Did relying on a tax service excuse interest and penalty when a sole proprietor made income-tax estimates but filed no gross-receipts returns?

Plain-English summary

LMR Computing Technologies remained liable for interest and negligence penalty after its tax preparer confused quarterly income-tax estimates with the business's gross-receipts filing obligations. Hiring a tax service did not excuse the missing CRS returns or the additional delay after the owner discovered the problem.

Lee Reeves started the Farmington sole proprietorship in July 2002 and filed his first gross receipts payment for the six months ending December 2002. He then hired Jackson Hewitt for tax advice.

A preparer reviewed his business records, told him to make quarterly estimated payments, and supplied the amounts. Reeves made those payments but did not realize they applied only to state income tax. No CRS returns were filed during 2003.

Reeves should have noticed that the returns were missing

In early 2004, the preparer first asked for gross receipts paperwork. Reeves then understood that the quarterly payments had not covered that tax.

Because he had personally filed the January 2003 CRS return, he knew what form was used. The decision found no evidence that he had asked why later CRS returns were not being prepared or authorized the tax service to sign them.

Waiting another six months was negligent

When Reeves asked the preparer to prepare the delinquent returns, she told him to wait until the income-tax return was complete. She then left the firm without completing either task.

Reeves learned in August 2004 that she had left. A replacement preparer completed the returns for June 2003, December 2003, and June 2004, and Reeves filed them and paid the principal.

The decision distinguished another administrative case where timely but incomplete CRS returns had been filed and the owners immediately contacted the Department after discovering the omission. Here, no returns had been filed, and Reeves allowed an additional six-month delay after learning of the delinquency.

Regulation 3.1.11.11(D) expressly said that reliance on an agent did not excuse failure to file a timely return. The continued inaction met the definition of negligence.

Interest was mandatory

Interest compensated the State for the 18 months during which Reeves had the use of unpaid gross receipts tax. Even a formal extension would not have removed interest from the original due dates.

Result: protest DENIED. The assessed penalty and interest stood.

What this means for you

New sole proprietors

Estimated personal income-tax payments and business CRS returns are separate obligations. Reconcile both rather than assuming one payment stream covers everything.

Businesses using a tax service

Confirm exactly which returns the preparer will file, who will sign them, and when filing occurs. Delegation does not eliminate the taxpayer's filing duty.

Taxpayers who discover missing returns

Act promptly. Continuing to wait on the same preparer after discovering a delinquency can independently support negligence.

Common questions

Q: What were the quarterly payments for?
A: State income-tax estimates, not gross receipts tax.

Q: Were any CRS returns filed during 2003?
A: No.

Q: When did Reeves discover the problem?
A: In early 2004, when the preparer asked for gross receipts paperwork.

Q: Why didn't professional reliance remove the penalty?
A: The regulation did not excuse late filing through an agent, and Reeves knew the required form and delayed correction after discovering the omission.

Q: Could interest be waived?
A: No. The decision treated it as mandatory on late-paid tax.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-3 — tax includes related interest and civil penalty
• NMSA 1978, § 7-1-67(A) — mandatory interest
• NMSA 1978, § 7-1-13(E) — interest despite an extension
• NMSA 1978, § 7-1-69 — negligence penalty and former 10% cap
• Regulation 3.1.11.10 NMAC — definition of negligence
• Regulation 3.1.11.11(D) NMAC — professional reliance does not excuse late filing

Cases cited:

• 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)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: LMR Computing Technologies
• Decision PDF: D&O 07-07

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
LMR COMPUTING TECHNOLOGIES No. 07-07
NM ID NO. 02-499985-00-7, TO ASSESSMENTS
ISSUED UNDER LETTER ID NOS. L2029534208,
L1491590144 and L0724556800

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on April 26, 2007, before

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

was represented by Peter Breen, Special Assistant Attorney General. LMR Computing

Technologies, a sole proprietorship, was represented by its owner, Lee Reeves (“Taxpayer”).

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. In July 2002, the Taxpayer established a sole proprietorship in Farmington, New

Mexico, operating under the name LMR Computer Technologies.

2. New Mexico businesses are required to report gross receipts, compensating, and

withholding taxes on a combined Form CRS-1; in January 2003, the Taxpayer made his first

gross receipts tax payment for the six-month period ending December 31, 2002.

3. After seeing how much paperwork was involved in running a new business, the

Taxpayer decided to hire Jackson Hewitt Tax Service in Farmington to advise him on tax matters

related to his business.

4. In January 2003, the Taxpayer provided Sonya, the Jackson Hewitt employee

assigned to his account, with his “quick books” and other records showing his receipts from the

business.

5. After reviewing this material, Sonya advised the Taxpayer to begin making

estimated tax payments and gave him the amounts he needed to pay each quarter. The Taxpayer

followed Sonya’s advice and made regular quarterly payments to the Department.

6. The Taxpayer did not file any CRS-1 returns during 2003.

7. In early 2004, the Taxpayer met with Sonya to go over the information needed to

file his 2003 income tax returns. For the first time, Sonya brought up the subject of the New

Mexico gross receipt tax and asked the Taxpayer for his paperwork on these taxes.

8. At that point, the Taxpayer realized that the estimated tax payments he had been

making to the Department only applied to state income tax and not to the gross receipts tax.

9. When the Taxpayer asked Sonya to prepare gross receipts tax returns for prior

periods, she advised him to wait until she completed his 2003 income tax return.

10. Sonya did not finish the Taxpayer’s income tax return by the April 15th deadline

and told the Taxpayer she was filing for an extension to August 15, 2004 and he didn’t need to

do anything until then.

11. Sonya left Jackson Hewitt in April 2004 without completing the Taxpayer’s

income tax returns or delinquent gross receipts tax returns.

12. In August 2004, the Taxpayer called Jackson Hewitt again and learned that Sonya

had left the company.

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13. The Taxpayer’s account was reassigned to another Jackson Hewitt employee who

prepared the Taxpayer’s 2003 income tax returns and also prepared his CRS-1 returns for

reporting periods ending June 30, 2003, December 31, 2003, and June 30, 2004. The Taxpayer

filed these returns in August 2004 and paid the amount of tax principal due.

14. Upon receipt of the Taxpayer’s three past-due CRS-1 returns in August 2004, the

Department assessed the Taxpayer for interest and penalty on the late payment.

15. On August 27, 2004, the Taxpayer filed a written protest to the assessments of

interest and penalty.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the interest and penalty

assessed by the Department. The Taxpayer does not dispute his liability for the tax principal, but

maintains that it is unfair to assess him interest and penalty when he attempted to take the steps

necessary to insure compliance with the state’s tax laws and was misled by his tax advisor.

Burden of Proof. NMSA 1978, § 7-1-17(C) 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." For this reason, the presumption of

correctness of an assessment of taxes also applies to the assessment of interest and penalty. El

Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982

(Ct. App. 1989).

Assessment of Interest. NMSA 1978, § 7-1-67 governs the imposition of interest on late

payments of tax and provides, in pertinent part:

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A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such 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). 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.

The assessment of interest is designed to compensate the state for the time value of

unpaid revenues. Even taxpayers who obtain a formal extension of time to pay tax are liable for

interest from the original due date until payment is made. See, NMSA 1978, §§ 7-1-13(E) and 7-

1-67(A). Here, the Taxpayer failed to pay gross receipts taxes due for reporting periods January

2003 through June 2004. As a result, the Taxpayer—rather than the state—had the use of these

revenues during the 18-month period at issue. Accordingly, interest was properly assessed and

there is no basis for abatement.

Assessment of Penalty. NMSA 1978, § 7-1-69 imposes a penalty of two percent per

month, up to a maximum of ten percent, when a taxpayer fails “due to negligence or disregard of

rules and regulations” to pay taxes 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.

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Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent. Subsection D of the regulation provides as follows:

D. the taxpayer proves that the failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax counsel
or accountant as to the taxpayer’s liability after full disclosure of all
relevant facts; failure to make a timely filing of a tax return, however,
is not excused by the taxpayer’s reliance on an agent.

The Taxpayer argues that by hiring a tax service to advise him concerning his tax obligations, he

has established his lack of negligence under the above regulation. The Taxpayer also relies on

Kidz Karousel, Inc., a 2001 administrative decision of the Department’s Hearing Officer, which

found that the taxpayer was not liable for the negligence penalty under the facts of that case.1

There, Kidz Karousel’s owners engaged the services of an attorney and a certified public

accountant to advise them concerning business procedures and to insure that the corporation filed

all tax forms required by New Mexico law. The owners also hired a payroll service to file the

corporation’s monthly CRS returns. What they failed to realize, and their attorney and CPA

failed to advise them, was that the payroll service was only reporting withholding taxes.

Eighteen months later, the owners discovered that their gross receipts taxes had not been paid.

Instead of relying on the CPA who had previously misled them, they promptly notified the

Department themselves and filed amended CRS returns to report the back taxes.

While the facts in Kidz Karousel bear some similarity to the facts of this case, there are

also important differences. The most significant difference for purposes of Regulation

3.1.11.11(D) is that Kidz Karousel did not involve a failure to file required tax returns.

1
Although these decisions are posted on the Department’s web site and provide general guidance concerning
positions taken in past cases, they do not serve as legal precedent for future cases.

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Throughout the period at issue, Kidz Karousel’s payroll service was filing timely (although

incomplete) CRS returns on behalf of the corporation. In contrast, no CRS returns were filed by

the Taxpayer in this case. Although the Taxpayer testified that he thought the estimated

payments he was making covered his gross receipts tax liability, there is no evidence that he ever

questioned Jackson Hewitt to determine why they had not prepared CRS returns for his signature

(nor is there any evidence that he had authorized Jackson Hewitt to sign such returns on his

behalf). The Taxpayer’s protest letter states that he filed the initial CRS return for his business in

January 2003. Accordingly, he was familiar with the forms required to report and pay gross

receipts taxes to the state and should have taken steps to insure that subsequent returns were

being filed in a timely manner.

Another difference between the two cases is the Taxpayer’s failure to take prompt action

to correct his tax reporting once he discovered that no CRS returns had been filed for the

previous twelve months. In Kidz Karousel, the owners rejected their CPA’s belated offer to help

them with their gross receipts tax reporting and went directly to the Department to insure the

problem was corrected as soon as possible. Here, the Taxpayer allowed his tax service to delay

the filing of his back CRS returns by an additional six months. At the administrative hearing, the

Taxpayer testified that he would have “pushed harder” if he had known that interest and penalty

were accruing on his liability. Timely tax reporting should not depend on whether a taxpayer

believes he will be penalized for failing to comply with the state’s tax laws. Once the Taxpayer

knew that he was delinquent in reporting gross receipts taxes to the state, his failure to take

affirmative action to bring himself into compliance meets the definition of negligence set out in

the Department’s regulation (i.e., a failure to exercise that degree of ordinary business care and

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prudence which reasonable taxpayers would exercise under like circumstances; inaction where

action is required; and inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or

inattention).

CONCLUSIONS OF LAW

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

penalty issued under Letter ID Nos. L2029534208, L1491590144 and L0724556800, and

jurisdiction lies over the parties and the subject matter of this protest.

B. Pursuant to Section 7-1-67 NMSA 1978, the Taxpayer is liable for interest on the

late payment of gross receipts taxes.

C. Pursuant to Section 7-1-69 NMSA 1978 and the Department’s regulations, the

Taxpayer was negligent in failing to file CRS returns during the period at issue and to insure

prompt filing of those returns once he discovered his delinquent gross receipts tax liability;

accordingly, penalty was properly imposed.

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

DATED April 30, 2007.

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