Could a medical association avoid late-return penalties because it paid its gross receipts tax on time and no Department employee suggested a managed audit?

Plain-English summary

Paying the gross receipts tax on time did not excuse New Mexico Orthopedic Association from filing its monthly CRS returns on time. The association's CEO/CFO abruptly resigned, no one ensured that his filing duty was reassigned, and the late-return penalties were upheld.

The CEO/CFO resigned on February 27, 2013. One of his duties had been preparing and filing the association's CRS returns. The association nevertheless wired its gross receipts tax payments on time: $79,766.36 for February, $100,065.32 for March, and $79,766.36 for April.

The problem surfaced after the Department sent an overpayment notice in June. The interim financial director investigated and discovered that the money had been sent but the three returns had not been filed.

A return can be late even when the tax is paid

Section 7-1-69(A) imposed a penalty for failing to file a required return by its due date, regardless of whether tax was due. The Department assessed three late-filing penalties:

• $4,785.99 for February 2013
• $4,002.62 for March 2013
• $1,846.28 for April 2013

Those assessments totaled $10,634.89.

The hearing officer found negligence. After the CEO/CFO resigned, the board did not make sure the returns were filed. When it hired the interim financial director, it did not tell him that filing the gross receipts tax returns was one of his duties. Those failures to act fell within the decision's cited negligence standards.

The Department did not have to suggest a managed audit

The association argued that Department employees should have advised it to enter a managed audit, under which penalty and interest would not be due. Its interim financial director acknowledged that he knew of no statute or regulation requiring the Department to offer that advice.

The decision said managed audits have precise prerequisites, and public information about them was available on the Department's website. Because the managed-audit provisions did not apply to the association, the Department's failure to recommend one did not invalidate the penalties.

Result: protest denied. All three late-filing penalty assessments were sustained.

What this means for you

Businesses that pay tax by wire transfer

Payment and filing are separate obligations. A timely transfer does not substitute for the required return.

Organizations facing staff turnover

When a tax employee leaves, identify every return and deadline that person owned and formally reassign them. The decision attributed the missed filings to the organization, not just the departed executive.

Taxpayers considering a managed audit

Do not assume the Department must propose one. The decision described managed audits as subject to statutory prerequisites and treated the published program information as something taxpayers could seek out themselves.

Common questions

Q: Was the gross receipts tax itself paid late?
A: No. The decision found that the February, March, and April 2013 tax payments were made on or before their due dates.

Q: Why was there still a penalty?
A: Section 7-1-69(A) separately penalized failure to file a required return on time, regardless of whether any tax was due.

Q: Did the CEO/CFO's abrupt resignation excuse the missed returns?
A: No. The board failed to ensure that the filing work was covered and did not tell the interim financial director about the duty.

Q: Did the Department have to tell the association about managed audits?
A: No. The association identified no law requiring that advice, and the hearing officer found that the managed-audit provisions did not apply.

Q: How much penalty was upheld?
A: The three assessments were $4,785.99, $4,002.62, and $1,846.28, totaling $10,634.89.

Citations and references

Statutes, regulations, and guidance:

• NMSA 1978, §§ 7-1-17(C) and 7-1-3(U) — assessment presumption and definition of tax
• NMSA 1978, § 7-1-69(A) — penalty for failure to file a required return
• Regulations 3 NMAC 1.11.10 and 3.1.11.11 NMAC — negligence standards as cited in the decision
• NMSA 1978, §§ 7-1-11.1, 7-1-69(G)(2), and 7-1-67(A)(4) — managed audits
• NMSA 1978, § 7-1-24 — protest jurisdiction
• Department Publication FYI-404 — Managed Audits for Taxpayers

Source

• Listing: New Mexico Decisions & Orders
• Decision post: New Mexico Orthopedic Association
• Decision PDF: D&O 13-37

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
NEW MEXICO ORTHOPEDIC ASSOCIATION No. 13-37
LETTER ID NO. L1855091152, L0512913872 and L1586655696

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 26, 2013, before

Richard M. Jacquez, Hearing Officer. New Mexico Orthopedic Association (“Taxpayer”) was

represented by Mr. Dupuy Bateman, Interim Financial Director. The Taxation and Revenue

Department ("Department") was represented by Nelson Goodin, Chief Legal Counsel. Ms.

Amanda Carlisle, Protest Auditor appeared as a witness for the Department. By stipulation,

Taxpayer’s Exhibits 1-3 and Department Exhibits A-F were admitted into the record. All exhibits

are more thoroughly described in the Administrative Protest Hearing Exhibit Log. Based on the

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

FINDINGS OF FACT

1. The Taxpayer is a New Mexico corporation registered with the Department for

payment of gross receipts tax and withholding taxes, which are reported to the Department on

Form CRS (Combined Reporting System).

2. The Taxpayer was required to report and pay gross receipts taxes for February,

March and April 2003.

3. On February 27, 2013, Mr. Carbajal, Chief Executive Officer and Chief

Financial Officer for the Taxpayer abruptly resigned his positions.

4. One of Mr. Carbajal’s duties was to prepare and file CRS returns for gross
   receipts taxes due from the Taxpayer.

5. The Taxpayer’s gross receipts taxes were calculated as part of the revenue

generating process and payment of gross receipts taxes were sent via wire transfer.

6. On March 15, 2013, the Taxpayer paid gross receipts taxes in the amount of

$79,766.36 for the month of February 2013. On April 8, 2013, the Taxpayer paid gross receipts

taxes in the amount of $100,065.32 for the month of March 2013. On May 16, 2013, the

Taxpayer paid gross receipts taxes in the amount of $79,766.36 for the month of April 2013.

(Taxpayer Exhibit 1)

7. The Taxpayer paid all gross receipts taxes on or before taxes were due for

February, March and April 2013.

8. Mr. Dupuy Bateman was hired as Interim Financial Director for the Taxpayer in

April 2013.

9. On June 3, 2013, the Taxpayer received notice from the Department that the

Taxpayer had made an overpayment to the Department. Mr. Bateman received the notice

approximately one week later.

10. Mr. Bateman investigated the reason for the overpayment and discovered that the

Taxpayer had sent payment to the Department for gross receipts taxes due for February, March

and April of 2013, but had failed to file CRS returns for all three months.

11. Mr. Bateman went on the Department’s website to file the CRS returns online and

noticed that penalties were being applied. Mr. Bateman was confused since he knew payment of

the gross receipts taxes had been paid on time.

12. On June 14, 2013, Mr. Bateman contacted a personal acquaintance, Mr. David

In the Matter of the Protest of NM Orthopedic Association, page 2
Robbins, Administrative Services Division (ASD) Director for the Department, regarding the

Taxpayer’s failure to file the CRS returns. Mr. Bateman was referred to speak with Ms. Charlene

Trujillo, Deputy Director of Revenue Processing for the Department. Ms. Trujillo referred Mr.

Bateman to an employee with the Department. (Taxpayer Exhibit 3)

13. Mr. Bateman was advised by the Department’s employee to file the CRS returns

and file a protest to any assessed penalties.

14. On June 14, 2014, the Taxpayer filed CRS reports for February, March and April

2013.

15. On July 5, 2013, Mr. Bateman filed a written protest to the assessment of penalty.

16. On July 8, 2013, the Department issued Assessment No. L1855091152 to the

Taxpayer, assessing a late-filing penalty for report period February 2013, in the amount of

$4,785.99.

17. On July 8, 2013, the Department issued Assessment No. L0512913872 to the

Taxpayer, assessing a late-filing penalty for report period March 2013, in the amount of

$4,002.62.

18. On July 8, 2013, the Department issued Assessment No. L15866545696 to the

Taxpayer, assessing a late-filing penalty for report period April 2013, in the amount of

$1,846.28.

DISCUSSION

The sole issue to be decided is whether the Department correctly assessed a late-filing

penalty against the Taxpayer. While the Taxpayer does not dispute that its February, March and

April 2013 CRS returns were filed after the statutory due date, it protests the Department’s

In the Matter of the Protest of NM Orthopedic Association, page 3
assessment of penalty because no employee from the Department informed, recommended or

asked the Taxpayer to enter into a managed audit to avoid the assessment of penalties.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of taxes

made by the Department is presumed to be correct. Section 7-1-3(U) NMSA 1978 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. Accordingly, the presumption of correctness

applies to the Department’s assessment of penalty, and it is the Taxpayer’s burden to come

forward with evidence to show that the assessment was incorrect.

Statutory Authority to Impose Penalty. The imposition of penalty is governed by

Section 7-1-69(A) NMSA 1978, which states:

A. Except as provided in Subsection B of this section, in the case of failure
due to negligence or disregard of rules and regulations, but without intent to evade
or defeat any tax, to pay when due any amount of tax required to be paid, to pay in
accordance with the provisions of Section 7-1-13.1 NMSA 1978 when required to
do so or to file by the date required a return regardless of whether any tax is due,
there shall be added to the amount as penalty the greater of:

(1) two percent per month or any fraction of a month from the date the
tax was due multiplied by the amount of tax due but not paid, not to exceed
twenty percent of the tax due but not paid;

(2) two percent per month or any fraction of a month from the date the
return was required to be filed multiplied by the tax liability established in the late
return, not to exceed twenty percent of the tax liability established in the late
return; or

(3) a minimum of five dollars ($5.00), but the five-dollar ($5.00)
minimum penalty shall not apply to taxes levied under the Income Tax Act or
taxes administered by the department pursuant to Subsection B of Section 7-1-2
NMSA 1978.

Negligence. Based on the evidence presented the Taxpayer’s failure to file the CRS

returns was negligent. The term "negligence" is defined in Regulation 3 NMAC 1.11.10 as:

In the Matter of the Protest of NM Orthopedic Association, page 4
1) failure to exercise that degree of ordinary business care and prudence
which reasonable taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness, erroneous
belief or inattention.

Upon the resignation of the Taxpayer’s CEO/CFO the Board of Physicians, who oversaw the

CEO/CFO failed to exercise ordinary business care and prudence to make sure that the CRS returns

were filed on time. In addition, upon the hiring of Mr. Bateman in April 2013, the Board of

Physicians failed to advise Mr. Bateman that one of his duties would be to file the CRS returns for

gross receipts taxes. Mr. Bateman was not made aware of the requirement to file CRS returns for

gross receipts until after the Department sent a notification of overpayment to the Taxpayer. The

various actions and inactions underlying the Taxpayer’s failure to file its February, March and April

2013 returns in a timely manner support a finding of negligence. There was insufficient evidence

offered during the hearing indicating that any legally recognizable indications of non-negligence

were present. Regulation 3.1.11.11 NMAC (2001).

Failure to Advise Taxpayer of Managed Audit. The Taxpayer argued that

they are not liable for penalty because the Department failed to advise the Taxpayer to

enter into a managed audit. If a taxpayer enters into a managed audit agreement with

the Department, penalty and interest are not due. NMSA 1978, Sections 7-1-69(G) (2)

(2007) and 7-1-67(A) (4) (2007). There are very precise prerequisites that must exist

prior to the Department agreeing to enter into a managed audit with a taxpayer. NMSA

Section 7-1-11.1 (2001); Department Publication FYI-404, Managed Audits for

Taxpayers.

In the Matter of the Protest of NM Orthopedic Association, page 5
Mr. Bateman testified that he was not aware of the requirements for a managed

audit and was relying upon information from an account with REDW that the Taxpayer

would be eligible for a managed audit. Mr. Bateman acknowledged that he was not

aware of any statute or regulation which would require the Department to advise the

Taxpayer of applying for a managed audit. Ms. Carlisle testified that information

regarding a managed audit is public information and is available on the Department’s

website. Therefore, the managed audit provisions do not apply to the Taxpayer.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to assessment Letter ID Nos.

L1855091152, L0512913872 and L1586655696 pursuant to Section 7-1-24 NMSA 1978, and

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

2. The Department’s assessment of penalty against the Taxpayer was properly issued

in accordance with the provisions of Section 7-1-69(A) NMSA 1978.

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

DATED December 2, 2013

Richard M. Jacquez
Richard M. Jacquez
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87509-0630

In the Matter of the Protest of NM Orthopedic Association, page 6