I made an honest mistake on my return that the Department could have caught but didn't for years — do I still owe interest on the tax I underpaid?

Plain-English summary

Emiel Bosman, a New Mexico resident, worked in 1990 as a photographer for a Texas studio, photographing school children on assignments in New Mexico, Arizona, and elsewhere. On his 1990 New Mexico return he subtracted $2,405.69 — the wages he earned on out-of-state assignments — treating it as "non-New Mexico income." He didn't hide it: he wrote the adjustment in handwritten notations on lines 7 and 8 and attached his federal return showing the full amounts. The deduction produced a larger refund ($399.42), which the Department paid.

But a resident's wages are taxable by New Mexico no matter where the work is done — the only relief for cross-border wages is a credit for income tax actually paid to another state. So the deduction was improper (Bosman later agreed). Years later, an IRS tape-match flagged the discrepancy, and in 1994 the Department issued Assessment No. 595796 — $59.12 tax, $5.91 penalty, $30.29 interest for 1990.

The Department abated the penalty and Bosman paid the tax, but he protested the interest. His argument: because his return disclosed the mistake on its face, the Department should have caught it at filing and reduced his refund — its error should offset his, and interest should be waived.

Hearing Officer Gerald Richardson denied the protest:

• Interest is not a penalty. It compensates the state for revenue that should have been in its hands but wasn't. The rate is set by the Legislature (Section 7-1-67), and the Department can't change it. The penalty (Section 7-1-69) was the part tied to fault, and it was abated because there was no fraud and insufficient negligence.
• Interest applies to any underpayment, for any reason. Section 7-1-67(A) imposes interest whenever tax isn't paid when due, "without regard to" the taxpayer's intent. Bosman's error caused an underpayment (an over-refund), so interest ran for the time the state was without the money.
• Self-reporting keeps the responsibility on the taxpayer. Under Section 7-1-13, the taxpayer must accurately report and pay. The Department accepted Bosman's own calculation and refunded on that basis. Its failure to notice the disclosed error for several years does not shift the responsibility to determine the correct tax, and there is no exception to interest for that situation.

What this means for you

New Mexico residents with out-of-state earnings

If you're a New Mexico resident, wages you earn on jobs in other states are still taxable by New Mexico. You cannot simply subtract "out-of-state" income. The correct mechanism is the credit for income tax you actually pay to the other state — and if the other state charges no tax on those wages, there's nothing to credit and the income is fully taxed here.

If you make an honest, fully disclosed mistake

Disclosing an error on your return — even attaching backup — does not protect you from interest if it turns out you underpaid. The Department accepting your return (or paying a refund based on it) is not approval of your math. Interest runs from the original due date until the tax is paid, no matter how the underpayment happened or how long it takes to surface.

Practical takeaway

Because interest can quietly accrue for years before a tape-match catches an error, it pays to get your reporting right the first time and to fix a suspected mistake promptly (file an amended return and pay) rather than waiting. A penalty may be abated for a good-faith, non-negligent taxpayer, but the interest will remain.

Common questions

Q: I disclosed my mistake right on the return. Why do I still owe interest?
A: Because interest isn't about fault or disclosure — it compensates the state for tax it didn't have on time. Section 7-1-67(A) imposes it on any underpayment for any reason, with no exception for a disclosed error the Department didn't catch.

Q: The Department paid me the refund. Doesn't that mean my return was approved?
A: No. New Mexico is a self-reporting system; the Department accepted your own figures. If those figures were wrong, you remain responsible, and interest accrues on the resulting underpayment.

Q: Can out-of-state wages ever be excluded from New Mexico tax?
A: For a resident, no — they're taxable here. The remedy for double taxation is a credit for income tax you actually pay to the other state, not a deduction of the out-of-state wages.

Citations and references

Statutes:

• § 7-1-67(A) NMSA 1978 — interest accrues on unpaid tax from the day after it becomes due until it is paid
• § 7-1-13 NMSA 1978 — self-reporting system; the taxpayer is responsible for properly and timely reporting tax
• § 7-1-69 NMSA 1978 — civil penalty for negligence or fraud (abated here)
• § 7-1-24 NMSA 1978 — a taxpayer's right to file a written protest (basis for jurisdiction)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Emiel and Sara Bosman
• Decision PDF: D&O 95-04

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 EMIEL AND SARA BOSMAN, No. 95-04
PROTEST TO
ASSESSMENT NO. 595796.

DECISION AND ORDER

This matter came on for hearing on July 19, 1995 before Gerald B. Richardson, Hearing

Officer. Mr. Emiel Bosman (hereinafter "Taxpayer") represented himself at the hearing. The

Taxation and Revenue Department (hereinafter "Department") was represented by Bridget A.

Jacober, Special Assistant Attorney General.

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

as follows:

1. On February 9, 1991, the Taxpayer filed a PIT-1A short form personal income tax

return for 1990 claiming a refund in the amount of $399.42. Based upon this return, the

Department refunded $399.42 to the Taxpayer.

2. The starting point on the PIT-1A form for calculating a taxpayer's New Mexico

personal income tax liability is line 7, which instructs a taxpayer to state his adjusted gross income
as reported to the federal government.

3. Line 8 of the PIT-1A form instructs taxpayers to state their federal taxable income
   as reported to the federal government.

4. In filling out lines 7 and 8 of his 1990 PIT-1A form, the Taxpayer made
   handwritten notations disclosing his federal adjusted gross income and federal taxable income as

reported to the federal government and then subtracted $2,405.69 and filled in the blanks on lines
7 and 8 with the reduced amount reflecting the deduction of $2,405.69. The Taxpayer's

handwritten notations indicated that the $2,405.69 was non-New Mexico income.

5. In filing his 1990 New Mexico personal income tax return, the Taxpayer also

attached a copy of his federal return which reflected the Taxpayer's adjusted gross income and

federal taxable income as reported to the federal government which corresponded to the amounts

noted in the Taxpayer's handwritten notations on the Taxpayer's New Mexico return.

6. In 1990 the Taxpayer worked as a photographer for Shugart Studios based in

Levelland, Texas. The Taxpayer's work was to take photographs of school children. The

majority of the Taxpayer's work assignments were in New Mexico but the Taxpayer also worked

in Arizona and New Mexico. The $2,405.69 deducted by the Taxpayer as non-New Mexico

income reflects wages earned by the Taxpayer while working on assignments outside of New

Mexico during 1990.

7. As a resident, domiciled in New Mexico, the wages earned by the Taxpayer are

subject to income taxation by New Mexico regardless of the fact that the work representing those

wages occurred outside of New Mexico. If a taxpayer also pays income tax to another state on

those same wages, a credit against the taxpayer's New Mexico income tax liability in the amount

of taxes paid to the other state is available. The Taxpayer now understands this and agrees that

the $2,405.69 was not deductible for purposes of calculating the income tax owing to New

Mexico for 1990. At the time the Taxpayer's return was filed, however, the Taxpayer did not

believe that his wages earned as a New Mexico resident for work performed outside of New

Mexico were taxable in New Mexico.

8. The Department has an information sharing agreement with the Internal Revenue

Service (IRS) whereby the IRS provides the Department information concerning the filing

information reported to the IRS by New Mexico residents. The Department then compares the

information it receives from the IRS with the information as reported to New Mexico concerning

taxpayer's adjusted gross income and federal taxable income. This is called a "tape match

program."

2

9. In 1994, as a result of the tape match program, the Department noted the

discrepancy between the Taxpayer's adjusted gross income and federal taxable income as reported

to the Department and as reported to the IRS. Consequently, on August 22, 1994, the

Department issued Assessment No. 595796 to the Taxpayer, assessing $59.12 in personal income

tax, $5.91 in penalty and $30.29 in interest for the 1990 tax year.

10. On September 9, 1994, the Taxpayer filed a timely, written protest to Assessment

No. 595796 with the Department.

11. The Department has abated the penalty portion of the assessment and the Taxpayer

has paid the tax portion of the assessment.

12. The Taxpayer is now retired, living on a fixed income, and it is more difficult now

for him to pay the liability for 1990 than it would have been if the Department had noted the

Taxpayer's filing error at the time the 1990 return was filed and had reduced the amount of the

Taxpayer's refund claim for 1990. If the error had been caught by the Department at the time of

the Taxpayer's 1990 tax filing, it would also have avoided the accumulation of interest upon the

unpaid taxes for the 1990 tax year.

3
DISCUSSION
The Taxpayer does not dispute his liability for the underlying tax assessed and the

Department has abated the penalty assessed. Thus, the only issue to be determined is whether the

Taxpayer is liable for interest on the underpaid taxes for 1990. The Taxpayer does not dispute

that he received the full refund he claimed in filing his 1990 return and that this resulted in the

underpayment of taxes until after he paid the assessed tax. The Taxpayer disputes the interest

assessed however because he feels that because his return disclosed his erroneous filing position,

that the Department should have noticed his mistake, recalculated the tax and correspondingly

reduced his refund claimed. Essentially, the Taxpayer's argument is that although he made a

mistake in how he filed his tax return, the Department also made a mistake in not catching this

mistake when he filed his return, since the difference in calculation was noted on the face of the

return. The Taxpayer argues that the Department's mistake should offset his own mistake and

that interest should be abated.

It should be noted at the outset that the Taxpayer has operated at all times in good faith.

His mistake in the manner in which he filed was based upon a mistaken understanding of how the

tax laws applied to wages of a resident earned from out-of-state locations and his tax return made

full disclosure of the adjustments to income he was claiming. Nonetheless, the Taxpayer is

operating under some misconceptions about the operation of the tax laws and where the

responsibility lies for properly reporting taxes.

First, the Taxpayer misunderstands the nature of the assessment of interest. Underlying

the Taxpayer's protest to interest is his preception that he is somehow being penalized for not

properly reporting his taxes. The assessment of interest is not a penalty, but is intended to

compensate the state for the value of revenues which should have been in the hands of the state

but were not because taxes were improperly reported. While one may quibble with the rate of

interest imposed, that is set by the legislature in Section 7-1-67 NMSA 1978 and the Department

4
has no authority to charge a rate other than the rate established by statute. The legislature has

provided a penalty for failure to properly report taxes based upon taxpayer negligence or fraud.

Those penalties are set out at Section 7-1-69 NMSA 1978. The Department has already agreed to

abate the penalty assessed because it has determined that in the circumstances of this case, there

was no evidence of fraud and insufficient evidence of negligence to require the imposition of

penalty. The imposition of interest is not based upon any intention of a taxpayer in filing a

return, but is simply based upon the determination that an underpayment of tax occurred for any

reason. This is born out by the language of Section 7-1-67(A) 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 paid to the state on such amount from the first day following the day on
which the tax becomes due, without regard to any extension of time or installment
agreement, until it is paid. . . . (emphasis added).

In this case, the Taxpayer has acknowledged that the tax was not properly reported, resulting in an

incorrectly large refund to the Taxpayer, which caused there to be an underpayment of tax. Thus,

interest is due for the period of time after the due date that the Department did not have payment

of the tax.

The Taxpayer is also operating under a misconception of where the responsibility lies for

properly determining a taxpayer's tax liability. We have a self reporting tax system. Section

7-1-13 NMSA 1978 places the responsibility upon taxpayers to report their taxes properly, and in

a timely manner. Under such a system it is the taxpayer's responsibility to accurately determine

and report its tax liability. Although the Taxpayer did not intentionally misreport his tax liability,

nonetheless, it was his error in reporting his income which caused the underreporting of tax. The

fact that the Department erred in failing to notice the underreporting and did not catch this error

for several years does not shift the responsibility for accurately determining the Taxpayer's

liability to the Department. There is simply no exception to the imposition of interest pursuant to

Section 7-1-67 when an underpayment of tax occurs due to taxpayer error and the Department

5
fails to notice the underpayment of tax even though the taxpayer's return provided information

that, if analyzed, would provide the Department with the information necessary to determine that

an underpayment existed. The fact of the matter is that in this case, the Department accepted the

Taxpayer's own determination of his tax liability and granted the Taxpayer's refund based upon

the Taxpayer's own calculations. The fact that these calculations were in error and that the

Department could have determined that based upon information disclosed in the return does not

shift the responsibility for accurately determining tax liability to the Department. The Taxpayer

bears that responsibility and must bear the consequences for inaccurately determining his own tax

liability.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 595796 pursuant to

Section 7-1-24 NMSA 1978 and jurisdiction lies over the parties and the subject matter of this

protest.

2. An underpayment of tax resulted from the inaccurate reporting of tax liability by

the Taxpayer.

3. Because there was an underpayment of tax as reported by the Taxpayer, interest

was properly imposed on the underpayment pursuant to Section 7-1-67 NMSA 1978.

4. The Department's failure to notice, at the time of the filing of the Taxpayer's
   return, that the Taxpayer had not properly calculated his tax liability does not mitigate the

imposition of interest on tax underpayments pursuant to Section 7-67 NMSA 1978.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.
DONE, this 15TH day of August, 1995.

6