Did a former employer's failure to withhold New Mexico tax excuse income tax, penalty, and interest on a profit-sharing distribution?

Plain-English summary

The hearing officer denied Benny Nevarez's protest and upheld New Mexico personal income tax, penalty, and interest for 2003. Nevarez received an $18,454.04 distribution from his former employer's profit-sharing plan. The employer withheld 20% for federal tax, but the evidence showed no New Mexico withholding. Nevarez then filed his state return without including the distribution.

The IRS later increased his federal adjusted gross income by $21,457: the $18,454.04 distribution plus $3,003 of other unreported work income. Nevarez did not amend his New Mexico return within 90 days of that federal adjustment. The Department's matching program found the discrepancy and assessed $1,334 in tax, a $133.40 penalty, and interest.

Nevarez argued that his former employer should have handled the withholding and that their strained relationship made it difficult to obtain documents. The decision found no evidence of state withholding or that Nevarez asked for it. Because New Mexico uses a self-reporting system, those circumstances did not overcome the assessment. Interest was mandatory, and failing both to report the income and to amend the return qualified as negligence.

What this means for you

Individuals receiving retirement or profit-sharing money

Federal withholding does not prove that New Mexico income tax was also withheld. Check the payment records and tax forms, include the distribution in the income reported to New Mexico when required, and do not assume the plan administrator handled state tax.

Taxpayers whose federal income is adjusted

The decision applies NMSA 1978, § 7-1-13(C), under which the taxpayer had 90 days to amend the New Mexico return after the federal adjustment. Waiting for the Department's matching program did not avoid the tax, penalty, or interest.

Accountants and tax professionals

The assessment carried a presumption of correctness. The taxpayer produced no evidence that the added income was exempt or deductible and no proof of New Mexico withholding. His use of a tax-preparation service for the distribution paperwork also did not establish nonnegligence because he did not show that he disclosed or discussed the state income-tax issue with the preparer.

Common questions

Q: Was the profit-sharing distribution taxable in New Mexico?
A: Yes. The decision held that the $18,454.04 distribution was net income subject to New Mexico personal income tax.

Q: Did the former employer withhold New Mexico tax?
A: No evidence showed that it did. The documents and checks showed only a 20% federal withholding, and the two checks accounted for the entire distribution.

Q: Why did the Department assess $1,334 rather than the full $1,996 liability it calculated?
A: The decision says the Department determined a $1,996 liability after considering the corrected federal income and the earlier $393 refund, but the March 7, 2007 notice assessed $1,334 in tax. It does not further explain that difference.

Q: Why was interest upheld?
A: NMSA 1978, § 7-1-67 made interest mandatory from the time the unpaid tax was due until the principal was paid. The hearing officer described interest as compensation for the time value of unpaid revenue, not punishment.

Q: Why was the penalty upheld?
A: The taxpayer omitted the income and then did not amend after the federal adjustment. The hearing officer treated those failures as an erroneous belief, inadvertence, and inattention within the regulation's definition of negligence. The 2003 version of the statute capped the penalty at 10% of the unpaid tax.

Q: What was the final result?
A: The protest was denied. At the hearing, the decision reported an outstanding balance of $2,439.92—$1,334 tax, $133.40 penalty, and $972.52 interest—with interest continuing to accrue.

Citations and references

• NMSA 1978, § 7-2-3 — tax on the net income of New Mexico residents
• NMSA 1978, § 7-1-13(C) — amendment after a federal adjustment
• NMSA 1978, § 7-1-17(C) — presumption that the assessment is correct
• NMSA 1978, § 7-1-67 — mandatory interest
• NMSA 1978, § 7-1-69(A) (2003) — negligence penalty
• Regulation §§ 3.1.11.10 and 3.1.11.11 NMAC — negligence and nonnegligence
• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (N.M. Ct. App. 1972)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Benny Nevarez
• Decision PDF: D&O 11-30

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
BENNY NEVAREZ No. 11-30
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0225000064

DECISION AND ORDER

A hearing was held on the above captioned matter on November 18, 2011. Mr. Benny

Nevarez (“Taxpayer”) appeared pro se. The Taxation and Revenue Department of the State of

New Mexico (“Department”) was represented by Staff Attorney Ida M. Lujan. Protest Auditor

Sylvia Sena appeared as a witness for the Department. In addition to the documents contained in

the Administrative File articulated at the beginning of the hearing, Taxpayer Exhibits #1-3 and

Department Exhibits A-G, as fully described in the Exhibit Cover Sheet, are admitted into the

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

FOLLOWS:

FINDINGS OF FACT

1. Taxpayer, a professional plumber, worked for 10-years as an employee of Pronto

Plumbers, Inc (“Pronto Plumbers”) in Las Cruces/Mesilla Park, New Mexico.

2. In addition to his salary, Taxpayer was eligible to participate in Pronto Plumbers

Profit Sharing Plan (“Profit Sharing Plan”).

3. While employed with Pronto Plumbers, Taxpayer vested in that Profit Sharing

Plan.

4. At some point in 2001, Pronto Plumbers terminated Taxpayer’s employment.
5. In 2003, Taxpayer approached the owner of Pronto Plumbers, Mr. Thomas Levy,

about withdrawing his distribution from the Profit Sharing Plan.

6. Mr. Levy provided Taxpayer with a packet of forms to prepare before any

distributions from the Profit Sharing Plan could be made to Taxpayer. Taxpayer provided a copy

of those forms into the record as Taxpayer Exhibits # 1.1-1.15.

7. Taxpayer brought the packet to Jackson Hewitt Tax Service to prepare the packet

of materials needed to redeem his Profit Sharing Plan holdings.

8. On July 31, 2003, Pronto Plumbers informed Taxpayer that he was eligible for

$18,454.04 in distributions from the Profit Sharing Plan. However, that distribution would be

subject to federal withholding taxes. [Taxpayer Exhibit 1.3]

9. Pronto Plumbers further informed Taxpayer that federal law required a federal

withholding of 20%. [Taxpayer Exhibit 1.1]

10. Taxpayer Exhibits #1.1-1.15 do not indicate that Pronto Plumbers would withhold

any amount of New Mexico income tax. Any reference to a withholding in those exhibits only

comes in the context of federal withholdings.

11. On August 7, 2003, Pronto Plumbers issued a check from its Profit Sharing Plan

trust account to Taxpayer in the amount of $14,763.33, which mathematically equals the

$18,454.04 promised amount, less 20% in federal withholding taxes. [Taxpayer Exhibit #2]

12. On August 8, 2003, Pronto Plumbers issued a check from its Profit Sharing Plan

trust account to Citizen’s Bank in the amount of $3,690.81 with a Federal Tax Deposit Coupon

Form 8109-B attached. That amount equals the 20% in federal withholding taxes for Taxpayer’s

profit sharing distribution. [Taxpayer Exhibit #3]

In the Matter of the Protest of Benny Nevarez, page 2 of 11

13. There is no evidence that Pronto Plumbers made any New Mexico income tax

withholdings on Taxpayer’s distributions.

14. On April 9, 2004, Taxpayer filed his New Mexico personal income taxes.

Taxpayer listed his federal adjusted gross income as $31,337, an amount that did not include the

$18,454.04 in distributions from the Profit Sharing Plan. [Department Exhibit A]

15. As a result of the April 9, 2004 New Mexico personal income tax filing, Taxpayer

received a $393.00 income tax refund for tax year 2003.

16. Taxpayer redeemed that $393.00 New Mexico 2003 personal income tax refund.

17. At some point thereafter, the Internal Revenue Service (“IRS”) made a correction

to Taxpayer’s 2003 Adjusted Gross Income. As a result of this correction, Taxpayer’s Federal

Adjusted Gross Income was increased by $21,457.00 to $52,794.00. [Department Exhibit B]

18. This $21,457.00 increase in Federal Adjusted Gross Income resulted from the

$18,454.04 distributions from the Profit Sharing Plan and $3,003 in other unreported work

income.

19. Taxpayer did not amend his 2003 New Mexico personal income tax to account for

this corrected Federal Adjusted Gross Income.

20. As a result of the Department’s information matching program with the IRS, the

Department learned of a discrepancy between Taxpayer’s corrected Federal Adjusted Gross

Income of $52,794 and the reported $31,337 amount in Taxpayer’s 2003 New Mexico personal

income tax return.

21. On November 29, 2006 the Department sent Taxpayer notice of limited scope

audit for personal income tax. [Department Exhibit B]

In the Matter of the Protest of Benny Nevarez, page 3 of 11

22. The Department, after considering the corrected Federal Adjusted Gross Income

and accounting for the previously provided $393.00 refund, determined that Taxpayer had a

$1,996.00 personal income tax liability for tax year 2003.

23. On January 29, 2007, the Department mailed Taxpayer a notice of potential

assessment for personal income tax. [Department Exhibit C]

24. On March 7, 2007, the Department sent Taxpayer Notice of Assessment, Letter Id.

No. L0225000064 for $1,334.00 in personal income tax, $133.40 in penalty (calculated to the

maximum 10% limit then in affect), and $572.10 in interest for the tax year 2003. [Department

Exhibit D]

25. On April 2, 2007, Taxpayer protested the assessment issued in this matter.

[Department Exhibit E]

26. On April 5, 2007, the Department acknowledged Taxpayer’s protest of the

assessment. [Department Exhibit F]

27. On October 14, 2011, the Department filed a Request for Hearing with the

Department’s Hearing Bureau.

28. On October 19, 2011, the Hearing Bureau sent Notice of Administrative Hearing,

scheduling this matter for November 18, 2011.

29. As of the November 18, 2011 hearing, Taxpayer still owed $1,334.00 in personal

income tax, $133.40 in penalty, and $972.52 in interest, for a total outstanding balance of

$2,439.92. That total is subject to the continuing accrual of interest. [Department Exhibit G,

corrected with testimony to reflect maximum penalty cap of 10% instead of the inadvertently

listed 20% maximum penalty]

In the Matter of the Protest of Benny Nevarez, page 4 of 11
DISCUSSION

The issue in this case is whether Taxpayer is liable for personal income tax, penalty, and

interest for tax year 2003 for the unreported distributions he received from his former employer’s

profit sharing plan. Taxpayer claimed that after he completed the packet of materials necessary

to redeem his profit sharing distributions, his former employer was responsible for making the

proper withholdings. However, because of his former employer’s alleged grudge against him,

Taxpayer claims that his former employer failed to assist him with the necessary documents to

substantiate the State withholdings. In brief answer, Taxpayer is liable for 2003 personal income

tax, penalty, and interest.

Presumption of Correctness and Burden of Proof.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessment issued in this case is

presumed to be correct. Consequently, the Taxpayer has the burden to overcome the assessment

and establish that he was not required to pay the tax principal, interest, and penalty. See

Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972).

2003 Personal Income Tax

Payment of New Mexico personal income tax is governed by NMSA 1978, §§ 7-2-1, et

seq. Unless otherwise exempted by law, a tax is imposed “upon the net income of every” New

Mexico resident. NMSA 1978, §7-2-3 (1981). The $18,454.04 in profit sharing distribution that

Taxpayer ultimately received in this matter qualifies as “net income” subject to income tax under

NMSA 1978, Section 7-2-3 (1981).

Taxpayer was a full-time employee of Pronto Plumbing in Las Cruces for ten-years, until

his termination in 2001. Apparently, at the time of his termination, Taxpayer had reported what

Taxpayer alleges were some of Pronto Plumbing’s questionable work quality and billing practices

In the Matter of the Protest of Benny Nevarez, page 5 of 11
to contractors and customers, resulting in a strained relationship between Taxpayer and his boss,

Mr. Thomas Levy. However, before his 2001 termination, Taxpayer had vested in Pronto

Plumbing’s Profit Sharing Plan.

In 2003, Taxpayer returned to his former employer, Pronto Plumbing, to ask for his profit

sharing distribution. Mr. Levy gave Taxpayer a packet of materials that needed to be completed in

order for Taxpayer to receive his profit sharing distribution, Taxpayer Exhibits 1.1-1.15. While that

packet referenced federal tax withholdings for the distribution, it did not indicate that any

withholdings for state income tax purposes were to be made.

Taxpayer brought this packet of materials to Jackson Hewitt Tax Service in Las Cruces,

who assisted him with the preparation of those documents. There is no evidence that Taxpayer ever

discussed his state income tax obligations with Jackson Hewitt. After he completed the packet of

materials, Taxpayer returned them to his former employer, Pronto Plumbing.

Pronto Plumbing informed Taxpayer that he was entitled an $18,454.04 profit sharing

distribution, less a 20% federal tax withholding. On August 7, 2003, Pronto Plumbing provided

Taxpayer with a check in the amount of $14,763.23. The following day, Pronto Plumbing

deposited Taxpayer’s 20% federal tax withholding totaling $3,690.81 into the bank. Based on these

two checks, which equaled the $18,454.04 amount, Pronto Plumbing did not make any New

Mexico tax withholdings from Taxpayer’s profit sharing distribution. Moreover, there is no

evidence that Taxpayer requested that such New Mexico withholdings be made on his behalf.

Taxpayer did not have any W-2 forms related this profit sharing plan distribution at the time of the

protest hearing to substantiate his suggestion that a State withholding may have been made by

Pronto Plumbers.

In the Matter of the Protest of Benny Nevarez, page 6 of 11
On April 9, 2004, Taxpayer submitted his New Mexico personal income tax return based on

a Federal Adjusted Gross Income of $31,337. This $31,337 did not include his profit sharing plan

distribution. Based on this 2003 New Mexico personal income tax return, Taxpayer received a

$393.00 personal income tax refund.

At some point thereafter (neither party established the specific date), the IRS issued an

unidentified letter, form, or ruling to Taxpayer that corrected Taxpayer’s Federal Adjusted Gross

Income in tax year 2003 in light of Taxpayer’s profit sharing distribution and a small amount of

other unreported income. The correction to Federal Adjusted Gross Income reflected an additional

$21,457 in income, raising the Federal Adjusted Gross Income from $31,337 to $52,794.

Through its matching program, the Department detected a difference between Taxpayer’s

corrected Federal Adjusted Gross Income and the Federal Adjusted Gross Income that Taxpayer

reported to the State of New Mexico on his 2003 income tax return. Although under NMSA 1978,

Section 7-1-13(C) (1994), Taxpayer had 90-days to amend his income tax return in light of the

federal adjustment, Taxpayer failed to do so. Thus, on November 29, 2006, the Department sent

Notice of Limited Scope Audit to Taxpayer, outlining the difference between his State-reported

Federal Adjusted Gross Income and the corrected Federal Adjusted Gross Income amount reported

by the IRS. When Taxpayer did not respond to that notice or another notice sent on January 29,

2007, the Department issued a Notice of Assessment on March 7, 2007. Including the $393.00

refund issued to Taxpayer as a result of the incorrectly reported Federal Adjusted Income, Taxpayer

had a 2003 personal income tax liability of $1,334, penalty totaling $133.40, and interest then

totaling $572.10 at the time of assessment.

Taxpayer indicated that he had difficulty obtaining any paperwork from Mr. Levy of Pronto

Plumbers because of the sour relationship between them, making it difficult for him to contest the

In the Matter of the Protest of Benny Nevarez, page 7 of 11
assessment. Moreover, Taxpayer indicated that he believed in completing Pronto Plumbers’

paperwork of materials, Pronto Plumbers assumed responsibility for withholding tax. However,

nothing in Taxpayer Exhibits 1.1-1.15 supports this contention. While Taxpayer’s situation with

his former employer sounds sympathetic and could naturally lead to some misunderstandings due to

a failure to communicate, New Mexico has a self-reporting tax regime where every taxpayer is

tasked with the reasonable duty to ascertain the possible tax consequences of his or her actions. See

Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert.

denied, 90 N.M. 255, 561 P.2d 1348 (1977).

In sum, the evidence established that Taxpayer did not report $21,457, including the

$18,454.04 profit sharing distribution, in 2003 personal income on his New Mexico personal

income tax return, and did not amend his State return within 90-days of the federal correction to his

Federal Adjusted Gross Income. Taxpayer presented no evidence that this $21,457 was subject to

an exemption or deduction. And the evidence established that no withholdings were made on this

$21,457 amount. Consequently, Taxpayer failed to overcome the presumption of correctness with

the assessed personal income tax.

Assessment of Interest

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, Section 7-1-67 (2008). Under the statute, the Department has

no discretion in the imposition of interest, as the statutory use of the word “shall” makes the

imposition of interest mandatory regardless of the explanation provided by a taxpayer. See State

v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The language of the statute also makes it

clear that interest begins to run from the original due date of the tax and continues until the tax

In the Matter of the Protest of Benny Nevarez, page 8 of 11
principal is paid in full. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. Here, the Taxpayer failed to pay

personal income tax due to the state. In effect, the Taxpayer had a loan of state funds during the

time taxes were owed but not paid. Therefore, interest is due and continues to accrue until such

time as the principal tax assessed is paid.

Assessment of Penalty.

The Department only seeks to impose a maximum 10% penalty pursuant to NMSA 1978

Section 7-1-69 (2003, prior to amendments through 2007). When a taxpayer fails to pay taxes

due to the State as a result of negligence or disregard of rules and regulations, NMSA 1978,

Section 7-1-69(A) (2003) imposes a penalty of two percent per month “from the date the tax was

due,” not to exceed ten percent of the outstanding tax liability. Again, the statute’s use of the

word “shall” makes the imposition of penalty mandatory in all instances where a taxpayer’s

failure to act timely meets the legal definition of “negligence.” The term “negligence” is defined

in Regulation §3.1.11.10 NMAC (1/15/01) to include “inadvertence, indifference, thoughtlessness,

carelessness, erroneous belief or inattention.”

In this case, Taxpayer did not report his profit sharing income to New Mexico on his

2003 personal income tax return and did not amend his 2003 New Mexico income tax return to

reflect his corrected Federal Adjusted Gross Income in light of his profit sharing distributions.

By failing to initially report the income, and then by failing to amend his income tax return,

Taxpayer met the definition of civil negligence based on his erroneous belief, inadvertent error,

and inattention. This erroneous belief, inadvertent error, and inattention met the legal definition

of “negligence” under the penalty statute. See El Centro Villa Nursing Center v. Taxation and

Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989).

In the Matter of the Protest of Benny Nevarez, page 9 of 11
Taxpayer presented insufficient evidence under Regulation §3.1.11.11 NMAC (1/15/01)

to demonstrate nonnegligence. While Taxpayer mentioned that he worked with Jackson Hewitt

Tax Service to complete the paperwork necessary to obtain his profit sharing distribution, he

presented no evidence that he ever discussed with them his potential state income tax liabilities

from that distribution. Consequently, Taxpayer did not demonstrate the full disclosure necessary

to show nonnegligence under Regulation §3.1.11.11(D) NMAC (1/15/01). As such, the

Department is required by statute to impose penalty.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely, written protest to the assessment of 2003 personal income

tax, interest and penalty under Assessment No. # L0225000064, and jurisdiction lies over the

parties and the subject matter of this protest.

2. The Taxpayer is liable for 2003 personal income tax and interest for income earned

as a result of his unreported profit sharing plan distribution.

3. Taxpayer was civilly negligent in not reporting his profit sharing distributions as

part of his 2003 New Mexico personal income tax return and in not amending his 2003 New

Mexico personal income tax return upon learning of his corrected Federal Adjusted Gross

Income that reflected his profit sharing distribution.

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

DATED: December 2, 2011.

BRIAN VANDENZEN
Tax Hearing Officer

In the Matter of the Protest of Benny Nevarez, page 10 of 11
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, §7-1-25, 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.

In the Matter of the Protest of Benny Nevarez, page 11 of 11