Could Spelman Investments recover $14,746.07 of CRS filing penalties when it paid its taxes but mistakenly failed to file returns after New Mexico changed its online system?
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This page answers the general question as of 2017. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
Spelman Investments was not entitled to a refund of $14,746.07 in penalties for failing to file Combined Reporting System returns. Paying the tax on time did not satisfy the separate filing requirement, and failing to act on four Department letters constituted negligence.
Mark and Janice Spelman co-owned a business that managed rental properties in Ruidoso. Janice handled its records and tax filings.
The new TAP system separated payment from return filing
Before May 2014, Spelman filed its CRS returns and made payments at the same time on one website.
When the Department changed to the Taxpayer Access Point (TAP) system, payments were made on one webpage while returns had to be filed separately on another.
Janice continued paying the required taxes from May 2014 through July 2016, but she did not realize that the related returns were not being filed.
The Department mailed four nonfiler notices
The Department mailed notices to Spelman's correct address on:
- August 11, 2014;
- November 13, 2014;
- February 23, 2015; and
- July 16, 2015.
Each notice identified missing CRS returns and asked the business to contact the Department. The list of unfiled periods grew with each letter.
The Spelmans did not recall receiving the letters. Janice acknowledged that the business received a lot of mail and testified that if the letters arrived, she did not open them because they were not certified.
The AHO noted that the Department was not required to send those notices by certified mail.
The business corrected the returns after a phone call
In July 2016, Department employee Sandra Whitten called Mark, explained that returns were missing, and walked Janice through the TAP filing process.
Spelman immediately filed all returns for May 2014 through July 2016.
Mark later paid the penalties and sought a refund. The refund request covered $14,746.07 and was denied.
Good intentions and timely tax payments did not defeat negligence
Section 7-1-69(A) required a penalty when a late return resulted from negligence or disregard of Department rules, even without intent to evade tax.
Regulation 3.1.11.10 defined negligence to include failure to exercise ordinary business care, inaction when action is required, inadvertence, carelessness, erroneous belief, and inattention.
The filing failure began as an inadvertent misunderstanding of the changed system. But the business then failed to respond to four letters mailed to its proper address.
The AHO found that not opening Department mail because it was not certified failed the ordinary-business-care standard. None of Regulation 3.1.11.11's listed indicators of non-negligence applied.
Result: protest DENIED. The penalty was properly assessed, and Spelman did not establish entitlement to the $14,746.07 refund.
What this means for you
Businesses using electronic filing systems
Confirm that both the payment and the return show as completed. A successful payment confirmation does not necessarily mean a return was filed.
Taxpayers receiving Department mail
Open and investigate regular mail from the Department. A notice need not be certified to put a business on warning that required filings are missing.
Businesses that paid tax on time
Payment and filing are separate duties. Timely payment did not prevent a late-return penalty when the corresponding returns were not submitted.
Owners handling taxes without dedicated staff
Review filing confirmations and account transcripts after a system change. An innocent interface misunderstanding can become negligence when repeated warnings are ignored.
Common questions
Q: Did Spelman pay the underlying taxes?
A: Yes. It made the CRS payments through TAP during the entire period.
Q: What did it fail to do?
A: It did not separately file the related CRS returns from May 2014 through July 2016.
Q: Why were the returns missed?
A: The new TAP system put payments and return filing on different webpages, unlike the prior system.
Q: How many written notices did the Department send?
A: Four, all by regular mail to the correct address.
Q: Did Spelman correct the filings once it understood the problem?
A: Yes. It filed all missing returns immediately after a Department employee called in July 2016.
Q: Why was the penalty still upheld?
A: The AHO found that failing to open or respond to four properly addressed Department letters was not ordinary business care.
Q: How much penalty refund was denied?
A: $14,746.07.
Citations and references
Statutes and regulations:
- NMSA 1978, § 7-1-69(A) — mandatory penalty for negligent failure to file
- NMSA 1978, § 7-1-13 — taxpayer payment responsibility
- NMSA 1978, §§ 7-1-3(X) and 7-1-17(C) — tax definition and presumption of correctness
- Regulation 3.1.6.13 NMAC — presumption for penalty and interest
- Regulation 3.1.11.10 NMAC — negligence definition
- Regulation 3.1.11.11 NMAC — indicators that may show non-negligence
Cases cited:
- Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — statutory “shall” generally creates a mandatory duty
- El Centro Villa Nursing Center v. Taxation & Revenue Department, 1989-NMCA-070 — inadvertent error can support penalty
- Grogan v. New Mexico Taxation & Revenue Department, 2003-NMCA-033 — unintentional filing or payment failures can be negligent
- Chevron U.S.A., Inc. v. State ex rel. Department of Taxation & Revenue, 2006-NMCA-050 — weight given to agency regulations
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Spelman Investments
- Decision PDF: D&O 17-49
Original ruling text
STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT
IN THE MATTER OF THE PROTEST OF
SPELMAN INVESTMENTS No. 17-49
TO DENIAL OF REFUND
ISSUED UNDER LETTER
ID NO. L0668837168
DECISION AND ORDER
A protest hearing occurred on the above captioned matter on November 14, 2017 before
David Buchanan, Esq., Hearing Officer, in Santa Fe, New Mexico. At the hearing, owners Mark
Spelman and Janice Spelman appeared and testified at the hearing for Spelman Investments
(“Taxpayer”). Staff Attorney, David Mittle, appeared representing the State of New Mexico
Taxation and Revenue Department (“Department”). Protest Auditor Nicholas Pacheco appeared
and testified as a witness for the Department. Taxpayer Exhibit #1 and Department Exhibits A –
D 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
- Taxpayer filed a request for refund for $14,746.07 in penalty paid for the
Combined Reporting System (CRS) reporting periods from May 2014 through July 2016 on
February 15, 2017.
-
The Department denied the refund request on April 11, 2017.
-
Taxpayer filed a formal protest of the refund denial on July 10, 2017.
-
The Department acknowledged receipt of a valid protest on July 27, 2017.
- The Department filed a request for hearing in this matter with the Administrative
Hearings Office on September 11, 2017.
- On September 11, 2017, the Administrative Hearings Office sent Notice of
Administrative Hearing, setting this matter for a hearing on October 3, 2017.
- On October 2, 2017, Taxpayer filed a request for continuance of the hearing.
Taxpayer waived the requirement that the hearing be held within 90 days of the protest. The
Department did not object.
- On October 3, 2017, the Administrative Hearings Office issued an Order Granting
Continuance and Notice of Administrative Hearing continuing the hearing to November 14,
2017.
- Mark Spelman and Janice Spelman are co-owners of Spelman Investments. The
business manages rental properties in Ruidoso, New Mexico. Mrs. Spelman performed all record
keeping and tax filing for the business. [Testimony of Mrs. Spelman]
- Prior to May 2014, Mrs. Spelman filed and paid all CRS taxes online for
Taxpayer. All returns were filed and payments were made on the same website at the same time.
The online filing system changed to the TAP system in May 2014. In the new TAP system,
payments were made on one webpage, but returns were filed separately on another webpage.
[Testimony of Mrs. Spelman]
- Mrs. Spelman used the TAP system to pay CRS taxes for Taxpayer from May
2014 through July 2016. [Testimony of Mrs. Spelman; attachments to Protest]
- Mrs. Spelman did not file the related returns for Taxpayer from May 2014
through July 2016. [Testimony of Mrs. Spelman].
In the Matter of the Protest of Spelman Investments
Page 2 of 8
- Mrs. Spelman’s intent was to pay the required taxes and to file the returns
properly, but she did not realize that she was not filing the returns properly under the new TAP
system. [Testimony of Mrs. Spelman]
- Returns must be filed so that the State can properly allocate funds to the
jurisdictions where the business is located. [Testimony of Mr. Pacheco].
- The Department sent a letter by regular mail to Taxpayer at the proper address on
August 11, 2014 advising that CRS returns for May 2014 had not been filed and asking Taxpayer
to contact the Department. [Department Exhibit A-1]
- Neither Mr. or Mrs. Spelman recalled receiving the letter of August 11, 2014.
[Testimony of Mr. Spelman; Testimony of Mrs. Spelman]
- The Department sent a letter by regular mail to Taxpayer at the proper address on
November 13, 2014 advising that CRS returns for May 2014, June 2014, July 2014 and August
2014 had not been filed and asking Taxpayer to contact the Department. [Department Exhibit
B-1]
- Neither Mr. or Mrs. Spelman recalled receiving the letter of November 13, 2014.
[Testimony of Mr. Spelman; Testimony of Mrs. Spelman]
- The Department sent a letter by regular mail to Taxpayer at the proper address on
February 23, 2015 advising that CRS returns for May 2014, June 2014, July 2014, August 2014,
September 2014, October 2014 and November 2014 had not been filed and asking Taxpayer to
contact the Department. [Department Exhibit C-1]
- Neither Mr. or Mrs. Spelman recalled receiving the letter of February 23, 2015.
[Testimony of Mr. Spelman; Testimony of Mrs. Spelman]
In the Matter of the Protest of Spelman Investments
Page 3 of 8
- The Department sent a letter by regular mail to Taxpayer at the proper address on
July 16, 2015 advising that CRS returns for May 2014, June 2014, July 2014, August 2014,
September 2014, October 2014, November 2014, December 2014, January 2015, February 2015,
March 2015 and April 2015 had not been filed and asking Taxpayer to contact the Department.
[Department Exhibit D-1]
- Neither Mr. or Mrs. Spelman recalled receiving the letter of July 16, 2015.
[Testimony of Mr. Spelman; Testimony of Mrs. Spelman]
- Mrs. Spelman acknowledged that they get a lot of mail. She testified that if they
did receive the letters, they were not sent by certified mail and she did not open them.
[Testimony of Mrs. Spelman]
-
Sandra Whitten with the Department contacted Mr. Spelman by telephone in July
-
Ms. Whitten advised Mr. and Mrs. Spelman that they had not been filing the required
returns. Ms. Whitten walked Mrs. Spelman though the TAP system, showed her how to properly
file returns and assisted her with setting up the system properly. [Testimony of Mrs. Spelman]
- Taxpayer filed all returns for May 2014 through July 2016 immediately after
being contacted by Ms. Whitten and learning of the issue. [Testimony of Mrs. Spelman;
Attachments to Protest]
- Mr. Spelman contacted Department employee Danny Pogan regarding the
penalty. Mr. Pogan advised that they should probably pay the penalty and then file for a refund.
Mr. Pogan indicated that the request would probably be denied, but then they could file a protest.
Mr. Pogan indicated that he did not think there would be a problem. [Testimony of Mr.
Spelman]
In the Matter of the Protest of Spelman Investments
Page 4 of 8
- Mr. Spelman drove to Santa Fe and paid the penalty in person. [Testimony of
Mr. Spelman].
DISCUSSION
It was apparent at the conclusion of the hearing in this protest that there was minimal
dispute of the material facts in this matter. Taxpayer paid the required taxes, but did not file the
related CRS returns after the Department’s computer system changed in 2014. The Department
sent four letters by regular mail after May 2014. Taxpayer either did not receive or did not open
the letters. Taxpayer corrected the issue and filed the CRS returns after being notified of the error
by telephone. Taxpayer paid the penalty, but then requested a refund.
Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17
(C) (2007). 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, § 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). In this case, the penalty was assessed by the Department and the Taxpayer paid
the penalty. The assessment of penalty by the Department is presumed to be correct, and it is the
Taxpayer’s burden to present evidence and legal argument to show that it is entitled to a refund.
Penalty “shall be added to the amount assessed” when a return is not filed by the date
required regardless of whether a tax is due. See NMSA 1978, § 7-1-69 (A) (2007). Section 7-1-
69 (A) requires that the penalty be added whenever the failure to file is due to negligence or
disregard of Department rules and regulations, but without any intent to evade or defeat the tax.
In the Matter of the Protest of Spelman Investments
Page 5 of 8
The word “shall” indicates that the assessment of penalty is mandatory, not discretionary. See
Marbob Energy Corp. v. N.M. Oil Conservation Comm’n., 2009-NMSC-013, ¶ 22, 146 N.M. 24.
It is a taxpayer’s responsibility to make payments. See NMSA 1978, § 7-1-13 (2013).
Negligence includes the failure to exercise ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances; inaction by taxpayers where
action is required; or inadvertence, indifference, thoughtlessness, carelessness, erroneous belief
or inattention. See 3.1.11.10 NMAC (2001). Regulation 3.1.11.11 NMAC (2001) sets forth
several specific facts that may indicate that a taxpayer was not negligent: A. being affirmatively
misled by a Department employee; B. a disability or prolonged illness prevented the ability to
prepare a return; C. physical damage to records or place of business caused a delay in filing a
return or paying a tax; D. reasonable reliance on the advice of competent tax counsel or an
accountant; E. filing of an amended return; F. IRS abatements of federal penalty on income tax
returns; G. participation in production of oil and gas from a state or federal property; or G. good
faith doubt by an out-of-state business that there is a nexus with New Mexico. Penalty may be
assessed even when the failure to pay a tax or file a return is based on an inadvertent error or
unintentional failure to pay the tax or file the return when it was due. See El Centro Villa
Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M. 795. See also
Grogan v. N.M. Taxation and Revenue Dep’t, 2003-NMCA-033, ¶ 32-35, 133 N.M. 354. See
also Arco Materials, Inc. v. Taxation and Revenue Dep’t, 1994-NMCA-062, ¶ 14, 118 N.M. 12
rev’d on other grounds by Blaze Constr. Co v. Taxation and Revenue Dep’t, 1995-NMSC-110,
118 N.M. 647.
Taxpayer did not file the CRS returns at the required times. The failure to file the returns
was based on the inadvertent error of the Taxpayer due to the changes to the Department’s
In the Matter of the Protest of Spelman Investments
Page 6 of 8
computer system. However, Taxpayer was notified in writing four times by the Department of
the failure to file the required returns. There is no requirement that the Department send such
notifications by certified mail. The notices were mailed to the proper address for the Taxpayer.
The Hearing Officer was persuaded by the testimony presented at the hearing that Taxpayer did
not open the letters from the Department because they were not certified letters. Such inaction
demonstrates that Taxpayer did not exercise ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances. None of the indicators of non-
negligence set forth in Regulation 3.1.11.11 NMAC were evident in this case. While Taxpayer
may have intended to properly file the required tax returns and in fact timely paid the taxes,
Taxpayer was negligent by failing to timely file the required returns. The penalty was properly
assessed against the Taxpayer.
CONCLUSIONS OF LAW
A. Taxpayer filed a timely, written protest to the Department’s Denial of Refund, and
jurisdiction lies over the parties and the subject matter of this protest.
B. Taxpayer’s failure to timely file the required returns was due to Taxpayer’s
negligence and penalty was properly assessed by the Department under NMSA 1978, Section 7-
1-69 (2007).
C. Taxpayer did not establish that it was entitled to a refund of the penalty for CRS
periods from May 2014 through July 2016.
For the foregoing reasons, the Taxpayer’s protest IS DENIED.
In the Matter of the Protest of Spelman Investments
Page 7 of 8
DATED: December 15, 2017.
David Buchanan
Hearing Officer
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 Spelman Investments
Page 8 of 8
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