How was Michael Trujillo's personal income tax assessment changed after better records supported a bank-deposits calculation instead of audit extrapolation?

Plain-English summary

Michael Trujillo obtained a $90,413.48 abatement after better records supported a bank-deposits calculation and the Department replaced a fraud penalty with a negligence penalty. He remained liable for the recalculated balance.

Trujillo earned New Mexico income from a valet and event-parking business during tax years 2007 through 2013. He kept poor records and had difficulty accurately filing and reporting his taxes.

When the Department audited him in 2014, missing documentation forced the auditor to estimate income through extrapolation and averages. The Department initially treated the record failure as willful and assessed:

• $113,654.14 personal income tax;
• $63,906.69 fraud penalty; and
• $13,049.33 interest.

The initial assessment totaled $190,610.16.

Better records changed the calculation

During the protest, Trujillo's new CPA supplied improved documentation. The parties agreed that a bank-deposits method more accurately represented his earnings than the audit's extrapolation method.

The Department recalculated the income and taxes and concluded that the inaccurate reporting resulted from negligence rather than fraud. Trujillo agreed with the revised figures.

The AHO ordered abatement of:

• $35,985.86 tax;
• $48,372.03 penalty; and
• $6,055.59 interest.

Those components totaled $90,413.48.

A substantial balance remained

After the adjustment, Trujillo remained liable for:

• $77,668.28 personal income tax;
• $15,533.66 penalty; and
• $15,916.09 interest as of July 18, 2017.

The updated balance was $109,118.03, with interest continuing to accrue until the tax principal was paid.

The decision said the Department's original assessment was reasonable when made because it reflected the information Trujillo had provided. The later abatement followed the better documentation produced during the protest.

Result: protest GRANTED IN PART and DENIED IN PART. The AHO approved the stipulated $90,413.48 abatement and upheld the revised liability.

What this means for you

Cash-receipt and service businesses

Maintain complete contemporaneous records. When records are inadequate, the Department may use indirect methods such as extrapolation and averages to reconstruct income.

Taxpayers already under audit or protest

Continue gathering reliable records. Trujillo's new documentation materially reduced the tax and penalty even though it arrived during the protest rather than the original audit.

Taxpayers facing a fraud penalty

The quality and implications of the evidence matter. Here, the improved record allowed the parties to agree that negligence—not fraud—better described the reporting failure.

Common questions

Q: Why did the Department use extrapolation?
A: Trujillo's poor bookkeeping left the auditor without sufficient documentation.

Q: What changed during the protest?
A: A new CPA produced better records, and the parties agreed that bank deposits more accurately reflected earnings.

Q: Was the fraud penalty upheld?
A: No. The Department concluded that Trujillo's reporting failure was negligent rather than fraudulent.

Q: How much was abated?
A: $90,413.48, consisting of $35,985.86 tax, $48,372.03 penalty, and $6,055.59 interest.

Q: How much remained due?
A: $109,118.03 as of July 18, 2017, plus later interest.

Q: Did Trujillo dispute the revised figures?
A: No. The decision states that he concurred with them and conceded the revised tax, penalty, and interest.

Citations and references

• NMSA 1978, § 7-1-25 — right to appeal the administrative decision

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Michael Trujillo
• Decision PDF: D&O 17-33

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
MICHAEL TRUJILLO, No. 17-33
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L0818020304

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 20, 2017 before

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

represented by Mr. Peter Breen, Staff Attorney. Mr. Tom Dillon, Auditor, also appeared on behalf

of the Department. Mr. Michael Trujillo (Taxpayer), appeared for the hearing with his attorney,

Mr. Dan Pick. The Department’s exhibit “B”, a copy of the audit, was admitted. Other exhibits

referred to at the hearing were not admitted as they were already included in the administrative

file. 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. On April 30, 2015, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax years from December 31, 2007 through December 31,

2013. The assessment was for $113,654.14 tax, $63,906.69 penalty, and $13,049.33

interest. The penalty was a fraud penalty.

2. On July 29, 2015, the Taxpayer filed a formal protest letter.

3. On September 9, 2015, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

4. On September 11, 2015, the Hearings Office issued a notice of hearing.
5. On October 9, 2015, a telephonic scheduling hearing was conducted. The scheduling

hearing occurred within 90 days of the protest.

6. This protest was consolidated with two related protests at the scheduling hearing.

7. The hearing on the merits was originally set for July 2016.

8. The Taxpayer requested that the protest be held in abeyance as the parties were working

on a settlement. The request was granted, and the hearing was reset for July 20, 2017.

9. Two of the protests were withdrawn pending the hearing. The only protest still

outstanding at the time of the hearing was to the assessment issued under L0818020304.

10. On July 11, 2017, the parties requested a continuance. The request was denied.

11. On July 19, 2017, the parties filed a joint stipulation.

12. During the tax years in question, the Taxpayer was earning income from his business in

New Mexico, which provided valet and parking services for events.

13. The Taxpayer was not keeping good records during those years and had some trouble

accurately filing and reporting his taxes.

14. In 2014, the Department began an audit of the Taxpayer and his businesses. The

Department then issued the assessment.

15. Due to the Taxpayer’s poor bookkeeping, the Department used an extrapolation and

averages method to determine the tax owed. The auditor determined that the Taxpayer’s

failure to provide documentation was willful and assessed a fraud penalty.

16. During the protest, the Taxpayer’s new CPA was able to provide some better

documentation. The parties mutually determined that a bank deposits method would be a

more accurate representation of the earnings.

Michael Trujillo
Letter ID No. L0818020304
page 2 of 5

17. The Department recalculated the Taxpayer’s earnings and taxes based on the bank

deposits method.

18. The Department determined that the Taxpayer’s failure to report and pay accurately was

due to negligence, rather than fraud.

19. The Department determined that the assessment should be abated by $90,413.48. The

Taxpayer concurred with the new figures.

20. The Taxpayer is liable for personal income tax of $77,668.28, penalty of $15,533.66, and

interest as of July 18, 2017 of $15,916.09.

21. Interest continues to accrue until the tax principal is paid.

DISCUSSION

Based on the evidence presented and the stipulations of the parties, the amount of the

assessment should be adjusted. The Department’s assessment was reasonable at the time it was

made based on the information provided by the Taxpayer. The Taxpayer provided more

information during the protest, and the Department’s recalculated liability is reasonable.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notice of Assessment issued

under Letter ID numbers L0818020304, and jurisdiction lies over the parties and the subject matter

of this protest.

B. The Taxpayer conceded that he owed tax, penalty, and interest. The Department

recalculated the tax appropriately after the Taxpayer provided more information.

C. Therefore, the assessment IS ABATED AS FOLLOWS: $35,985.86 in tax,

$48,372.03 in penalty, and $6,055.59 in interest.

Michael Trujillo
Letter ID No. L0818020304
page 3 of 5
D. The Taxpayer remains LIABLE FOR TAXES AS FOLLOWS: $77,668.28 in tax,

$15,533.66 in penalty, and $15,916.09 in interest as of July 18, 2017. Interest continues to

accrue until tax principal is paid.

For the foregoing reasons, the Taxpayer's protest is DENIED IN PART AND GRANTED

IN PART.

DATED: July 31, 2017.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

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. If an appeal is not filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

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 begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record with the Court of Appeals, which

occurs within 14 days of the Administrative Hearings Office’s receipt of the docketing statement

from the appealing party. See Rule 12-209 NMRA.
Michael Trujillo
Letter ID No. L0818020304
page 4 of 5
CERTIFICATE OF SERVICE

Michael Trujillo
Letter ID No. L0818020304
page 5 of 5