Did the Department's failure to answer Margaret Palumbo's letter stop penalty and interest on her unpaid 2002 personal income tax?

Plain-English summary

Margaret Palumbo remained liable for penalty and interest on $1,072 of underpaid 2002 New Mexico personal income tax. The Department's failure to answer her September 2005 letter did not stop interest or establish estoppel.

Palumbo omitted IRA distributions from her 2002 federal return because she mistakenly believed the distributions became nontaxable after a taxpayer reached a certain age. Because the federal return was the basis for her New Mexico return, she also underreported her New Mexico tax by $1,072. Her original state return showed a $183 refund, which the Department paid.

After the IRS corrected the federal return, Palumbo did not realize she had to amend the New Mexico return within 90 days. She learned in August 2005 that the same mistake affected her 2001 state return.

The unanswered letter did not suspend the liability

On September 4, 2005, Palumbo told the Department that the error also appeared on her 2002 return. She asked about installment payments and said she expected paperwork for an amended return. The Department did not respond.

In January 2006, she filed an amended return showing $949 due, paid $313, and completed installment payments in February and March. The Department corrected her calculation by another $123 and separately assessed recovery of the earlier $183 excess refund, with penalty and interest.

Palumbo paid and did not dispute the tax principal. She challenged only penalty and interest accruing after September 4, 2005.

No post-letter negligence penalty had accrued

Section 7-1-69 imposed penalty for a negligent failure to pay tax, and Regulation 3.1.11.10 NMAC included an erroneous belief within negligence. The decision held that Palumbo's mistaken view of IRA taxation met that standard.

At the then-applicable rate of 2% per month, the penalty reached its 10% maximum in September 2003. Because that was two years before her letter, there was no later penalty for the hearing officer to abate.

Interest remained mandatory until final payment

Section 7-1-67 required interest from the day after tax became due until payment, without regard to an extension or installment agreement. Interest compensated the state for losing the use of the $1,072 from April 2003 until the final payment in 2006; it was not punishment for an intentional violation.

The Department's silence also did not justify estoppel. Section 7-1-13(C) required an amended New Mexico return within 90 days after the federal adjustment, and the Department's 2002 instruction packet identified that requirement and the necessary forms. Even a formally approved installment arrangement would not have stopped interest.

Result: protest DENIED. The penalty and interest remained due.

What this means for you

Taxpayers whose federal returns are adjusted

Check the state amended-return deadline immediately. In this decision, the New Mexico return was due within 90 days after the federal adjustment became final.

Taxpayers waiting for a Department response

An unanswered request for forms or payment terms may not suspend a filing obligation or stop statutory interest. Use published instructions and file the required return while seeking assistance.

Taxpayers paying in installments

An installment plan can spread payments but does not necessarily stop interest. The decision said interest would continue even under a formally approved arrangement.

Common questions

Q: Why was Palumbo's New Mexico return wrong?
A: She omitted IRA distributions from the federal return that formed the basis for her New Mexico return.

Q: How much New Mexico tax was underpaid?
A: $1,072. Her amended return showed $949 due, and the Department corrected the liability by another $123.

Q: Why was the earlier $183 refund assessed separately?
A: It was an excess refund generated by the original return and had to be recovered in addition to the corrected tax liability.

Q: Did penalty continue after the September 2005 letter?
A: No. It had already reached the then-applicable 10% maximum in September 2003.

Q: Why did interest continue?
A: Section 7-1-67 made interest mandatory until payment, including during an extension or installment agreement.

Q: Did the Department's silence create estoppel?
A: No. The decision found no exceptional government conduct and emphasized that the statute and instructions already explained the amended-return duty.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-13(C) — amended return after a federal adjustment
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-1-67 — interest on late-paid tax
• NMSA 1978, § 7-1-69 — negligence penalty
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• C & D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• 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)
• Wisznia v. State of New Mexico, Human Services Department, 1998-NMSC-011, 125 N.M. 140, 958 P.2d 98
• Gonzales v. Public Employees Retirement Board, 114 N.M. 420, 839 P.2d 630 (Ct. App. 1992)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Margaret Palumbo
• Decision PDF: D&O 07-04

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
MARGARET PALUMBO TO ASSESSMENT OF No. 07-04
PENALTY AND INTEREST ISSUED UNDER
LETTER ID NOS. L0771213568 & L0312936704

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on April 10, 2007, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department (“Department”) was

represented by Lewis J. Terr, Special Assistant Attorney General. Margaret Palumbo (“Taxpayer”)

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 2003, the Taxpayer filed a timely New Mexico personal income tax return for the

2002 tax year, showing a refund due of $183. The Department processed the Taxpayer’s return as

filed and sent her the refund she requested.

2. In completing her 2002 federal income tax return, which is used as the basis for

calculating tax due to New Mexico, the Taxpayer failed to include distributions she received from an

IRA account. This was based on her erroneous belief that IRA distributions were not subject to tax

after a taxpayer had reached a certain age.

3. Upon review of the Taxpayer’s 2002 federal return, the Internal Revenue Service

(“IRS”) notified the Taxpayer that she was not entitled to exclude her IRA distributions and owed

additional federal tax on this income.

4. As a result of the error on her federal return, the Taxpayer had underreported her

2002 New Mexico income tax by $1,072.

5. The Taxpayer did not realize that she was required her to amend her New Mexico

income tax return within 90 days of the date her federal tax return was adjusted, even though this

information is contained in the state’s tax laws and the Department’s instruction packet.

6. It was not until August 2005, when the Taxpayer received a notice concerning the

same error on her 2001 New Mexico income tax return, that she realized she had to amend her 2002

New Mexico return to include the distributions from her IRA.

7. On September 4, 2005, the Taxpayer sent a letter to the Department acknowledging

receipt of the notice concerning her 2001 return and notifying the Department that the same error

appeared on her 2002 return. The Taxpayer asked whether she could pay the additional tax due in

installments and concluded: “I look forward to receiving the paper work required to file an amended

return for Tax Year 2002. I will make certain that the matter is resolved as soon as possible.”

8. The Taxpayer did not receive a response to her September 4, 2005 letter.

9. In January 2006, the Taxpayer completed and filed an amended New Mexico income

tax return for the 2002 tax year showing $949 of tax due and enclosing a partial payment of $313.

The Taxpayer made additional payments in February and March 2006 to pay off the balance of the

tax shown on her amended return.

10. The Department subsequently discovered an error in the Taxpayer’s calculations and

adjusted the liability shown on her 2002 amended return from $949 to $1,072.

11. On April 28, 2006, the Department assessed the Taxpayer for the additional $123 of

tax due for 2002, plus penalty and interest on her total underpayment of $1,072.

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12. On May 9, 2006, the Department assessed the Taxpayer for the $183 excess refund

she received at the time she filed her original 2002 return, plus penalty and interest on that amount.

13. On May 20, 2006, the Taxpayer filed a written protest to the Department’s

assessments of penalty and interest. The Taxpayer has paid and does not dispute the amount of tax

principal.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the Department’s assessments of

penalty and interest on her underpayment of 2002 New Mexico income tax. At the administrative

hearing, the Taxpayer stated that she is not protesting the amount of penalty and interest that accrued

between April 15, 2003 (the original due date of her 2002 tax) and September 4, 2005 (the date she

notified the Department of the error on her 2002 return and asked them to provide her with the paper

work needed to file an amended return). The Taxpayer is protesting the penalty and interest that

accrued after September 4, 2005 because she believes the Department was at fault in failing to

respond to her requests for information.

Burden of Proof. NMSA 1978, § 7-1-17 provides that any assessment of tax 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 assessments

issued to the Taxpayer are presumed to be correct, and it is the Taxpayer’s burden to present

evidence and legal argument to show that she is entitled to an abatement.

Assessment of Penalty. NMSA 1978, § 7-1-69 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

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be added” to the amount of the underpayment. The term “negligence” as used in § 7-1-69 is defined

in Regulation 3.1.11.10 NMAC to include both “inadvertence” and “erroneous belief or inattention.”

Here, the Taxpayer erroneously believed that she was not liable for tax on her IRA distributions. This

error meets the definition of negligence set out in Department regulations and in New Mexico case law.

See, C & D Trailer Sales v. Taxation and Revenue Dept., 93 N.M. 697, 699, 604 P.2d 835, 837 (Ct.

App. 1979) (a taxpayer's mere belief that he is not liable to pay taxes is tantamount to negligence

within the meaning of the statute); 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.).

It also should be noted that penalty accrues at the rate of two percent per month, “not to exceed

ten percent of the tax due but not paid.” NMSA 1978, § 7-1-69. Based on this formula, the penalty

assessed against the Taxpayer reached its maximum of ten percent in September 2003, five months

after the April 2003 due date and two years before the Taxpayer first contacted the Department

concerning the error on her 2002 tax return. Because the Taxpayer stated that she is not challenging the

penalty and interest that accrued prior to September 4, 2005, there is no basis for abating penalty.

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 assessment of interest is 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, the Taxpayer made an honest mistake on her 2002 tax return and did not

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intentionally underreport taxes due to the state. The fact remains, however, that the State of New

Mexico would have received an additional $1,072 payment if the Taxpayer had completed her return

correctly. As a result of the Taxpayer’s mistake, the state was deprived of the use of this money for

the period between the original due date in April 2003, and date the final tax payment was made in

2006. For this reason, interest was properly assessed.

Estoppel. The Taxpayer maintains that she should not be required to pay the interest that

accrued on her unpaid taxes after September 4, 2005, the date she notified the Department of her

underpayment and asked the Department to send her the paper work needed to complete an amended

return. In effect, the Taxpayer is raising an estoppel issue, arguing that the Department should be

estopped from enforcing the collection of interest that would otherwise be due.

Estoppel is rarely applied against the state, and then only in exceptional circumstances where

there is “a shocking degree of aggravated and overreaching conduct or where right and justice

demand it.” Wisznia v. State of New Mexico, Human Services Department, 1998-NMSC-11, ¶17, 125

N.M. 140, 958 P.2d 98. In determining whether estoppel is appropriate, the conduct of both parties

must be considered. Gonzales v. Public Employees Retirement Board, 114 N.M. 420, 427, 839 P.2d

630, 637 (Ct. App.), cert. denied, 114 N.M. 227, 836 P.2d 1248 (1992).

The facts presented in this case do not support a finding of estoppel. At the time the IRS

adjusted the Taxpayer’s federal return in 2005, she was on notice that she had underreported the

income on her 2002 federal and state income tax returns. Pursuant to NMSA 1978, § 7-1-13(C),

taxpayers are required to file an amended New Mexico return within 90 days of the date of any

adjustment to the taxpayer’s federal return. In addition, the Department’s instruction packet for the

2002 tax year (and every year thereafter), which is a public record of the Department, contains a clearly

marked section on the filing of amended returns. These instructions advise taxpayers that: “An

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amended return is REQUIRED by law to be filed within 90 days of the date any adjustment to your

federal return becomes final.” (capitalization in the original). The instructions also set out the specific

forms and information needed to file an amended return.

New Mexico has a self-reporting tax system, and it is up to taxpayers to determine their tax

liabilities and accurately report those liabilities to the state. NMSA 1978, § 7-1-13. In this case, New

Mexico’s Income Tax Act provided the Taxpayer with legal notice of her obligation to amend her

2002 New Mexico income tax return within 90 days after the adjustment to her federal return. While

it is unfortunate that the Taxpayer was not aware of this requirement—and apparently did not notice

the instructions for filing amended returns set out in the Department’s personal income tax packet—

this does not excuse her from timely payment of her tax liability or the interest that accrued on that

liability.

Finally, the Taxpayer argues that interest should be waived because the Department did not

respond to her request to pay her additional tax liability in installments. The fact that the Taxpayer did

not receive formal approval of her installment payments did not, however, affect the accrual of interest.

Pursuant to NMSA 1978, §§ 7-1-13 and 7-167, even taxpayers who obtain a formal extension of time

to pay tax are liable for payment of the interest that accrues during the extension period.

CONCLUSIONS OF LAW

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

issued under Letter ID Nos. L0771213568 & L0312936704, and jurisdiction lies over the parties and

the subject matter of this protest.

B. Pursuant to NMSA 1978, § 7-1-69, the Taxpayer is liable for the penalty that accrued

between the due date of her 2002 personal income taxes in April 2003 and the date the penalty reached

its maximum of ten percent in September 2003.

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C. Pursuant to NMSA 1978, § 7-1-67, the Taxpayer is liable for the interest that accrued

between the due date of her 2002 personal income taxes in April 2003 and the date the final payment

was made in 2006.

D. The Department is not estopped from collecting the penalty and interest that accrued

on the Taxpayer’s late payment of her 2002 tax liability.

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

DATED April 12, 2007.

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