The Taxpayer had no explanation for why a vehicle registered in his name

was in the driveway when the Department’s auditor visited the house on Riverfront Drive in

June 2004.

Even if the Taxpayer’s testimony concerning the lost records were accepted, he

apparently made no attempt to reconstruct those records after he became aware of the

Department’s audit and assessment. At a minimum, the Taxpayer could have obtained copies of

monthly bank statements from his bank that would have shown deposits for reporting periods

after December 2000. The Taxpayer’s assertions that he stopped doing business at the end of

2000 and had no business income after that date conflicts with other evidence in the record. In

June 2001, the Taxpayer filed CRS returns for the months of January, February, March, and

April 2001. The January return reported only withholding tax. The February, March, and

April returns reported withholding tax and also reported gross receipts in the total amount of

$214,150.32. The information on those returns directly contradicts the Taxpayer’s testimony

that he had no income during 2001, as well as his statement that he was not required to file

state and federal income tax returns for that year. The Taxpayer continued to file CRS returns

for his construction business during 2002 and did not cancel his business registration with the

Department until May 2004.

The record in this case establishes that the Taxpayer failed to report and pay CRS

taxes due to the state. Much of the testimony the Taxpayer gave at the administrative hearing

was not credible, either because it was inherently unbelievable or because it was contradicted

by other evidence in the record. The Department’s assessment of CRS taxes for reporting

6
periods March 1998 through December 2000 was not based on estimated receipts, but on the

actual receipts reported as business income on the Taxpayer’s federal income tax returns.

Given the Taxpayer’s failure to provide any records or credible evidence concerning his

receipts for reporting periods January 2001 through May 2003, the Department’s use of prior-

year returns to estimate those receipts was reasonable. See, Archuleta v. O'Cheskey, 84 N.M.

428, 504 P.2d 638 (Ct. App. 1972); Torridge Corp. v. Commissioner of Revenue, 84 N.M.

610, 506 P.2d 354 (Ct. App. 1972), cert. denied, 84 N.M. 592, 506 P.2d 336 (1973).

CONCLUSIONS OF LAW

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

CRS taxes issued under Letter ID L1829415936, and jurisdiction lies over the parties and the

subject matter of this protest.

B. The Taxpayer failed to meet his burden of proving that the Department’s

assessment was incorrect.

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

DATED October 12, 2005.

MARGARET B. ALCOCK
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL
Pursuant to NMSA 1978, § 7-1-25, the Taxpayer has the right to appeal this decision
by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date
shown above. See, NMRA, 12-601 of the Rules of Appellate Procedure. If an appeal is not
filed within 30 days, this Decision and Order will become final.

7
CERTIFICATE OF SERVICE
On October 12, 2005, a copy of the foregoing Decision and Order was mailed by
certified mail # 7003 0500 0002 3966 6016 and by regular first class mail, to Richard Sanchez,
211 Montano Road, NW, Unit C, Albuquerque, NM 87107, and delivered by interoffice mail to
Lewis J. Terr, Special Assistant Attorney General, Taxation and Revenue Department, Santa Fe,
New Mexico.

MARGARET B. ALCOCK

8