Do confusion, missed communications, and hope for a managed audit excuse gross receipts tax penalty and interest after the taxpayer misses the audit deadlines?

Plain-English summary

Daniel Dawes and Lighthouse Entertainment remained liable for $753.22 of penalty and $820.95 of interest after a proposed managed audit never became an agreement. Confusion and communication difficulties did not overcome the assessment.

The Department assessed gross receipts tax for January 2012 through December 2016: $3,766.14 of tax, $753.22 of penalty, and $820.95 of interest. Dawes later paid the tax principal and requested leniency only on penalty and interest.

Dawes had applied for a managed audit because he hoped to resolve the overdue taxes without penalty and interest. The Department rejected the application in March 2020 after he failed to provide sufficient information and missed submission deadlines. Dawes continued trying to communicate, but calls were missed on both sides and requests and explanations were repeated without resolution.

The hearing officer recognized Dawes's frustration but found no evidence that pandemic-related circumstances caused the missed managed-audit deadlines. More fundamentally, Section 7-1-11.1 leaves the decision to enter a managed-audit agreement to the Department. No agreement was reached, so the Department remained free to assess the liability.

Penalty was mandatory because the tax had not been paid when due, Dawes did not prove any regulatory indicator of nonnegligence or a reasonable good-faith mistake of law, and he admitted negligence. Interest was likewise mandatory on tax unpaid after its due date. Later payment of the principal did not erase charges that had already accrued.

Result: protest DENIED; $753.22 of penalty and $820.95 of interest remained due.

Date note

The PDF contains no dated signature line. Its certificate of service says the decision was sent to the parties on November 10, 2021, matching the official post date used for issued_date.

What this means for you

A managed audit requires an actual agreement

Applying, negotiating, or hoping for approval does not create managed-audit protection. The agreement must be accepted and its requirements followed.

Information deadlines matter

The Department rejected the process because requested information was incomplete and deadlines were missed. Communication efforts did not substitute for the required submissions.

Pandemic disruption must be tied to the missed obligation

General communication difficulties during COVID-19 were not enough; the taxpayer needed evidence connecting the pandemic to the specific missed deadlines.

Paying principal later does not automatically waive additions

Penalty and interest accrued because tax was not timely paid. Once the principal was paid, the remaining dispute still involved those statutory additions.

Common questions

Q: Why did the managed audit fail?
A: Dawes did not provide all requested information by the Department's deadlines, and the parties never entered an agreement.

Q: Was the Department required to approve a managed audit?
A: No. The decision described approval as within the Department's sole discretion.

Q: Did COVID-19 excuse the missed deadlines?
A: No evidence connected the missed managed-audit deadlines to pandemic-related causes.

Q: Had Dawes paid the underlying gross receipts tax by the hearing?
A: Yes. He paid the $3,766.14 principal after assessment.

Q: What remained due?
A: $753.22 of penalty and $820.95 of interest.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-11.1 — managed-audit agreements and Department discretion
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(Z) — assessment presumption and definition of tax
• NMSA 1978, § 7-1-69(A)-(B) — negligence penalty and reasonable good-faith mistake-of-law exception
• NMSA 1978, § 7-1-67(A) — mandatory interest on unpaid tax
• NMSA 1978, § 7-1B-8 — hearing timing
• Regulations 3.1.6.13 and 3.1.11.11 NMAC — penalty and interest presumption and nonnegligence factors

Cases:

• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”
• Archuleta v. O'Cheskey, 1972-NMCA-165 — taxpayer burden to overcome an assessment
• New Mexico Taxation & Revenue Department v. Casias Trucking, 2014-NMCA-099 — assessment presumption and taxpayer burden

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lighthouse Entertainment (Daniel Dawes)
• Decision PDF: D&O 21-23

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 DANIEL S. DAWES
6 LIGHTHOUSE ENTERTAINMENT
7 TO THE ASSESSMENT
8 ISSUED UNDER LETTER ID NO. L1187026608

9 v. AHO No. 21.07-043A, D&O No. 21-23

10 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

11 DECISION AND ORDER

12 On October 21, 2021, Hearing Officer Dee Dee Hoxie, Esq. conducted a videoconference

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

14 (Department) was represented by Kenneth Fladager, Staff Attorney, who appeared by

15 videoconference. Elvis Dingha, Auditor, also appeared by videoconference on behalf of the

16 Department. Daniel Dawes (Taxpayer) appeared by videoconference and represented himself.

17 The Taxpayer and Mr. Dingha testified. The Hearing Officer took notice of all documents in the

18 administrative file. The Taxpayer filed Exhibit #1, proof of payment, prior to the hearing.

19 The main issue to be decided is whether the Taxpayer owes the penalty and interest that

20 were assessed. The Hearing Officer considered all of the evidence and arguments presented by

21 both parties. Because the Taxpayer failed to overcome the presumption of correctness, the

22 Hearing Officer finds in favor of the Department. IT IS DECIDED AND ORDERED AS

23 FOLLOWS:

24 FINDINGS OF FACT

25 1. On June 9, 2020, the Department assessed the Taxpayer for gross receipts tax for

26 the tax periods from January 1, 2012 through December 31, 2016. The assessment was for tax of

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1 $3,766.14, penalty of $753.22, and interest of $820.95. [Admin. file L1187026608; Testimony

2 of Taxpayer; Testimony of Mr. Dingha].

3 2. On September 8, 2020, the Taxpayer filed a timely1 written protest to the denial

4 of refund. [Admin. file protest].

5 3. On January 27, 2021, the Department acknowledged its receipt of the protest.

6 [Admin. file].

7 4. On July 21, 2021, the Department filed a request for hearing with the

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

9 5. On August 6, 2021, a telephonic scheduling hearing was conducted, which was

10 within 90 days of the request as required by statute. The Taxpayer failed to appear. [Admin.

11 file].

12 6. On September 3, 2021, a videoconference hearing on the merits was conducted.

13 The Taxpayer again failed to appear. [Admin. file].

14 7. On September 3, 2021, the Taxpayer filed a motion to be heard and explained that

15 he tried to appear for the hearing at the wrong time. The Department did not file a response, and

16 the hearing on the merits was reset. [Admin. file].

17 8. At some point, the Taxpayer became aware that he owed gross receipts taxes.

18 [Testimony of Taxpayer].

19 9. The Taxpayer applied for a managed audit as he hoped to avoid penalty and

20 interest on the overdue taxes that he owed. [Testimony of Taxpayer].

21 10. The managed audit was rejected in March 2020 because the Taxpayer had not

22 provided sufficient information and had missed deadlines. [Testimony of Taxpayer].

1
The 90th day from the assessment was September 7, 2020. Since September 7, 2020 was a legal holiday, the
deadline extended to the following business day, which was September 8, 2020. See 22.600.1.12 NMAC (2018).
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1 11. The Taxpayer continued to try to communicate with the Department and was still

2 hopeful that a managed audit could be done. [Testimony of Taxpayer].

3 12. After the assessment, the Taxpayer paid the tax principal that was assessed.

4 [Testimony of Taxpayer; Testimony of Mr. Dingha; Exhibit #1].

5 13. The Taxpayer is requesting leniency on the penalty and interest based on his lack

6 of understanding of the managed audit process and the lack of helpful communication with the

7 Department, which he feels was caused in part by the pandemic. [Testimony of Taxpayer].

8 DISCUSSION

9 Burden of proof.

10 The assessment issued in this case is presumed correct. See NMSA 1978, § 7-1-17 (C)

11 (2007). Unless otherwise specified, for the purposes of the Tax Administration Act, “tax” is

12 defined to include interest and civil penalty. See NMSA 1978, §7-1-3 (Z) (2019). The presumption

13 of correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

14 interest. See 3.1.6.13 NMAC (2001). Consequently, the Taxpayer has the burden to overcome

15 the assessment. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. See also N.M.

16 Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8.

17 Managed audits.

18 The Department has discretion to make agreements for managed audits. See NMSA, § 7-1-

19 11.1 (2003). All managed audit agreements must satisfy the statutory requirements, which include

20 deadlines for submission that the Department sets. See id. The Taxpayer admitted that he did not

21 provide all of the information that the Department requested by the deadlines that were set.

22 [Testimony of Taxpayer]. The Taxpayer was confused about the process and tried to communicate

23 with the Department to better his understanding. [Testimony of Taxpayer]. His attempts to

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1 communicate were largely unsuccessful, often resulting in missed calls on both sides and a

2 repetition of previous requests and explanations. [Testimony of Taxpayer].

3 The Taxpayer’s frustration with the managed audit process was clear. However, there was

4 no evidence that the Taxpayer failed to meet the managed audit deadlines due to any pandemic-

5 related reasons. Moreover, the Department has the sole discretion to enter into a managed audit

6 agreement. See NMSA 1978, § 7-1-11.1. There was no evidence that the Department and the

7 Taxpayer came to any agreement. See id. Without an agreement stating otherwise, the Department

8 was free to assess the Taxpayer. See id. See also NMSA 1978, § 7-1-17.

9 Assessment of Penalty.

10 The Taxpayer conceded that he owed the tax and paid it after the assessment was made.

11 [Testimony of Taxpayer]. The Taxpayer asks for leniency on penalty. When a tax is not paid by

12 the due date or a return is not filed by its due date, “there shall be added to the amount assessed a

13 penalty”. NMSA 1978, § 7-1-69 (A) (2007) (emphasis added). In addition to the standard

14 penalty, underpayments of income tax are also assessed an underpayment penalty. See NMSA

15 1978, § 7-2-12.2 (2011). The word “shall” indicates that the assessment of penalties is

16 mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n.,

17 2009-NMSC-013, ¶ 22, 146 N.M. 24. If a taxpayer is not negligent, penalties may be excused.

18 See 3.1.11.11 NMAC (2001) (listing several factors, such as consulting an accountant, that

19 indicate non-negligence). The Taxpayer did not provide evidence that he was not negligent

20 under the factors in the regulation or that his failure to pay his taxes when they were due was

21 based on a mistake of law made in good faith on reasonable grounds; rather, the Taxpayer

22 admitted that he was negligent. [Testimony of Taxpayer]. See NMSA 1978, § 7-1-69 (B). See

23 also 3.1.11.11 NMAC. Therefore, the penalty was properly assessed.

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1 Assessment of interest.

2 The Taxpayer also asks for leniency on interest. Interest “shall be paid” on taxes that

3 were not paid on or before the date on which they were due. NMSA 1978, § 7-1-67 (A) (2013).

4 Again, the word “shall” indicates that the assessment of interest is mandatory. See Marbob

5 Energy Corp., 2009-NMSC-013. Therefore, interest was properly assessed.

6 CONCLUSIONS OF LAW

7 A. The Taxpayer filed a timely, written protest of the Department’s assessment and

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

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

10 See NMSA 1978, Section 7-1B-8 (2019).

11 C. The Taxpayer failed to overcome the presumption of correctness, and the penalty

12 and interest were properly assessed. See NMSA 1978, § 7-1-17. See also 3.1.6.13 NMAC.

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

14 Taxpayer is liable for $753.22 in penalty and $820.95 in interest.

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

21 NOTICE OF RIGHT TO APPEAL

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

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

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

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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 November 10, 2021, a copy of the foregoing Decision and Order was submitted to the

11 parties listed below in the following manner:

12 INTENTIONALLY OMITTED ON PUBLIC COPY

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