Could a taxpayer recover penalty and interest after mistakenly claiming the age-65 income exemption and reading about managed-audit waivers?

Plain-English summary

Juan Ortega could not recover $21.59 of penalty and interest after mistakenly claiming an income exemption for people age 65 and older. His income exceeded the statutory limit, and the managed-audit program did not cover a return error found by the Department outside a written self-audit agreement.

Ortega timely filed his 2002 New Mexico personal income tax return and claimed the Section 7-2-5.2 exemption. He was not eligible because his federal adjusted gross income exceeded the exemption's income limit.

The Department corrected the return and assessed $142 of additional tax, $14.20 of penalty, and $7.39 of interest. Ortega paid and sought a refund of the $21.59 penalty and interest.

Interest compensated for delayed payment

Section 7-1-67 required interest from the original due date until payment. If Ortega had completed the return correctly, New Mexico would have received the additional $142 in April 2003 rather than August 2003.

The interest compensated the state for that delay and was mandatory rather than punitive.

Failure to read the exemption instructions was negligence

Section 7-1-69(A) imposed penalty when an underpayment resulted from negligence. Regulation 3.1.11.10 included inadvertence, carelessness, erroneous belief, and inattention.

Ortega did not carefully read the age-65 exemption instructions. The decision held that his unintentional error met the regulatory and case-law definition of negligence.

The managed-audit waiver did not apply

Ortega brought a newspaper clipping about the Legislature's expansion of the managed-audit program and argued that penalty and interest were being waived for other taxpayers.

Section 7-1-11.1 required a taxpayer to apply for and enter a written agreement to conduct a self-audit, then report the results within the agreed period. The cited managed-audit provisions waived penalty and interest for tax found through that process.

Ortega had no managed-audit agreement. The Department found his error through its own examination of the return, so he did not qualify for the program's treatment.

Result: protest DENIED. No refund of the $14.20 penalty or $7.39 interest was due.

What this means for you

Taxpayers claiming age-based benefits

Check every income threshold and phaseout in the applicable instructions. Meeting the age requirement alone did not establish eligibility.

Taxpayers making an unintentional error

New Mexico's negligence definition included inadvertence and erroneous belief. Lack of intent did not automatically eliminate penalty.

Businesses or individuals considering a managed audit

The program required a written agreement before the taxpayer conducted and reported the self-audit. A Department-discovered error was not transformed into a managed audit after the fact.

Taxpayers relying on news reports

Review the actual statutory eligibility requirements. A general article about expanded relief did not establish that Ortega's assessment qualified.

Common questions

Q: Why was Ortega ineligible for the senior exemption?
A: His federal adjusted gross income exceeded the limit in Section 7-2-5.2.

Q: How much additional tax resulted?
A: $142.

Q: What penalty and interest did he seek to recover?
A: $14.20 of penalty and $7.39 of interest, totaling $21.59.

Q: Why was the penalty upheld if the error was accidental?
A: The cited law treated inadvertence, carelessness, erroneous belief, and inattention as negligence.

Q: Why did the managed-audit waiver not apply?
A: Ortega had no written managed-audit agreement, and the Department discovered the error through its own return examination.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-2-5.2 — income exemption for qualifying persons age 65 or older
• NMSA 1978, § 7-1-11.1 — managed audit program
• NMSA 1978, § 7-1-67 — interest on late-paid tax
• NMSA 1978, § 7-1-67(A)(1)(4) — managed-audit interest treatment, as cited in the decision
• NMSA 1978, § 7-1-69(A) — negligence penalty
• NMSA 1978, § 7-1-69(G)(2) — managed-audit penalty treatment
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Juan B. Ortega
• Decision PDF: D&O 06-01

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
JUAN B. ORTEGA
TO DENIAL OF REFUND OF PENALTY AND No. 06-01
INTEREST PAID ON ASSESSMENT ISSUED
UNDER LETTER ID L1354715136

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 10, 2006, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department")

was represented by Elizabeth K. Korsmo, Special Assistant Attorney General. Juan B. Ortega

represented himself. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In April 2003, Juan B. Ortega filed a timely 2002 New Mexico personal income

tax return with the Department.

2. On his return, Mr. Ortega claimed the exemption provided in NMSA 1978, § 7-2-

5.2 for certain income of persons sixty-five years of age and older.

3. Mr. Ortega was not entitled to this exemption because his federal adjusted gross

income exceeded the income limit set out in § 7-2-5.2.

4. The Department discovered and corrected Mr. Ortega’s error, resulting in

additional income tax due for the 2002 tax year in the amount of $142.00.

5. On August 20, 2003, the Department issued an assessment to Mr. Ortega under

Letter ID L1354715136 in the total amount of $163.59, representing the additional $142.00 of tax

due, plus penalty of $14.20 and interest of $7.39.

6. Mr. Ortega paid the assessment and then filed a claim for refund of the $21.59 of

penalty and interest assessed on his late payment of the additional tax resulting from the error on

his 2002 return.

7. On November 25, 2003, the Department denied Mr. Ortega’s claim for refund.

8. On December 16, 2003, Mr. Ortega filed a written protest to the denial of his claim

for refund.

DISCUSSION

The issue to be decided is whether Juan B. Ortega is liable for the $21.59 of penalty and

interest assessed on his underpayment of personal income tax for the 2002 tax year.

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.... (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). 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, Mr. Ortega underreported his 2002

taxable income. If he had completed his return correctly, the State of New Mexico would have

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received an additional $142.00 tax payment in April 2003. As a result of his error, Mr.

Ortega—rather than the state—had the use of this money for the period between April 2003, the

original due date of the tax, and August 2003, the date when the additional tax was paid. For

this reason, interest was properly imposed.

Assessment of Penalty. NMSA 1978, § 7-1-69(A) provides that when a taxpayer fails to

pay taxes due to the state as a result of negligence or disregard of rules and regulations, a penalty

“shall be added” to the amount of the underpayment. The term “negligence” as used in § 7-1-

69(A) is defined in Regulation 3.1.11.10 NMAC to include “inadvertence, indifference,

thoughtlessness, carelessness, erroneous belief or inattention.” In this case, Mr. Ortega failed to

carefully read the instructions concerning the exemption for persons age 65 and older, resulting in

a tax underpayment of $142.00. Mr. Ortega’s error meets the definition of negligence set out in

Department regulations and in New Mexico case law. See, El Centro Villa Nursing Center v.

Taxation & Revenue Department, 108 N.M. 795, 797, 779 P.2d 982, 984 (Ct. App. 1989) (§ 7-1-

69 is designed specifically to penalize unintentional failure to pay tax.). For this reason, penalty

was properly imposed.

Application of the Managed Audit Program. At the January 10, 2006 hearing on his

protest, Mr. Ortega argued that he should not have to pay penalty and interest on his late payment

of 2002 income tax because penalty and interest was being waived for other taxpayers. In support

of his argument, Mr. Ortega produced a September 2003 newspaper clipping discussing the

expansion of the state’s managed audit program.

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The managed audit program is authorized by NMSA 1978, § 7-1-11.1, which was enacted

in 2001. Laws 2001, ch. 16, § 1. Under this program, a taxpayer may file an application with the

Department to enter into a written agreement under which the taxpayer will conduct a self-audit to

determine the taxpayer’s compliance with the state’s tax laws. The taxpayer must present the

results of its audit to the Department within the time limits set out in the written agreement. Upon

receipt of the taxpayer’s managed audit, the Department issues an assessment to the taxpayer for

any unpaid taxes found to be due. Pursuant to NMSA 1978, §§ 7-1-67(A)(1)(4) and 7-1-69(G)(2),

no interest or penalty is imposed on taxes found to be due as the result of a managed audit.

The managed audit program was initially limited to taxes due under the Gross Receipts and

Compensating Tax Act. In 2003, the legislature expanded the program to include all taxes

administered under the Tax Administration Act. It was this amendment that prompted the

newspaper article seen by Mr. Ortega. The article did not explain the managed audit program, but

simply stated that the legislature had expanded the waiver of penalty and interest for certain

taxpayers. This led Mr. Ortega to believe that he should not have to pay penalty and interest on

his late payment of 2002 personal income tax. Unfortunately, Mr. Ortega does not qualify for the

waiver of penalty and interest under the managed audit program because the Department’s

assessment was not based on a managed audit conducted pursuant to a written agreement with the

taxpayer, but was based on an examination of Mr. Ortega’s 2002 tax return that was initiated and

conducted by the Department.

Mr. Ortega argued that waiving penalty and interest for some taxpayers, but not for others,

is unfair. He also asserted, without substantiation, that the Department would have abated penalty

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and interest if it had been imposed on a state legislator or other well-connected taxpayer. Mr.

Ortega’s beliefs concerning the unfairness and corruption in state government are not something

that the Department or its hearing officer has jurisdiction to consider. Mr. Ortega must address

these concerns to his state representative or to the appropriate law enforcement agency. The only

matter at issue in this administrative protest is whether the Department’s denial of Mr. Ortega’s

refund claim is supported by New Mexico law. Based on the statutes and regulations cited above,

the Department’s denial was correct.

CONCLUSIONS OF LAW

A. Juan B. Ortega filed a timely, written protest to the Department’s denial of his claim

for refund of $21.59 of penalty and interest, and jurisdiction lies over the parties and the subject

matter of this protest.

B. Pursuant to NMSA 1978, § 7-1-67, Mr. Ortega was liable for the interest he paid on

his underpayment of 2002 personal income tax, and no refund is due.

C. Pursuant to NMSA 1978, § 7-1-69, Mr. Ortega was liable for the penalty he paid on

his underpayment of 2002 personal income tax, and no refund is due.

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

DATED January 12, 2006.

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