Did taxpayers owe interest after New Mexico mistakenly sent unsolicited 2009 and 2010 income-tax refunds based on credits they never claimed?

Plain-English summary

Lawrence and Earnestine Mitchell did not owe interest on two unsolicited income-tax refunds that the Department mistakenly sent them. They had never claimed the refunds, so the payments were not “tax” within the statutory rule that makes interest mandatory on unpaid tax.

The Mitchells filed and paid their 2009 and 2010 New Mexico personal income taxes. They did not request a refund or credit for either year.

The Department nevertheless sent refunds, citing calculation errors. It later determined that it had mistakenly applied the special-needs adopted-child credit, even though the Mitchells did not claim it or submit the yearly certification. Their child was living independently, so they had intentionally stopped seeking the credit.

The principal was repaid; only interest remained disputed

In January 2012, the Department assessed:

• 2009: $1,000 in tax and $56.46 in interest;
• 2010: $663 in tax and $13.64 in interest; and
• no penalty for either year.

The Mitchells repaid the $1,663 principal and a small part of the interest. They did not object to returning the money; they protested the interest caused by the Department's unsolicited mistake.

An unsolicited payment was not a statutory refund

Section 7-1-67(A) generally makes interest mandatory when tax is not paid on time. The decision recognized that an erroneous refund granted contrary to law can fall within the definition of “tax.”

But Section 7-1-26(D) prohibited the Department from making a refund unless the taxpayer had filed a claim. The Department admitted that the Mitchells filed no claims for 2009 or 2010.

Because these payments were not made pursuant to the Tax Administration Act's refund process, they did not fit the relevant definition of tax. Without unpaid “tax,” the interest statute did not apply.

Result: protest granted. The interest assessment—$70.10 when originally issued—was abated.

What this means for you

Taxpayers receiving an unexpected refund

Do not assume it is correct. Compare it with the filed return and contact the Department, especially when you did not claim a credit or refund.

People repaying a Department error

Principal and interest can present different legal questions. The Mitchells repaid the mistaken principal but successfully contested interest.

Accountants handling unexplained state payments

Document whether the taxpayer actually filed a refund claim. That procedural fact controlled the outcome here.

Common questions

Q: Did the Mitchells claim the adopted-child credit for 2009 or 2010?
A: No. They filed no claim or yearly certification for either year because their child was living independently.

Q: Did they keep the mistaken principal?
A: No. They repaid the $1,000 and $663 principal amounts and did not dispute that repayment.

Q: Why was interest abated if interest is normally mandatory?
A: The interest statute applied to unpaid tax. These unsolicited payments were not statutory refunds because no taxpayer claim had been filed, so they were not “tax” under the decision's analysis.

Q: Was any penalty assessed?
A: No. The Department assessed only principal and interest.

Q: How much interest was originally assessed?
A: $56.46 for 2009 and $13.64 for 2010, totaling $70.10.

Citations and references

Statutes and rule:

• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and definition of tax
• NMSA 1978, § 7-1-67(A) — interest on unpaid tax
• NMSA 1978, § 7-1-26(D) — refund requires a taxpayer claim
• NMSA 1978, § 7-1-25 and Rule 12-601 NMRA — appeal procedure

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795 (Ct. App. 1989)
• State v. Lujan, 90 N.M. 103 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lawrence and Earnestine Mitchell
• Decision PDF: D&O 13-26

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
LAWRENCE AND EARNESTINE MITCHELL, No. 13-26
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0312750400 and L1386492224

DECISION AND ORDER

A formal hearing on the above-referenced protest was held August 23, 2013, before Dee

Dee Hoxie, Hearing Officer. The Taxation and Revenue Department (Department) was

represented by Mr. Nelson Goodin, Chief Legal Counsel, and Mr. Aaron Rodriguez, Staff Attorney.

Ms. Sonya Varela, Auditor, also appeared on behalf of the Department. Mr. Lawrence Mitchell

and Ms. Earnestine Mitchell (Taxpayers) appeared for the hearing and represented themselves.

The Hearing Officer took notice of all documents in the administrative file. Based on the

evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers filed and paid their personal income taxes for 2009.

2. The Taxpayers did not file a claim for refund or credit for the 2009 tax year.

3. The Department issued a refund to the Taxpayers for the 2009 tax year. The Department

cited a calculation error as the reason for the refund.

4. The Taxpayers filed and paid their personal incomes taxes for 2010.

5. The Taxpayers did not file a claim for refund or credit for the 2010 tax year.

6. The Department issued a refund to the Taxpayers for the 2010 tax year. The Department

cited a calculation error as the reason for the refund.

7. The Department determined in December 2011 that it had erroneously granted refunds

for the 2009 and 2010 tax years to the Taxpayers.

8. On January 20, 2012, the Department assessed the Taxpayers for personal income tax and

interest for the tax period ending on December 31, 2009. The assessment was for

$1,000.00 tax and $56.46 interest. No penalty was assessed.

9. On January 20, 2012, the Department assessed the Taxpayers for personal income tax and

interest for the tax period ending on December 31, 2010. The assessment was for

$663.00 tax and $13.64 interest. No penalty was assessed.

10. On February 9, 2012, the Taxpayers filed a formal protest letter.

11. The Taxpayers paid the tax principal and a small part of the interest.

12. On May 21, 2013, the Department filed a Request for Hearing asking that the Taxpayers’

protest be scheduled for a formal administrative hearing.

13. On May 22, 2013, the Hearings Bureau mailed notice of the hearing to the parties.

DISCUSSION

The issue to be decided is whether the Taxpayers are liable for interest for the tax periods

ending in December 2009 and December 2010.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M.

Lawrence and Earnestine Mitchell
Letter ID Nos. L0312750400 and L1386492224
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795, 779 P.2d 982 (Ct. App. 1989). Therefore, the assessment issued to the Taxpayer is

presumed to be correct, and it is the Taxpayers’ burden to present evidence and legal argument to

show that they are not liable for the tax and interest.

Assessment of Interest.

The Taxpayers argued that they paid the tax on time, did not claim a refund or credit, and

should not have to pay interest. The Taxpayers have already paid back the amount of tax

principal assessed, and indicated that they did not have a problem paying that tax. The

Department admitted that the Taxpayers never filed a claim for refund or credit for the years in

question. The Department spontaneously, for unknown reasons, sent the Taxpayers a refund in

2009 and again in 2010. The Department later determined that it applied a special needs adopted

child credit to the Taxpayers. The Taxpayers explained that they had filed for that credit in prior

years, but did not apply for it in 2009 or 2010 because their child was living independently. The

Taxpayers also expressed their surprise at the Department’s actions since they were required to

file a certification for the credit each year that it was claimed, and prior claims had been denied

when they neglected to include that certification. The Taxpayers did not file any certifications

on the credit for the 2009 and 2010 tax years, as their child was living independently. The

Department, nevertheless, argues that the Taxpayers owe interest because the tax was not paid

when it was due.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

due. NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is

mandatory, not discretionary. See State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977).

Lawrence and Earnestine Mitchell
Letter ID Nos. L0312750400 and L1386492224
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The assessment of interest is not designed to punish taxpayers, but to compensate the state for

the time value of unpaid revenues.

Generally, “tax” includes the amount of a refund or a credit granted by the Department.

See NMSA 1978, § 7-1-3 (X) (defining tax). However, the refund or credit must be granted by

the Department “under any law subject to administration and enforcement under the provisions

of the Tax Administration Act to any person contrary to law[.]” See id. This means that the

refund must be made pursuant to the Tax Administration Act (TAA), and includes refunds that

the Department should not have granted because the taxpayer claiming the refund was not

actually entitled to the refund. See id. In this case, the refund was not made pursuant to the

TAA. The TAA prohibits the Department from making any refund “to any person unless as the

result of a claim made by that person[.]” NMSA 1978, § 7-1-26 (D). The Taxpayers never made

any claims for refunds in 2009 and 2010, and the Department admitted that there were no claims.

Therefore, the unsolicited refunds in this case do not meet the definition of tax, and interest does

not apply to them. See NMSA 1978, § 7-1-67 (A) (applying interest only to tax that is not paid).

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely written protest to the Notice of Assessment of 2009

and 2010 interest on personal income tax issued under respective Letter ID numbers L0312750400

and L1386492224, and jurisdiction lies over the parties and the subject matter of this protest.

2. The refunds issued to the Taxpayers for the 2009 and 2010 tax years were not made

pursuant to the TAA because they were not made pursuant to a claim for refund.

3. The unsolicited refunds for 2009 and 2010 are not tax as defined by the statute, and

are not subject to interest.

Lawrence and Earnestine Mitchell
Letter ID Nos. L0312750400 and L1386492224
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For the foregoing reasons, the Taxpayers' protest is GRANTED and the assessment of

interest is hereby ABATED.

DATED: September 24, 2013.

Dee Dee Hoxie
DEE DEE HOXIE
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 parties have 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 Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision

and Order will become final. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 630, Santa Fe, New Mexico 87504-0630. Mr. Griego may be contacted at 505-827-

0466.

CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Order to the parties listed below this _ day of
___, 20__ in the following manner:

First Class Mail Interoffice Mail

Lawrence and Earnestine Mitchell Nelson Goodin
8413 Corte Del Viento NW Taxation and Revenue Department, Legal
Albuquerque, NM 87120-5939 1100 S. St. Francis
Santa Fe, NM 87504

Lawrence and Earnestine Mitchell
Letter ID Nos. L0312750400 and L1386492224
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