Was New Mexico's 2015 assessment of Floyd and Anna Rivera's 2010 return timely when they omitted most of the required state-and-local-tax itemized-deduction addback?

Plain-English summary

Floyd and Anna Rivera's omission of most of the required New Mexico addback for state and local taxes understated their 2010 personal income tax by about 46%, triggering a six-year assessment period. The Department's April 2015 assessment was timely even though the normal three-year period had ended.

The Riveras timely filed their federal and New Mexico returns. On federal Schedule A, they claimed $11,700 of state and local income or general sales taxes as an itemized deduction.

New Mexico PIT-1 line 8 required that amount to be added back. The Riveras entered only $2,160, understating New Mexico base income by $9,540. Two smaller transposition and arithmetic errors also affected the return.

Federal adjusted gross income was only the starting point

New Mexico began its personal-income-tax calculation with federal adjusted gross income but did not adopt every federal deduction.

Section 7-2-2(N)(2) kept state and local taxes claimed in the federal itemized deduction within New Mexico net income. PIT-1 line 8 implemented that difference by adding the Schedule A amount back.

The Riveras mistakenly believed New Mexico treated the itemized deduction the same way as federal law. Their reported state liability of $1,045 should have been $1,528.

A greater-than-25% understatement allowed six years

The normal three-year assessment period for 2010 ended on December 31, 2014. The Department did not issue the assessment until April 8, 2015.

Section 7-1-18(D), however, gave the Department six years when reported tax liability was more than 25% too low. The approximately 46% understatement met that test, so an assessment made within four years after the end of the relevant calendar year was timely.

Unintentional error still supported penalty

The Riveras made the errors unintentionally and were frustrated that the later assessment allowed more penalty and interest to accrue.

The AHO found the assessment timely and treated the erroneous belief and inadvertent reporting error as civil negligence under Regulation 3.1.11.10(C) and El Centro Villa. Penalty therefore remained.

Interest was mandatory from the original due date until principal was paid, regardless of the reason for nonpayment.

Result: protest DENIED. As of hearing, the Riveras owed $483 tax, $96.60 penalty, and $63 interest, totaling $642.60, with interest continuing to accrue.

What this means for you

New Mexico taxpayers itemizing federally

Reconcile every New Mexico addition and subtraction separately. A federal deduction may require an explicit state addback.

Tax preparers reviewing PIT-1 line 8

Tie the entry directly to the state and local tax amount on federal Schedule A. Preserve the federal schedule and the state reconciliation worksheet.

Taxpayers evaluating an older assessment

Do not stop at the ordinary limitation period. Calculate the percentage understatement of tax liability shown on the return; more than 25% can extend New Mexico's period to six years.

Common questions

Q: What caused most of the mismatch?
A: The Riveras entered $2,160 instead of the $11,700 state-and-local-tax amount shown on Schedule A.

Q: How much New Mexico base income was omitted?
A: $9,540 from the line 8 addback error.

Q: Why did the six-year period apply?
A: Actual liability was about 46% higher than reported, exceeding the 25% statutory threshold.

Q: Did the AHO find intentional wrongdoing?
A: No. The errors were unintentional, but inadvertence and erroneous belief still met the civil-negligence definition.

Q: Could the Department waive interest because the audit came later?
A: No. The decision treated interest as mandatory until tax principal was paid.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-2(N)(2) — addback of state and local taxes included in federal itemized deductions
• NMSA 1978, § 7-1-18(A) and (D) — ordinary three-year and substantial-understatement six-year periods
• NMSA 1978, §§ 7-1-67 and 7-1-69 — mandatory interest and civil negligence penalty
• NMSA 1978, §§ 7-2-2(A), 7-2-3, and 7-2-12 — federal adjusted gross income starting point, tax, and return filing
• Regulation 3.1.11.10(C) NMAC — inadvertence and erroneous belief as negligence

Cases cited:

• Holt v. New Mexico Department of Taxation and Revenue, 2002-NMSC-034 — federal adjusted gross income as the starting point and independent state tax authority
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error as civil negligence
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — burden shifting after rebuttal of an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Floyd & Anna Rivera
• Decision PDF: D&O 15-28

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
FLOYD & ANNA RIVERA No. 15-28
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1708617680

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 29, 2015 before Brian

VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Floyd Rivera appeared pro

se, representing Floyd & Anna Rivera (“Taxpayers”). Staff Attorney Peter Breen appeared

representing the State of New Mexico Taxation and Revenue Department (“Department”).

Protest Auditor Sonya Varela appeared as a witness for the Department. Taxpayers’ Exhibits #1-

10 were admitted into the record. Department Exhibits A-B were admitted into the record. All

exhibits are more thoroughly described in the Administrative Exhibit Coversheet. Based on the

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

FINDINGS OF FACT

1. On April 8, 2015, the Department assessed Taxpayers for $483.00 in personal

income tax, $96.60 in penalty, and $59.51 in interest for a total tax assessment of $639.11 for the

personal income tax period ending on December 31, 2010. [Letter id. no. L1708617680].

2. On April 10, 2015, the Department received Taxpayers’ protest of the assessment.

3. On June 10, 2015, the Department requested a hearing in this matter with the

Hearings Bureau1.

1
On July 1, 2015, pursuant to enacted Senate Bill 356, the Hearings Bureau became the Administrative Hearings
Office (“AHO”). Since most of the events, except issuance of this decision, occurred before that date, the Hearings
Bureau will be referenced in the findings of fact even though the decision is issued under AHO’s caption.

4. On June 10, 2015, the Hearings Bureau set this matter for a hearing on June 29,

2015, within 90-days of Taxpayers’ protest.

5. There is no dispute that Taxpayers timely filed 2010 Personal Income Tax federal

and state returns with the IRS and New Mexico.

6. On June 9, 2011, Taxpayers received an assessment of taxes from the Department

for an additional $23.41. This is not the assessment at issue in this protest.

7. The Department detected a mismatch between Taxpayers’ federal and state

returns as part of the Tape Mismatch Program.

8. On October 19, 2014, the Department submitted to Taxpayers a Notice of Limited

Scope Audit Commencement-2010 Personal Income Tax because of discrepancy between the

New Mexico PIT return and the IRS return. [Taxpayers Ex. #1].

9. In trying to determine the discrepancy, Taxpayers made numerous contacts with

Department employees and IRS employees. Taxpayers did learn of a discrepancy of $280.00 in

social security income, which is consistent with the $23.41 in additional tax assessed on June 9,

2011.

10. The discrepancy in this case primarily relates to a misreporting on line 8 of the

New Mexico 2010 PIT-1 form, where a taxpayer is to report the amount of state and local

income or general sales tax deduction claimed on their federal itemized deduction, as shown on

federal Schedule A. In error, Taxpayers only reported $2,160 instead of the $11,700 amount of

state and local tax shown on Taxpayers’ Schedule A. [Department Ex. A; 06-31-15 CD 27:38-

32:16].

11. There were two other minor discrepancies related to an arithmetic error and a

transposition of numbers. [06-31-15 CD 27:38-32:16].

In the Matter of the Protest of Floyd and Anna Rivera, page 2 of 7

12. Taxpayers only reported a state personal income tax liability of $1045.00 but in

light the errors had an actual tax liability of $1,528.00, which is a tax liability approximately

46% higher than initially reported. [Department Ex. A; 06-31-15 CD 45:30-46:55].

13. Consequently, Taxpayers underreported their personal income tax liability in

2010 by more than 25%. [Department Ex. A; 06-31-15 CD 45:30-46:55].

14. Although Taxpayers’ errors were unintentional, the errors were inadvertent and

based on an erroneous belief that New Mexico treated the itemized deduction the same as the

IRS. [06-31-15 CD 38:00-41:04].

15. As of the date of hearing, for the personal income tax reporting period ending on

December 31, 2010, Taxpayers owed $483.00 in personal income tax, $96.60 in penalty, and

$63.00 in interest for a total tax liability of $642.60. [Department Ex. B].

DISCUSSION

There are only two issues in this case. First, Taxpayers did not understand the

discrepancy at issue and believed the returns were accurate with exception of one $280 error.

Secondly, Taxpayers argued that the statute of limitations had lapsed by the time the Department

issued its assessment.

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

presumed correct. Unless otherwise specified, for the purposes of the Tax Administration Act,

“tax” is defined to include interest and civil penalty. See NMSA 1978, §7-1-3 (X) (2013).Under

Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C) extends to

the Department’s assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't

of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting

a statute are presumed proper and are to be given substantial weight). Taxpayers have the burden to

In the Matter of the Protest of Floyd and Anna Rivera, page 3 of 7
overcome the assessment. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 431.

However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the

Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue

Dep't, 2003-NMCA-21, ¶13, 133 N.M. 217.

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

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

Mexico resident. NMSA 1978, § 7-2-3 (1981). NMSA 1978, Section 7-2-12 (2003) requires any

resident or any person deriving income from New Mexico to file a state income tax return. Like

many states, the calculation of New Mexico’s personal income tax liability begins with a

taxpayer’s adjusted gross income as reported to the IRS. See NMSA 1978, § 7-2-2 (A) (2010);

See also Holt v. N.M. Dep't of Taxation & Revenue, 2002- NMSC-34, ¶23, 133 N.M. 11

(“calculation of the taxpayers’ state income tax is based upon their adjusted gross income…on their

federal return.”).

However, the federal adjusted gross income is only a beginning point, as New Mexico

varies in its treatment of personal income tax from the IRS. See Holt, ¶6 (state has the authority to

assess and collect tax independent of IRS). One of those areas where New Mexico varies is in the

treatment state and local income or general income sales tax deductions claimed as part of the

federal itemized deduction. See NMSA 1978, Section 7-2-2 (N) (2) (2010). Under Section 7-2-2 (N)

(2), the amount of the state and local tax included in a taxpayer’s federal itemized deduction is not

deductible in New Mexico and remains part of the “net income” subject to state personal income

tax. To achieve this statutory requirement, New Mexico requires that the amount of state and local

tax listed on a taxpayer’s Schedule A be added back to the federal adjusted gross income on Line 8

of New Mexico’s PIT-1 Return.

In the Matter of the Protest of Floyd and Anna Rivera, page 4 of 7
In large part, the Department’s assessment in this case stems from Taxpayers’ reporting

error Line 8 of the New Mexico PIT-1 return. Taxpayers only reported $2,160.00 on line 8 rather

than the $11,700.00 in state and local income taxes listed on Taxpayers’ corresponding Schedule A.

Because of this error, Taxpayers inadvertently underreported their New Mexico base income by

$9,540. This error, along with two other minor errors related to transposing numbers and an

arithmetic error, substantiated the amount of Department’s assessment at issue in this protest, a fact

that Mr. Rivera implicitly acknowledged while cross-examining Department Auditor Sonya Varela.

Nevertheless, Taxpayers continued to argue that the normal three-year statute of limitations

for an assessment of 2010 personal income taxes had lapsed by the time of the April 8, 2015

assessment in this case. The hearing officer agrees that the assessment was not made within three-

years of the end of the calendar year from when the tax was due (2010 personal incomes were due

on April 15, 2011, making three years from the end of the calendar year December 31, 2014), as

generally required under NMSA 1978, Section 7-1-18 (A) (2013). However, under NMSA 1978,

Section 7-1-18 (D) (2013), the Department has six years from the end of the calendar year to assess

a taxpayer when the tax liability was underreported by more than 25%. Taxpayers’ errors in this

case related to the treatment of the state and local income under the itemized deduction resulted in

underreporting their tax liability by more than 25% (they underreported by approximately 46%).

Consequently, the Department’s assessment made within four-years of the end of the calendar when

the tax was due was timely under the relevant six-year statute of limitation articulated by Section 7-

1-18 (D).

Part of Mr. Rivera’s frustration in this case stems from what he believed was an unnecessary

delay in assessing Taxpayers, resulting in additional accrual of interest and penalty. As just

discussed, the Department timely assessed Taxpayers within the permissible statute of limitations.

In the Matter of the Protest of Floyd and Anna Rivera, page 5 of 7
Regarding 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, § 7-1-67 (2007) (italics for emphasis). 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. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24.

Turning to penalty, the Department has no basis to abate civil negligence penalty under

NMSA 1978, Section 7-1-69 (2007) in this case. When a taxpayer fails to pay taxes due to the

State because of negligence or disregard of rules and regulations, but without intent to evade or

defeat a tax, by its use of the word “shall”, Section 7-1-69 requires that civil penalty be added to

the assessment. As discussed above, the statute’s use of the word “shall” makes the imposition of

penalty mandatory in all instances where a taxpayer’s actions or inactions meets the legal

definition of “negligence.” Taxpayers erroneously believed New Mexico adopted the federal

treatment of state and local income under the itemized deduction, resulting in the underreporting

of New Mexico personal income tax. Although certainly unintentional, this erroneous belief and

inadvertent error meets the definition of civil negligence subject to civil penalty under Regulation

3.1.11.10 (C) NMAC. See El Centro Villa Nursing Center v. Taxation and Revenue Department,

1989-NMCA-070, 108 N.M. 795 (inadvertent error constitutes civil negligence). Taxpayers’

protest is denied and Taxpayers owe the assessed amount.

CONCLUSIONS OF LAW

A. Taxpayers filed a timely, written protest to the assessment. Jurisdiction lies over the

parties and the subject matter of this protest. The hearing was timely set and held in compliance

with NMSA 1978, Section 7-1-24.1 (A) (2013).

In the Matter of the Protest of Floyd and Anna Rivera, page 6 of 7
B. Under NMSA 1978, Section 7-1-17 (2007), the assessment is presumed correct.

Taxpayers did not overcome this presumption.

C. Taxpayers failure to add back in the amount of state and local taxes claimed on the

federal itemized deduction, as required by NMSA 1978, Section 7-2-2 (N) (2) (2010), caused the

discrepancy that led to the Department’s assessment.

D. The Department’s assessment was timely made under NMSA 1978, Section 7-1-18

(D) (2013) because Taxpayers underreported their tax liability by more than 25% that year.

E. Under NMSA 1978, Section 7-1-67 (2007), Taxpayers are liable for accrued

interest under the assessment. Interest continues to accrue until the tax principal is satisfied.

F. Under NMSA 1978, Section 7-1-69 (2007), Taxpayers are liable for civil

negligence penalty under the negligence definition found under Regulation 3.1.11.10 (C) NMAC.

For the foregoing reasons, Taxpayers’ protest IS DENIED. As of the date of hearing,

Taxpayers owed $483.00 in personal income tax, $96.60 in penalty, and $63.00 in interest for a

total tax liability of $642.60. Interest continues to accrue until the tax principal is satisfied.

DATED: August 4, 2015.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Floyd and Anna Rivera, page 7 of 7