Could self-employed contractor Jimmy Stuart have New Mexico penalty and interest removed because paying them would cause financial hardship?

Plain-English summary

Financial hardship did not allow the AHO to remove Jimmy Stuart's penalty or interest. Stuart admitted the unpaid tax principal. The remaining $9,155.10 as of May 5, 2016—$6,609.31 tax, $1,471.87 penalty, and $1,073.92 interest—was upheld.

Stuart was self-employed and performed contracted services for other businesses. He did not report or pay CRS taxes during the relevant 2010-2012 periods. He consulted people doing similar work rather than a tax professional and learned from Tax Aid in 2012 that he needed a CRS number and had to pay CRS taxes.

Interest was mandatory

Section 7-1-67 says interest “shall be paid” when tax is not timely paid. The AHO explained that interest compensates New Mexico for the time value of unpaid revenue rather than punishing the taxpayer, so it could not be waived for hardship.

The failure to investigate was negligence

The AHO found Stuart's inaction met all three regulatory definitions of negligence: failure to exercise ordinary business care, failure to act when required, and inadvertence or erroneous belief.

The good-faith mistake-of-law exception did not apply because Stuart had not made an informed judgment on reasonable grounds. Consulting laypeople in similar work was not evidence of informed tax advice.

Hardship, later advice, and a spouse's illness did not create an exception

A Department employee discussed a possible hardship program only after the assessment and then said Stuart did not qualify. That did not show the Department affirmatively misled him about his original filing and payment duties.

Stuart's wife was diagnosed with cancer in 2013. The illness exception did not apply because the taxpayer himself was not ill, the diagnosis followed the relevant reporting periods, and Stuart had obtained help filing returns.

The AHO also found no current statutory tax-amnesty program and no law allowing penalty or interest abatement merely because the taxpayer could not afford the liability. Compromise under Section 7-1-20 required a good-faith doubt about liability, not financial hardship.

Result: protest DENIED. The full hearing-date balance remained due, with interest continuing on unpaid principal.

The decision contains an internal terminology mismatch: finding 1 calls the assessed principal “withholding tax,” while the findings, discussion, and conclusions repeatedly analyze Stuart's failure to report and pay gross receipts tax. This page follows the decision's substantive analysis and conclusion.

What this means for you

Self-employed contractors

Do not rely only on informal advice from others in the same trade. Confirm CRS registration, filing, and payment duties with a qualified tax professional or authoritative Department guidance.

Taxpayers facing hardship

Ability to pay and legal liability are separate questions. A protest seeking abatement must fit a statute or regulation; hardship alone did not eliminate legally due tax, penalty, or interest here.

Taxpayers claiming illness-related relief

The cited regulation focused on the taxpayer's own disabling injury or prolonged illness and inability both to prepare a return and to obtain another preparer. A family member's later illness did not meet that standard.

Common questions

Q: Did Stuart dispute the tax principal?
A: No. He acknowledged the tax and protested only penalty and interest.

Q: Why was interest not abated?
A: Section 7-1-67 made interest mandatory when tax was unpaid after its due date.

Q: Did advice from other contractors establish a reasonable mistake of law?
A: No. The AHO found no informed consultation or reasonable legal grounds for not reporting and paying the tax.

Q: Did the Department's hardship discussion excuse the earlier failure?
A: No. It occurred after assessment and did not affirmatively mislead Stuart about the original tax duties.

Q: Could his wife's cancer support the illness exception?
A: No. The taxpayer was not the person who became ill, the diagnosis was later, and he had help filing returns.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17 and 7-1-20 — assessment presumption and compromise for good-faith doubt about liability
• NMSA 1978, § 7-1-67 — mandatory interest
• NMSA 1978, § 7-1-69 — negligence penalty and good-faith mistake-of-law exception
• Regulations 3.1.6.13 and 3.1.6.14 NMAC — presumption for penalty and interest; ability to pay
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence definitions and indicators of nonnegligence

Cases cited:

• Archuleta v. O'Cheskey, 1972-NMCA-165 — burden to overcome an assessment
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — lack of informed consultation did not avoid penalty
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine possible tax consequences

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jimmy Stuart
• Decision PDF: D&O 16-22

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
JIMMY STUART No. 16-22
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0985627696

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on May 5, 2016 before David

Buchanan, Esq., Hearing Officer Supervisor, in Santa Fe. Jimmy Stuart (“Taxpayer”) appeared

for the hearing and represented himself. Taxpayer testified on his own behalf at the hearing. Staff

Attorney Sherri Trevino, Esq. appeared representing the State of New Mexico Taxation and

Revenue Department (“Department”). Department Exhibit A (Spreadsheet of Liabilities as of

May 5, 2016) was admitted into the record. Protest Auditor Thomas Dillon appeared and testified

as a witness for the Department. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 11, 2015, under letter id. no. L0985627696, the Department

assessed Taxpayer for $7,359.31 in withholding tax, $1,471.87 in penalty, and $992.88 in

interest for a total assessment of $9,824.06 for the CRS reporting periods between January 1,

2010 and December 31, 2012.

2. On February 15, 2016, Taxpayer protested the Department’s assessment.

3. On February 25, 2016, the Department’s protest office acknowledged receipt of a

valid protest.

4. On April 5, 2016, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

5. On April 6, 2016, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on May 5, 2016, within 90-

days of the Department’s acknowledgment of receipt of a valid protest.

6. The only issue at protest is whether the Department’s assessments of penalty and

interest should be abated in light of Taxpayer’s arguments at protest.

7. Taxpayer is self-employed and performs contracted services for other businesses.

8. Taxpayer was responsible for reporting and paying New Mexico combined

reporting system (“CRS”) taxes.

9. Taxpayer did not report or pay CRS taxes for work he performed as a business

during the relevant period.

10. Taxpayer had assistance filing his tax returns during the relevant period. He did

not consult with a tax professional regarding CRS taxes during the relevant period. Taxpayer

consulted with lay individuals who were engaged in similar work instead of consulting a tax

professional.

11. In 2012, Taxpayer learned from a tax professional with Tax Aid that he needed to

get a CRS number and pay CRS taxes. Taxpayer started paying CRS taxes in 2012.

12. Taxpayer supported his wife and daughter while they were in college during the

relevant period. Taxpayer accumulated student loan and credit card debt during that time.

13. Taxpayer’s wife graduated from college in 2013, but was diagnosed with cancer

on her first day of work after graduation.

In the Matter of the Protest of Jimmy Stuart, page 2 of 8

14. Taxpayer acknowledged his liability for the assessed tax. Taxpayer is seeking to

abate the assessed penalty and interest due to financial hardship.

15. Taxpayer contacted a Department employee who discussed a hardship program,

but Taxpayer was advised that he did not qualify because he had an active CRS number.

16. As of May 5, 2016, the remaining amounts due for the assessment in question

were $6,609.31 in tax, $1,471.87 in penalty and $1,073.92 in interest for a total remaining

amount of $9,155.10. See Exhibit A.

DISCUSSION

Taxpayer agrees that he owes the assessed tax principal. The only issue in this protest is

whether any of the interest under NMSA 1978, Section 7-1-67 (2013) or penalty under NMSA

1978, Section 7-1-69 (2007) must be abated because of Taxpayer’s claimed economic hardship.

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

presumed correct. Consequently, Taxpayer has the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. 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).

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 Marbob Energy Corp. v. N.M. Oil Conservation Comm’n.,

In the Matter of the Protest of Jimmy Stuart, page 3 of 8
2009-NMSC-013, ¶ 22, 146 N.M. 24. The assessment of interest is not designed to punish

taxpayers, but to compensate the state for the time value of unpaid revenues. Because the tax

was not paid when it was due, interest was properly assessed.

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, NMSA 1978 Section 7-1-69

(2007) requires that

there shall be added to the amount assessed a penalty in an amount equal
to 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.

(italics added for emphasis).

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.” See Marbob

Energy Corp., 2009-NMSC-013, ¶22 (use of the word “shall” in a statute indicates provision is

mandatory absent clear indication to the contrary).

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this

case, Taxpayer would be determined negligent under all three of those definitions.

In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o penalty shall

be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

mistake of law made in good faith and on reasonable grounds.” Here, there is no evidence that

Taxpayer made an informed judgment or determination based on reasonable grounds that gross

In the Matter of the Protest of Jimmy Stuart, page 4 of 8
receipts tax did not apply to it when Taxpayer failed to report and pay gross receipts tax on its

CRS returns. See C & D Trailer Sales v. Taxation and Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93

N.M. 697 (penalty upheld where there was no evidence that the taxpayer “relied on any informed

consultation” in deciding not to pay tax). Consequently, this mistake of law provision of Section

7-1-69 (B) does not mandate abatement of penalty in this case.

The other grounds for abatement of civil negligence penalty are found under Regulation

3.1.11.11 NMAC. That regulation establishes eight indicators of nonnegligence where penalty

may be abated. Based on the argument of Taxpayer and the evidence presented, only two factors

under Regulation 3.1.11.11 NMAC are potentially pertinent in this proceeding:

A. the taxpayer proves the taxpayer was affirmatively misled by a
department employee;
B. the taxpayer, disabled because of injury or prolonged illness,
demonstrates the inability to prepare a return and make payment and was
unable to procure the services of another person to prepare a return
because of injury or illness.

Under 3.1.11.11 (A) NMAC, Taxpayer was advised by a Department employee about a

possible “hardship” program, but was then advised that he did not qualify. However, the

information was provided by the Department employee after the assessment was made.

Therefore, Taxpayer was never “affirmatively misled by a department employee” about his need

to report and pay his taxes as required under subsection A. Under New Mexico's self-reporting

tax system, “every person is charged with the reasonable duty to ascertain the possible tax

consequences” of his or her actions. Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-

127, ¶5, 90 N.M. 16. It is the duty of Taxpayer to determine what CRS taxes need to be reported

and paid.

Taxpayer presented evidence that his wife was diagnosed with cancer in 2013. Section

3.1.11.11 (B) NMAC would not be applicable in this instance because it was Taxpayer’s wife

In the Matter of the Protest of Jimmy Stuart, page 5 of 8
and not Taxpayer himself who became ill; the illness occurred after the relevant reporting period;

and Taxpayer was able to obtain assistance with filing his taxes during that time period. None of

the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC allow for abatement of

penalty in this protest.

Taxpayer also discussed the possibility that he could obtain assistance through certain

programs that were mentioned by the Department employee. The Hearing Officer is aware that in

the past there have been Tax Amnesty programs that came from specific Legislative action that

may have provided the Taxpayer with certain relief. However, those programs were authorized for

a defined, limited period of time that has now expired. There is currently no statutory provision

that allows for Tax Amnesty.

Taxpayer claimed undue financial hardship as a basis to abate both interest and penalty.

Taxpayer indicated that abating interest and penalty would allow him to pay the taxes due and

meet his other debt obligations. Despite the Hearing Officer’s sympathy with the Taxpayer’s

position, New Mexico law does not provide a statutory or regulatory provision for abatement of

interest or penalty for undue financial hardship. The Department is required to assess a taxpayer

for any tax liability exceeding $25.00. See § 7-1-17 (A). NMSA 1978, Section 7-1-20 (1995) only

allows the Department to compromise on a tax assessment when it has a “good faith doubt” to the

liability. That section does not contain any financial hardship exception. Regulation 3.1.6.14

NMAC (01/15/01) does not allow the Department to abate otherwise legally required assessments

based on Taxpayer’s ability to pay. For the foregoing reasons, Taxpayer’s protest IS DENIED.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

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

In the Matter of the Protest of Jimmy Stuart, page 6 of 8
B. The hearing was timely set within 90-days of protest under NMSA 1978, Section 7-

1B-8(A) (2015).

C. Taxpayer did not overcome the presumption of correctness, including the assessed

interest or penalty, that attached to the assessments under NMSA 1978, Section 7-1-17 (C) (2007)

and Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

D. Under NMSA 1978, § 7-1-67 (A), Taxpayer is liable for interest because interest

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

assessment of interest is mandatory, not discretionary.

E. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inaction in failing to include gross receipts tax and payment of tax on

its CRS returns during the relevant period met the definition of civil negligence under Regulation

3.1.11.10 NMAC. Taxpayer did not establish a good faith, mistake of law made on reasonable

grounds that would allow for abatement of penalty under Section 7-1-69 (2007).

F. None of the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC

allow for abatement of penalty in this protest.

G. Inability to pay is not grounds for abatement of an assessed tax liability under

Regulation 3.1.6.14 NMAC (01/15/01).

H. Interest is due on the amount of unpaid principal tax and continues to accrue on

the unpaid principal amount until the principal amount of tax due is paid.

In the Matter of the Protest of Jimmy Stuart, page 7 of 8
For the foregoing reasons, the Taxpayers’ protest IS DENIED. IT IS ORDERED that the

Taxpayer is liable for the outstanding assessment amounts of $6,609.31 in tax, $1,471.87 in

penalty and $1,073.92 in interest. The interest amount is calculated through May 5, 2016.

DATED: May 31, 2016.

David Buchanan
David Buchanan
Hearing Officer Supervisor
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), 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. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Jimmy Stuart, page 8 of 8