Could Dr. Eduardo Castrejon avoid penalty and interest when employees failed to file two prepared 1990 CRS-1 returns and the Department did not notify him of the omissions until nearly four years later?

Plain-English summary

Dr. Eduardo Castrejon remained responsible for penalty and interest after his employees failed to submit two prepared CRS-1 returns and tax payments. The Department's nearly four-year delay in bringing the omissions to his attention did not shift the legal duty to file and pay away from him.

Castrejon was a family practitioner with practices in Las Cruces and Anthony. His accountants normally prepared the monthly returns, employees prepared the checks, and Castrejon signed both. For the February and May 1990 reporting periods, employees did not prepare the checks, and the returns and taxes were not timely submitted.

Castrejon credibly testified that he personally first learned of the omissions from a Department letter dated January 19, 1994. He found the missing reports, filed them, and paid the unpaid tax.

The Department then assessed:

• February 1990: $97.13 penalty and $582.79 interest; and
• May 1990: $171.44 penalty and $964.37 interest.

The disputed total was $268.57 penalty and $1,547.16 interest.

Employees' omissions remained the taxpayer's responsibility

Section 7-1-69(A) imposed penalty for negligent failure to timely pay tax or file a required return. TA Regulation 69:3 defined negligence to include inaction where action was required and inadvertence, thoughtlessness, carelessness, or inattention.

The decision found the filing and payment failures negligent under those definitions. Although Castrejon's employees made the mistake, they acted as his agents. Citing El Centro Villa Nursing Home v. Taxation and Revenue Department, the hearing officer held that a taxpayer cannot transfer ultimate tax responsibility to an accountant or employee.

The penalty reached its statutory 10% maximum within five months of each due date.

Interest was mandatory

Section 7-1-67(A) said interest “shall be imposed” from the first day after unpaid tax became due until payment. Subsection B set the rate at 15% per year, computed at 1.25% per month.

Citing Security Trust v. Smith, the decision treated “shall” as mandatory. It found no exception or mitigating circumstance in the statute and upheld the interest.

Delayed notice did not shift the filing duty

The record was inconclusive about whether the Department had tried to send an earlier notice. Its automated collection system was supposed to send notices, but the Department kept no record proving that one had been sent. The hearing officer found Castrejon credible that he personally received none before January 1994.

Even so, the decision described New Mexico's system as self-reporting: the taxpayer must ensure correct and timely returns and payments. Nothing in Sections 7-1-69 or 7-1-67 shifted that responsibility because the Department, mail, or office staff failed to produce earlier notice.

Result: protest DENIED. Both the penalty and interest assessments were upheld.

What this means for you

Business owners delegating tax filings

Use controls that confirm returns and payments were actually submitted. Delegating preparation and check handling did not transfer legal responsibility in this decision.

Taxpayers who receive a late delinquency notice

Prompt payment after notice can stop further interest, but the Department's delayed notice did not erase penalty or interest already accrued here.

Employers evaluating staff mistakes

The hearing officer attributed employees' negligent inaction to the taxpayer because they were acting as his agents.

Taxpayers disputing interest on equitable grounds

The decision treated statutory interest as mandatory and found no general fairness exception for delayed notice.

Common questions

Q: Which returns were missed?
A: The February and May 1990 monthly CRS-1 returns.

Q: Did Castrejon know about the omissions at the time?
A: The decision found his testimony credible that he personally did not receive notice before January 19, 1994.

Q: Why was the penalty upheld if employees made the mistake?
A: They acted as his agents, and ultimate responsibility for filing and payment remained with him.

Q: How much penalty and interest was assessed?
A: $268.57 in penalty and $1,547.16 in interest across the two reporting periods.

Q: Did the Department prove it had sent earlier notices?
A: No. The evidence was inconclusive, but the lack of proven earlier notice did not change the result.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-69(A) — negligence penalty for late filing or payment
• NMSA 1978, § 7-1-67(A)-(B) — mandatory interest from the due date and the 15% annual rate
• NMSA 1978, § 7-1-24 — right to protest an assessment
• TA Regulation 69:3 — definitions of taxpayer negligence

Cases cited:

• El Centro Villa Nursing Home v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Security Trust v. Smith, 93 N.M. 35, 596 P.2d 248 (1979)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Eduardo A. Castrejon, MD
• Decision PDF: D&O 94-02

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
EDUARDO A. CASTREJON, MD,
ID NO. 02-031345-00 4
PROTEST TO ASSESSMENT NOS.
1780484 AND 1780485 No. 94-02

DECISION AND ORDER

This matter came on for hearing before Gerald B. Richardson, Hearing Officer, on

October 6, 1994. Dr. Castrejon represented himself at the hearing. The Taxation and Revenue

Department, hereinafter, "Department", was represented by Frank D. Katz, Chief Counsel. Based

upon the evidence and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Dr. Castrejon is a family practitioner with practices in both Las Cruces and

Anthony, New Mexico.

2. Because of the demands of his medical practice, Dr. Castrejon entrusts the

bookkeeping and accounting work required by his business to employees and his accountant.

3. In the normal course of affairs, Dr. Castrejon's accountants prepare his monthly

CRS-1 returns. Dr. Castrejon's employees then prepare a check in the amount of the taxes due

and bring the return and the check to Dr. Castrejon for his signatures.

4. For the February, 1990 and May 1990 reporting periods, although Dr. Castrejon's

accountants prepared the monthly returns, Dr. Castrejon's employees failed to prepare a check and

the returns were not filed or the taxes paid in a timely manner.

5. Dr. Castrejon first became aware that his returns were not filed or taxes paid for

the February and May 1990 reporting periods when he was notified of that fact by the Department

by letter dated January 19, 1994.

6. After researching his records to determine what had happened, Dr. Castrejon

located the missing reports, promptly filed them with the Department and paid the unpaid taxes.

7. On March 30, 1994 the Department issued Assessment No. 1780485 assessing

$97.13 in penalty and $582.79 in interest for the February, 1990 reporting period.

8. On March 30, 1994 the Department issued Assessment No. 1780484 assessing

$171.44 in penalty and $964.37 in interest for the May, 1990 reporting period.

9. On April 15, 1994 Dr. Castrejon filed a written protest to the two assessments.

DISCUSSION

The ultimate issue to be determined herein is whether the Department's delay of almost

four years in notifying Dr. Castrejon of his failure to file reports and pay taxes for two reporting

periods can be taken into account to offset penalty and interest assessed by the Department during

the period of time between the due date for the taxes and the date they were paid. Dr. Castrejon is

a conscientious, hard working businessman who sincerely attempts to comply with the many

requirements and regulations concerning operating a business and a medical practice. Due to the

heavy demands of his profession, he entrusts the accounting and bookkeeping duties to his staff or

accountants. He did not notice that his staff failed to bring tax returns and checks for him to sign

for the two non-filed months. As soon as the matter was brought to his attention by the

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Department, some four years later1, Dr. Castrejon acted promptly to pay the unpaid taxes and file

the non-filed returns. Dr. Castrejon asserts that it is unfair to assess penalty and interest for such a

long period when if he had been notified of the missing reports earlier, he would have paid the

taxes sooner and mitigated the continued accrual of interest and penalty.

Before determining if penalty and interest may be mitigated, it must be determined that

they were properly imposed. Penalty was assessed pursuant to Section 7-1-69(A) NMSA 1978

(1993 Repl. Pamp.) which provides in pertinent part:

In the case of failure, due to negligence or disregard of rules and
regulations, but without intent to defraud, to pay when due any
amount of tax required to be paid, or to file by the date required a
return regardless of whether any tax is due, there shall be added to
the amount as penalty the greater of:
(1) two percent per month or any fraction of a month from
the date the tax was due multiplied by the amount of tax due but
not paid, not to exceed ten percent of the tax due but not paid;....

TA Regulation 69:3 defines taxpayer negligence for purposes of Section 7-1-69(A) as follows:

1) failure to exercise that degree of ordinary business care and
prudence which reasonable taxpayers would exercise under like
circumstances;
2) inaction by taxpayers where action is required;
3) inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.

In this case, the failure to pay tax was negligent under either definitions two or three. Although

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The evidence at the hearing was inconclusive as to whether the Department had attempted to
notify Dr. Castrejon previously about the non-filed months. The Department has an automated
collection system where such notices are supposed to be sent, but it does not maintain a record of
such notices being sent and so, was unable to prove that it had attempted to notify Dr. Castrejon
prior to its notice of January 19, 1994. It is possible that notices were sent and either lost in the
mails or not brought to the Dr.'s attention by his staff. In any event, I found Dr. Castrejon entirely
credible in his testimony that he, personally, had not received any notice prior to the Department's
notice of January 19, 1994.

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the negligence was on the part of Dr. Castrejon's employees, they were acting as his agents.

Ultimately, Dr. Castrejon is responsible for the payment of the taxes and he cannot abdicate that

responsibility by appointing an accountant or an employee in tax matters. El Centro Villa Nursing

Home v. Taxation and Revenue Dept., 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Thus,

penalty was properly assessed against Dr. Castrejon. It should also be noted that penalty reached

the statutory maximum of ten percent within five months of the due date for the taxes.

With respect to interest, it is imposed pursuant to Section 7-1-67(A), NMSA 1978 (1993

Repl. Pamp.), which provides in pertinent part:

If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be imposed on such amount from the
first day following the day on which the tax becomes due ... until it
is paid....(emphasis added)

Subsection B of the same statute sets the statutory interest rate at fifteen percent per year,

computed at one and one-quarter percent per month.

It is noteworthy that the legislature chose to use the word, "shall" with respect to the

imposition of interest. It is a well established rule of statutory construction that "shall" indicates

something mandatory in statutory use unless such a construction would be inconsistent with the

manifest intent of the legislature or repugnant to the context of the statute. Security Trust v.

Smith, 93 N.M. 35, 596 P.2d 248 (1979). There being nothing in the statute to indicate to the

contrary, Section 7-1-67 mandates the imposition of interest whenever tax is not paid, from the

due date, until it is paid. There are no exceptions or mitigating circumstances contemplated by the

wording of the statute. Thus, it is clear that interest was properly imposed in the circumstances of

this case.

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This brings us to Dr. Castrejon's argument that the Department's delay in notifying him

compels an abatement of interest and penalty. Although I am sympathetic with his desire to

minimize his liability by promptly making payment of his unpaid tax liability, his argument

misapprehends the nature of our self-reporting tax system. The responsibility to ensure the proper

and timely reporting and payment of taxes lies with the taxpayer under our system. From a tax

policy standpoint, it undoubtedly enhances taxpayer compliance to promptly notify taxpayers

when returns are not filed. The Department has an automated computer collection system which

is supposed to do just that. I doubt whether we will ever be able to determine where the

breakdown in that system occurred in this case, whether it was the Department, the U.S. Mail, or

employees in the Dr. Castrejon's office. Nonetheless,the system's failure to timely notify Dr.

Castrejon does not act to shift the responsibility for the proper reporting and payment of taxes

away from Dr. Castrejon. There is nothing in the language of either Section 7-1-69 or 7-1-67 to

indicate that there are any circumstances which shift the responsibility to timely report and pay

taxes away from the taxpayer. Thus, although I can empathize with Dr. Castrejon's concerns that

he was not promptly notified of the problem with his tax reports, the law does not afford the

remedy which he seeks.

CONCLUSIONS OF LAW

1. Dr. Castrejon filed a timely, written protest to the Department's assessments,

pursuant to Section 7-1-24, NMSA 1978 and jurisdiction lies over both the parties and the subject

matter of this protest.

2. Dr. Castrejon and/or his agents and employees were negligent in failing to timely

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report and pay taxes for the February and May, 1990 reporting periods, and penalty was properly

assessed pursuant to Section 7-1-69(A), NMSA 1978 (1993 Repl. Pamp.)

3. Interest was properly assessed against Dr. Castrejon pursuant to Section 7-1-67,

NMSA 1978 (1993 Repl. Pamp.) for the late payment of taxes for the February and May, 1990

reporting periods.

4. The Department's delay in notifying Dr. Castrejon of his failure to report and pay

taxes does not mitigate the imposition of interest or penalty imposed because the failure to notify a

taxpayer of a tax delinquency does not shift the responsibility for the proper payment and

reporting of taxes from the taxpayer.

For the foregoing reasons, the protest is hereby denied.

Done, this 4th day of November, 1994.

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