Could a $35.39 estimated-tax underpayment penalty be abated when a husband's terminal illness left the taxpayers unable to address withholding or obtain tax help?

Plain-English summary

The AHO abated a $35.39 estimated-tax underpayment penalty because Joseph Chwirka's terminal illness and Rebecca Chwirka's caregiving left the couple unable to address the missing withholding or obtain tax help. Their protest was granted.

Joseph Chwirka had always prepared the couple's returns. After a cancer diagnosis in March 2015, he continued working while receiving treatment until his health forced him to stop in October. His disability income for October through December had no income-tax withholding, unlike the wages on which the couple had previously relied.

The Chwirkas' 2015 New Mexico income-tax liability was $4,669. Their withholding totaled $2,304, leaving $2,365 due. Rebecca Chwirka paid that tax on March 29, 2016, before the April 15 due date. She did not contest the tax, and the Department assessed no interest; the only dispute was the $35.39 underpayment penalty.

The payment was below the statutory safe amount

Section 7-2-12.2 required an annual payment through withholding or estimated installments equal to the lesser of 90% of the current year's tax or 100% of the prior year's tax. The couple's $2,304 payment was below both 90% of their $4,669 2015 liability and their $7,365 2014 liability, and the shortfall exceeded $1,000.

The AHO therefore agreed that the Department initially had to assess the penalty. The statute said a penalty “shall” be added for an underpayment, making its initial imposition mandatory.

Prolonged illness established non-negligence

The decision then applied Regulation 3.1.11.11(B) NMAC. That rule allowed penalty abatement when a taxpayer disabled by injury or prolonged illness could not prepare a return and make payment and could not procure another person to prepare the return.

Joseph Chwirka's health continuously declined after he stopped working. Rebecca Chwirka testified that caring for her husband of 36 years during his final months was all-consuming. He died on January 28, 2016. Only afterward did she obtain professional return-preparation assistance.

The AHO found it unreasonable to expect the couple to step away from that health crisis to investigate disability-income withholding, make estimated payments, or hire assistance. Those circumstances established non-negligence and overcame the assessment's presumption of correctness.

Result: protest GRANTED. The $35.39 underpayment penalty was abated.

What this means for you

Taxpayers dealing with serious illness

Serious illness does not automatically erase an estimated-tax penalty. This decision turned on evidence that the prolonged illness actually prevented the taxpayers from preparing, paying, or obtaining help during the relevant period.

Caregivers and surviving spouses

Document the timing of the illness, disability income, missing withholding, caregiving demands, payment of the underlying tax, and when professional help became available. The AHO relied on that concrete sequence rather than illness alone.

Accountants and tax professionals

Separate the underlying tax from the penalty question. Here the taxpayers accepted and timely paid the $2,365 balance; only the $35.39 estimated-tax penalty was contested and abated.

Common questions

Q: Did the AHO eliminate the couple's 2015 income tax?
A: No. Rebecca Chwirka did not dispute the $2,365 balance and paid it on March 29, 2016. The decision addressed only the penalty.

Q: Why was there an underpayment?
A: No tax was withheld from Joseph Chwirka's disability income during October, November, and December 2015.

Q: Was the Department wrong to assess the penalty initially?
A: No. The payment fell below the statutory required annual payment, so the AHO found the initial assessment mandatory before considering abatement.

Q: Why did the prolonged-illness exception apply?
A: Joseph Chwirka was disabled by terminal illness, and the AHO found that the crisis left the couple unable to address estimated taxes or procure tax-preparation help.

Q: Was interest also abated?
A: No interest had been assessed. The only disputed amount was the $35.39 underpayment penalty.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-12.2 — required annual payment, underpayment penalty, and waiver authority
• NMSA 1978, §§ 7-1-3 and 7-1-17 — definition of tax and assessment presumption
• NMSA 1978, § 7-1B-8 — 90-day hearing deadline
• Regulations 3.1.11.10 and 3.1.11.11(B) NMAC — negligence and prolonged-illness indicator of non-negligence

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — penalty included within the presumed-correct assessment
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — “shall” generally makes a statutory provision mandatory
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to investigate possible tax consequences

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Joseph D. & Rebecca A. Chwirka
• Decision PDF: D&O 16-54

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
JOSEPH D. & REBECCA A. CHWIRKA No. 16-54
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1922485808

DECISION AND ORDER

A hearing occurred in the above-captioned protest on November 17, 2016 at 10 a.m.

before Chris Romero, Hearing Officer, in Santa Fe, New Mexico. Rebecca A. Chwirka

represented herself pro se. Her spouse, Joseph D. Chwirka is deceased. Mr. and Mrs. Chwirka

are collectively referred to as “Taxpayers”. Ms. Chwirka appeared by telephone with the

concurrence of the Department and prior permission of the Hearing Officer. Staff Attorney,

Elena Morgan, appeared representing the State of New Mexico Taxation and Revenue

Department (“Department”). Protest Auditor Veronica Galewaler appeared as a witness for the

Department. Taxpayer Exhibits #1, #2, #3, and #5 were admitted into the record without

objection. Taxpayer Exhibit #4 was not admitted because it was illegible. Ms. Chwirka was

allowed to resubmit Taxpayer Exhibit #4 after conclusion of the hearing. It was received and

admitted without objection as Taxpayer Exhibit #5. Department Exhibit A was admitted into the

record without objection. On November 28, 2016, the Department submitted an amendment to

the first page of Department Exhibit A. The amendment was admitted as Department Exhibit A-

1 Amended. 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 August 10, 2016, under letter id. no. L1922485808, the Department assessed

Taxpayers the amount of $35.39 in underpayment penalty for Personal Income Tax for the tax

reporting period ending December 31, 2015.

2. On August 23, 2016, the Department received Ms. Chwirka’s Formal Protest of

the assessment.

3. On September 9, 2016, the Department’s protest office acknowledged receipt of a

valid protest of the assessment.

4. On October 17, 2016, the Department filed a request for hearing in this matter

with the Administrative Hearings Office.

5. On October 18, 2016, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on November 17, 2016 at 10

a.m.

6. On October 20, 2016, Ms. Chwirka requested permission to appear at the hearing

by telephone. On October 21, 2016, counsel for the Department indicated that it did not oppose

her request to appear by telephone. The Administrative Hearings Office entered an Order

Permitting Telephonic Appearance on October 24, 2016.

7. The hearing on the merits occurred within 90-days of the Department’s

acknowledgment of receipt of a valid protest.

8. Taxpayers, Joseph D. and Rebecca A. Chwirka, were married for 36 years.

9. Until his illness and death, Mr. Chwirka had always prepared Taxpayers’ income

tax returns.

10. Taxpayers were never required to make estimated tax payments in previous tax

years. Their annual payments were accomplished through withholdings.

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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11. In March of 2015, Mr. Chwirka was diagnosed with cancer.

12. While undergoing treatment for cancer, Mr. Chwirka maintained employment as

long as he could during which time his income continued to be subject to income tax

withholdings.

13. In October of 2015, Mr. Chwirka’s health had deteriorated to the extent he could

no longer continue working. He began to receive disability income. There were no withholdings

from Mr. Chwirka’s disability income.

14. Mr. Chwirka received disability income for October, November, and December of

2015.

15. Mr. Chwirka’s condition continued to deteriorate and he died at his home on

January 28, 2016. The cause of death was cholangiocarcinoma. He was 60 years old. [Taxpayer

Ex. #2].

16. In 2016, after Mr. Chwirka died, Ms. Chwirka sought assistance from Karen

Rademacher of Rademacher Professional Services to assist in preparing Taxpayers’ 2015 income

tax returns.

17. Taxpayers’ New Mexico income tax liability for 2015 was $4,669.00. Taxpayers’

total payments and credits through withholding were $2,304.00 resulting in an underpayment of

tax in the amount of $2,365.00. [Taxpayer Ex. #1; Department Ex. A-1 Amended]

18. Ms. Rademacher and Ms. Chwirka concluded that the underpayment occurred as

a result of there not being any withholdings from the disability benefits that Mr. Chwirka

received during the final three months of 2015. [Taxpayer Ex. #3]

19. Ms. Chwirka paid the tax due in the amount of $2,365.00 on March 29, 2016.

[Department Ex. A-1 Amended]

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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20. The Department assessed an underpayment penalty calculated as provided in

Department Ex. A-2. The penalty assessed was $35.39.

21. The Department assessed the underpayment penalty because Taxpayers had not

made the required annual payment for 2015. The required annual payment was 90 percent of the

tax liability for 2015 or 100 percent of the tax liability for 2014.

22. Taxpayers’ liability for 2014 was $7,365.00. [Department Ex. #A-1 Amended].

Taxpayers’ liability for 2015 was $4,669.00. [Taxpayer Ex. #1; Department Ex. #A-1 Amended].

Taxpayers’ 2015 payments and credits, totaling $2,304.00 [Taxpayer Ex. #1; Department Ex.

A-1 Amended], were less than 90 percent of Taxpayers’ 2015 liability or 100 percent of

Taxpayers’ 2014 liability and resulted in an underpayment of more than $1,000.00 for 2015.

DISCUSSION

Ms. Chwirka does not protest the amount of New Mexico income tax due for 2015 nor

did the Department assess interest in this matter. The only issue subject of this protest is the

Department’s assessment of underpayment penalty under NMSA 1978, Sec. 7-2-12.2 (2015),

which Ms. Chwirka requested be abated because of the circumstances surrounding Mr.

Chwirka’s illness and death.

Burden of Proof

Assessments by the Department are presumed to be correct. See NMSA 1978, Sec. 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,

Sec. 7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-

NMCA-070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayers is presumed to be

correct, and it is the Taxpayers’ burden to present evidence and legal argument to show that the

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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penalty was improperly imposed or that Taxpayers are entitled to an abatement of penalty.

Estimated Tax.

Taxpayers are required to make “the required annual payment in installments through

either withholding or estimated tax payments.” NMSA 1978, Sec. 7-2-12.2 (A) (2011). The

required annual payment is either 90% of the current tax year or 100% of the prior tax year,

whichever is less. See NMSA 1978, Sec. 7-2-12.2 (B). Relying on the prior tax year’s tax due,

Taxpayers could have paid $7,365.00 to avoid an underpayment penalty, or relying on 90 percent

of the current tax year, Taxpayers could have paid approximately $4,203.00 toward their total 2015

tax liability of $4,669.00 in order to avoid the underpayment penalty. Taxpayers’ actual payment

was $2,304.00 which was far less than the required annual payment using either of the two

permitted formulae.

Consequently, the Department was required to assess a penalty pursuant to NMSA 1978,

Sec. 7-2-12.2 G which provides “in the case of an underpayment of the required annual payment

by a taxpayer, there shall be added to the tax a penalty[.]” (Emphasis added).

The statute’s use of the word “shall” makes the imposition of penalty mandatory. See

Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use

of the word “shall” in a statute indicates provision is mandatory absent clear indication to the

contrary).

Since the Taxpayers’ actual 2015 payment was more than $1,000 less than the required

annual payment, the Department correctly assessed a penalty. See NMSA 1978, Sec. 7-2-12.2 H

(1). However, the circumstances in this protest warrant additional consideration to determine

whether the Taxpayers are entitled to an abatement of the penalty.

At the hearing, the Ms. Chwirka explained that the circumstances presented in 2015 were

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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unique. Mr. Chwirka was diagnosed with cancer in March of 2015. He worked as long as his

failing health permitted while also undergoing cancer treatment. In October of 2015, his health

declined to the level that he could no longer work. Ms. Chwirka said Mr. Chwirka began to

receive disability benefits for the remainder of 2015. He died in January of 2016.

Mr. Chwirka’s health during the last three months of 2015 obviously continued to

deteriorate. During this time, the Taxpayers did not recognize the fact that taxes were not being

withheld from the disability income Mr. Chwirka was receiving nor did Taxpayers consider the

potential consequences of the resulting underpayment. Rather, Ms. Chwirka testified that her

efforts and attention were directed to caring for her ailing husband. As the Hearing Officer

interpreted Ms. Chwirka’s testimony, caring for her husband of 36 years in the final months of

his life was all-encompassing and it would have been unreasonable to expect her to pause amid

her family crisis to investigate the potential tax consequences of the disability income her

husband had begun receiving only three months before the end of the year and his death. The

Hearing Officer agreed.

Despite the mandatory imposition of penalty, the Legislature has recognized that there

will be occasions when the imposition of a penalty may be waived. One such scenario in which

the secretary is granted discretion to forego the imposition of an underpayment penalty is when

“the secretary determines that the underpayment was not due to fraud, negligence or disregard of

rules and regulations.” See NMSA 1978, Sec. 7-2-12.2 (H) (4) (2015).

The Department does not allege that the Taxpayers acted with fraudulent intentions.

Rather, the Department’s claims that Taxpayers’ failure to make the required annual payment

resulted from negligence consisting of their lack of knowledge or erroneous belief, which is

considered to be negligence for purposes of assessment of penalty. See Tiffany Const. Co., Inc. v.

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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Bureau of Revenue, 1976-NMCA-127, 90 N.M. 16 (“Every person is charged with the reasonable

duty to ascertain the possible tax consequences of his action. This can be done by consultation

with one's legal advisor. Depending on the facts, failure to do so may constitute negligence.”).

In Regulation 3.1.11.10 NMAC, the Department defined “negligence” as that term was used

in NMSA 1978, Sec. 7-1-69 (2015) of the Tax Administration Act. There is no indication that the

Legislature intended the term to be defined differently when it made reference to “negligence” in

NMSA 1978, Sec. 7-2-12.2 of the Income Tax Act. Both sections address imposition of penalties

resulting from taxpayer negligence.

Regulation 3.1.11.10 NMAC defines “negligence” as the: (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, Taxpayers

were negligent under Regulation 3.1.11.10 (B) & (C) NMAC because they failed to take action to

pay estimated taxes during the latter portion of 2015 resulting in an underpayment penalty.

However, Regulation 3.1.11.11 NMAC establishes eight indicators of non-negligence

where penalty may be abated. Based on the argument of Ms. Chwirka and the evidence

presented, the only factor under Regulation 3.1.11.11 NMAC potentially applicable is subsection

B, which reads:

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.

During the final three months of 2015, Mr. Chwirka was indisputably disabled due to

prolonged illness which eventually resulted in death. Ironically, it was the financial benefit

received as a result of that disability which ultimately contributed to this protest.

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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Disability alone is not enough under Regulation 3.1.11.11 (B) NMAC. To abate penalty,

a taxpayer must also demonstrate an inability to prepare a return and make payment or procure

the services of another person to prepare the return. In this protest, it was clear and

unquestionable that Ms. Chwirka was consumed with caring for her ailing husband. Taxes were

not a priority in light of the surrounding circumstances. Rather, her efforts were concentrated on

providing Mr. Chwirka with continuous care in what would be the final months of his life.

Recall that Mr. Chwirka’s disability income started in October of 2015, the tax year

concluded on December 31, 2015, and Mr. Chwirka died on January 28, 2016. Mr. Chwirka’s

condition was obviously in continuous decline during this period and the Hearing Officer

inferred from the circumstances that opportunities to dedicate any time, thought, or effort to

taxes were minimal to begin with, and became nonexistent as Mr. Chwirka’s condition

worsened, as he approached death.

Not until after Mr. Chwirka’s death did Ms. Chwirka seek professional assistance with

Taxpayers’ returns because Ms. Chwirka recognized how the circumstances of tax year 2015

would pose some challenges from a tax perspective. However, it was too late to avoid the penalty

despite the fact that Ms. Chwirka satisfied her 2015 liability before it was due on April 15, 2016.

Because Mr. Chwirka was undeniably disabled by illness, and the circumstances were

such that it would be unreasonable to expect Taxpayers to retreat from this personal health crisis

to prepare returns, pay estimated taxes, or even procure the services of another, it would be

unconscionable to penalize Taxpayers under these circumstances, no matter how minute the

penalty may seem. The underpayment penalty of $35.39 should be abated pursuant to 3.1.11.11

(B) NMAC.

Therefore, Taxpayers’ protest is GRANTED.

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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CONCLUSIONS OF LAW

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

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

B. The hearing was timely set and held within 90-days of the Department’s

acknowledged receipt of a valid protest under NMSA 1978, Section 7-1B-8 (2015).

C. Taxpayers were entitled to abatement of penalty under Regulation 3.1.11.11 (B)

NMAC which allows for abatement of penalty because taxpayer, disabled because of injury or

prolonged illness, demonstrated 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.

D. By establishing non-negligence under Regulation 3.1.11.11 (B) NMAC,

Taxpayers overcame the presumption of correctness on the penalty assessed under NMSA 1978,

Section 7-2-12.2 (2015).

For the foregoing reasons, the Taxpayers’ protest GRANTED.

DATED: November 29, 2016.

Chris Romero
Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Joseph D. and Rebecca A. Chwirka
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NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), 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 Joseph D. and Rebecca A. Chwirka
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