If the IRS increases your income after the fact, how long does New Mexico have to bill you for the extra state tax, and can you avoid the penalty and interest?

Plain-English summary

David and Raya Kovensky filed and paid their New Mexico income tax for 2014 and 2015 using H&R Block software. Years later, the IRS corrected their federal adjusted gross income for both years — raising 2014 from $44,425 to $72,482 and 2015 from $36,988 to $65,578 — and reported those changes to New Mexico. Because New Mexico calculates state income tax off a taxpayer's federal adjusted gross income, the higher federal numbers meant they owed more state tax. In September 2020 the Department assessed $3,449 in additional tax, plus penalty and interest, for a total near $4,890.

The couple did not dispute that they owed the additional tax. They fought only the penalty and interest, and they argued the assessment came too late — they believed the state could not reach back more than three years, and at first even thought the Department's letter was a scam. The Administrative Hearings Office denied the protest on every point.

On timing, the general rule is a three-year assessment window, but New Mexico law extends it to six years when a return understates the tax due by more than 25%. The Kovenskys' 2014 return understated the tax by about 83% ($154 reported vs. $1,998 actually due) and their 2015 return by 100% ($0 reported vs. $1,605 due). Both blew past the 25% threshold, so the six-year window applied and the September 2020 assessment was timely.

On penalty, the statute says a negligence penalty "shall be added" — it is mandatory, not discretionary. And New Mexico treats a taxpayer's "erroneous belief" that no tax is owed as a form of negligence, so simply not understanding the situation did not excuse them. On interest, the statute likewise says interest "shall be paid"; it is not a punishment but compensation to the state for the time value of money paid late. The couple ended up liable for $3,449 in tax, $689.80 in penalty, and $838.22 in interest.

What this means for you

Anyone whose income was raised by an IRS audit or correction

New Mexico piggybacks on your federal adjusted gross income. When the IRS changes your federal income — through an audit, a matching correction, or an amended return — your New Mexico tax almost always changes too, and the Department finds out. Don't assume a years-old federal change is behind you: if the correction means you underpaid New Mexico by a large margin, the state's assessment clock is longer than you think.

Taxpayers who think an old tax notice must be a scam

The Kovenskys ignored the Department's letters partly because they assumed the state could not audit that far back and that the notice might be fake. That instinct cost them: ignoring the inquiry did not stop the assessment, and it left them unable to document anything because they had thrown out their records. If you get a notice that looks off, verify it through the Department's official channels rather than ignoring it — a real notice does not go away.

Accountants and tax professionals

This is a clean illustration of the §7-1-18(D) six-year exception: a return understating tax by more than 25% reopens the assessment window from three years to six. Both years here were far over the line. Note also the negligence standard under Regulation 3.1.11.10 NMAC — "inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention" all qualify — so a client's honest confusion is not, by itself, a penalty defense; the non-negligence factors in 3.1.11.11 (such as reliance on a professional) are what move the needle. The presumption of correctness under §7-1-17 extends to penalty and interest via Regulation 3.1.6.13.

Common questions

Q: If I understate my New Mexico income tax, how long does the state have to assess me?
A: Usually three years from the end of the year the tax was due. But if your return understates the tax by more than 25%, the window stretches to six years. Here, understatements of roughly 83% and 100% put both years in the six-year window, so a 2020 assessment of 2014–2015 tax was timely.

Q: The IRS changed my income. Do I have to worry about New Mexico?
A: Yes. New Mexico bases its income tax on your federal adjusted gross income, and the IRS reports federal corrections to the state. A federal increase generally means more New Mexico tax, and the Department can assess it.

Q: I just misunderstood my taxes — can the penalty be removed?
A: Not on that basis alone. New Mexico's negligence penalty is mandatory, and the rules treat an "erroneous belief" that no tax is owed as negligence. Penalty relief usually requires showing affirmative non-negligence, such as reasonable reliance on a tax professional after full disclosure — not simply that you were confused.

Q: Can interest be waived?
A: No. Interest is mandatory by statute. It is not a punishment but compensation to the state for revenue paid late, and it keeps accruing until the tax principal is paid.

Q: Does this decision apply to my situation?
A: Not automatically. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It shows how the Administrative Hearings Office reasons, but it binds only the parties to that protest, and your facts may differ.

Citations and references

Statutes and rules:

• NMSA 1978, § 7-2-3 (1981) — personal income tax on residents' net income
• NMSA 1978, § 7-2-2(A) (2014) — New Mexico income based on federal adjusted gross income
• NMSA 1978, § 7-2-12 (2016) — when income tax returns are due
• NMSA 1978, § 7-1-18(A), (D) (2013) — three-year assessment limit; six years for over-25% understatement
• NMSA 1978, § 7-1-17 (2007) — assessment presumed correct
• NMSA 1978, § 7-1-3(Z) (2019) — "tax" includes penalty and interest
• NMSA 1978, § 7-1-69(A) (2007) — mandatory negligence penalty
• NMSA 1978, § 7-1-67(A) (2013) — mandatory interest
• NMSA 1978, § 7-1B-8 (2019) — 90-day hearing requirement
• Regulations 3.1.11.10 and 3.1.11.11 NMAC (2001) — negligence and non-negligence factors
• Regulation 3.1.6.13 NMAC (2001) — presumption of correctness extends to penalty and interest

Cases cited:

• El Centro Villa Nursing Ctr. v. Taxation & Revenue Dep't, 1989-NMCA-070 ("tax" includes penalty and interest)
• N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099 (taxpayer's burden to overcome presumption)
• Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013 ("shall" is mandatory)
• Tiffany Constr. Co. v. Bureau of Revenue, 1976-NMCA-127 (erroneous belief is negligence)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: David and Raya Kovensky
• Decision PDF: D&O 21-18

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 DAVID & RAYA KOVENSKY
6 TO THE ASSESSMENT
7 ISSUED UNDER LETTER ID NO. L0182709936

8 v. AHO No. 21.04-021A, D&O No. 21-18

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On July 15, 2021, Hearing Officer Dee Dee Hoxie, Esq. conducted a videoconference

12 hearing on the merits of the protest to the assessment. The Taxation and Revenue Department

13 (Department) was represented by Jama Fisk, Staff Attorney, who appeared by videoconference.

14 Alma Tapia, Auditor, also appeared by videoconference on behalf of the Department. David

15 Kovensky and Raya Kovensky (Taxpayers) appeared by telephone and represented themselves.

16 Mr. Kovensky, Mrs. Kovensky, and Ms. Tapia testified. The Hearing Officer took notice of all

17 documents in the administrative file. Exhibits #1 (letter); #2 (cancelled checks); #3 (checkbook

18 registers); “A” (assessment); and “B” (tape mismatch) were admitted1.

19 The main issue to be decided is whether the Taxpayers are liable for the penalty and

20 interest. The Taxpayers did not dispute liability for the tax principal. The Hearing Officer

21 considered all of the evidence and arguments presented by both parties. Because the Taxpayers

22 failed to overcome the presumption that the assessment is correct, the Hearing Officer finds in

23 favor of the Department. IT IS DECIDED AND ORDERED AS FOLLOWS:

24 FINDINGS OF FACT

1
Exhibits will be cited as “Ex.” followed by their respective number or letter.
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1 1. On September 28, 2020, the Department assessed the Taxpayers for personal

2 income tax, penalty, and interest for the tax periods from January 1, 2014 through December 31,

3 2015. The assessment was for tax of $3,449.00, penalty of $689.80, and interest of $751.26, for

4 a total liability of $4,889.82. [Admin. file; Testimony of the Taxpayers; Testimony of Ms.

5 Tapia; Ex. A].

6 2. On October 6, 2020, the Taxpayer filed a timely written protest to the assessment.

7 [Admin. file protest; Testimony of the Taxpayers; Testimony of Ms. Tapia].

8 3. On November 19, 2020, the Department acknowledged its receipt of the protest.

9 [Admin. file].

10 4. On April 27, 2021, the Department filed a request for hearing with the

11 Administrative Hearings Office. [Admin. file request].

12 5. On May 21, 2021, a telephonic scheduling hearing was conducted, which was

13 within 90 days of the request as required by statute. [Admin. file].

14 6. The Department uses a taxpayer’s federal adjusted gross income to determine

15 how much personal income tax a taxpayer will owe to New Mexico. [Testimony of Ms. Tapia].

16 See also NMSA 1978, § 7-2-2 (A) (2014). See also NMSA 1978, § 7-2-3 (1981).

17 7. The federal government notified the Department that it made corrections to the

18 Taxpayer’s reported adjusted gross income for the tax years 2014 and 2015. [Testimony of Ms.

19 Tapia; Ex. B].

20 8. For 2014, the Taxpayer’s adjusted gross income changed from $44,425.00 to

21 $72,482.00. For 2015, the Taxpayer’s adjusted gross income changed from $36,988.00 to

22 $65,578.00. [Testimony of Ms. Tapia; Ex. B].

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1 9. The Department notified the Taxpayers of the adjustments and requested that the

2 Taxpayers provide them with additional information on those tax years to determine if the

3 Taxpayers owed additional New Mexico personal income tax based on the higher federal

4 adjusted gross income. [Testimony of Ms. Tapia; Testimony of the Taxpayers].

5 10. The Taxpayers thought that the letter they received from the Department was a

6 fake and that someone was trying to scam them because of the tax years involved. The

7 Taxpayers believed that the Department could not audit tax years more than three years past.

8 [Testimony of the Taxpayers].

9 11. The Taxpayers did not respond to the Department’s inquiries. [Testimony of the

10 Taxpayers; Testimony of Ms. Tapia].

11 12. The Department assessed the Taxpayers for additional personal income tax,

12 penalty, and interest. [Testimony of Ms. Tapia; Testimony of the Taxpayers; Ex. A].

13 13. The Taxpayers report and file their taxes using the H&R Block software program.

14 [Testimony of Taxpayers].

15 14. The Taxpayers did not keep their records for the 2014 and 2015 tax years.

16 [Testimony of Taxpayers].

17 15. The only records that the Taxpayers were able to produce were to show that some

18 checks had been written to the Department during those years. [Testimony of Taxpayers; Ex. #1;

19 Ex. #2; Ex. #3].

20 DISCUSSION

21 Burden of proof.

22 Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17

23 (2007). By definition, tax includes the amount of tax principal and “the amount of any interest

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1 or civil penalty relating thereto”. NMSA 1978, § 7-1-3 (Z) (2019). See also El Centro Villa

2 Nursing Ctr. v. Taxation and Revenue Dep’t, 1989-NMCA-070, 108 N.M. 795. The

3 presumption of correctness also applies to the assessment of penalty and interest. See 3.1.6.13

4 NMAC (2001). Therefore, the Taxpayers have the burden to prove that they are entitled to an

5 abatement, in full or in part, of the assessment issued in the protest. See N.M. Taxation &

6 Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8.

7 Personal income tax.

8 New Mexico imposes a personal income tax upon the net income of every resident. See

9 NMSA 1978, § 7-2-3. New Mexico’s adjusted gross income is based on the person’s federal

10 adjusted gross income. See NMSA 1978, § 7-2-2. The Taxpayers admit that they owed New

11 Mexico personal income tax for the 2014 and 2015 tax years. The Taxpayers do not know why the

12 federal government corrected their reported federal adjusted gross income for those years because

13 they no longer have records of their income or earnings for those years. However, the Taxpayers do

14 not dispute that they owe additional personal income tax based on the corrected federal adjusted

15 gross income.

16 Time limits on assessments.

17 The Taxpayers argue that the Department’s assessment was made more than three years

18 after the tax years. The Taxpayers argue that the assessment was not timely. Generally, an

19 assessment must be made within three years from the end of the calendar year in which payment

20 of the tax was due. See NMSA 1978, § 7-1-18 (A) (2013). The taxes for the 2014 and 2015 tax

21 years were due when the returns were required to be filed in 2015 and 2016, respectively. See

22 NMSA 1978, § 7-2-12 (2016).

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1 Under the general deadline, the Department had until the end of 2018 and 2019 to assess.

2 However, the time in which to make an assessment is increased to six years from the end of the

3 calendar year in which the tax was due if a return is filed for that tax year that understates the tax

4 due by more than 25 percent. See NMSA 1978, § 7-1-18 (D).

5 In 2014, the Taxpayers reported New Mexico tax due as $154.00. [Admin. file protest;

6 Ex. B]. The amount of New Mexico tax due based on the corrected federal adjusted gross

7 income was $1,998.00. [Ex. B]. Therefore, the amount of tax due was understated on the return

8 by approximately 83 percent. In 2015, the Taxpayers reported New Mexico tax due as $0.00.

9 [Admin. file protest; Ex. B]. The amount of New Mexico tax due based on the corrected federal

10 adjusted gross income was $1,605.00. [Ex. B]. Therefore, the amount of tax due was

11 understated on the return by 100 percent. Both the 2014 and 2015 tax returns understated the tax

12 due by more than 25 percent. [Admin. file protest; Ex. B]. Consequently, the Department had

13 six years to assess, with deadlines in 2021 and 2022, respectively. See NMSA 1978, § 7-1-18.

14 The assessment was made on September 28, 2020. [Ex. A]. Therefore, the assessment was

15 timely.

16 Assessment of penalty.

17 Penalty “shall be added to the amount assessed” when a tax is not paid at the time that it

18 is due, even when the failure to pay is because of negligence rather than an intent to evade the

19 tax. NMSA 1978, § 7-1-69 (A) (2007) (emphasis added). The word “shall” indicates that the

20 assessment of penalty is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil

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

22 The Taxpayers argue that they were not negligent. The Taxpayers simply did not know

23 or understand what was going on with their taxes. If a taxpayer is not negligent, penalty may be

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1 excused. See 3.1.11.11 NMAC (2001) (listing several factors, such as consulting an accountant,

2 that indicate non-negligence). Negligence includes “inadvertence, indifference, thoughtlessness,

3 carelessness, erroneous belief or inattention.” 3.1.11.10 NMCA (2001). A taxpayer’s lack of

4 knowledge or erroneous belief that the taxpayer did not owe the tax is considered to be

5 negligence for purposes of assessment of penalty. See id. See also Tiffany Const. Co., Inc. v.

6 Bureau of Revenue, 1976-NMCA-127, 90 N.M. 16.

7 The Taxpayers failed to prove that they were not negligent. Therefore, the penalty was

8 properly assessed.

9 Assessment of interest.

10 Interest “shall be paid” on taxes that were not paid on or before the date on which they

11 were due. NMSA 1978, § 7-1-67 (A) (2013). Again, the word “shall” indicates that the

12 assessment of interest is mandatory. See Marbob Energy Corp., 2009-NMSC-013. The

13 assessment of interest is not designed to punish taxpayers, but to compensate the state for the

14 time value of unpaid revenue. Because the tax was not paid when it was due, interest was

15 properly assessed. Interest will continue to accrue until the tax principal is paid.

16 CONCLUSIONS OF LAW

17 A. The Taxpayers filed a timely written protest to the Notice of Assessment of personal

18 income tax issued under Letter ID Number L0182709936, and jurisdiction lies over the parties and

19 the subject matter of this protest.

20 B. The first hearing was timely set and held within 90 days of the request for hearing.

21 See NMSA 1978, § 7-1B-8 (2019).

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1 C. The Taxpayers owed additional personal income tax to New Mexico when the

2 federal government corrected the amounts of their federal adjusted gross income. See NMSA 1978,

3 § 7-2-2 and § 7-2-3.

4 D. The assessment was made within the statutory deadlines. See NMSA 1978, § 7-1-

5 18.

6 E. The Taxpayers failed to overcome presumption that the assessment was correct. See

7 NMSA 1978, § 7-1-17.

8 F. Assessment of penalty and interest was required and appropriate under the statutes.

9 See NMSA 1978, § 7-1-67 and § 7-1-69.

10 For the foregoing reasons, the Taxpayer’s protest IS DENIED. IT IS ORDERED that

11 Taxpayer is liable for tax principal of $3,449.00, penalty of $689.80, and interest of $838.22 for a

12 total outstanding liability of $4,977.022.

13 DATED: July 23, 2021.

14 Dee Dee Hoxie
15 Dee Dee Hoxie
16 Hearing Officer
17 Administrative Hearings Office
18 P.O. Box 6400
19 Santa Fe, NM 87502

20 NOTICE OF RIGHT TO APPEAL

21 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

22 decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

23 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

2
Ms. Tapia provided the current total, which reflects the continued accrual of interest. Ms. Tapia advised that this
total is valid through July 29, 2021.
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1 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

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

3 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

4 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

5 Hearings Office may begin preparing the record proper. The parties will each be provided with a

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

7 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

8 statement from the appealing party. See Rule 12-209 NMRA.

9 CERTIFICATE OF SERVICE

10 On July 23, 2021, a copy of the foregoing Decision and Order was submitted to the parties

11 listed below in the following manner:

12 First Class Mail and Email Email

13 INTENTIONALLY BLANK
14
15 John Griego
16 Legal Assistant
17 Administrative Hearings Office
18 P.O. Box 6400
19 Santa Fe, NM 87502

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