My new accountant didn't realize we had to pay a few days early, so we were late — can we avoid the penalty since it was an honest oversight and we always pay on time?

Plain-English summary

Robert A. Woods Construction, Inc. was a large enough taxpayer to fall under Section 7-1-13.1, the special-payment rule for businesses whose average monthly tax payments hit $25,000. That rule adds a twist: if you pay with a check drawn on a New Mexico bank, the Department must receive the check at least one banking day before the normal due date (the 25th). So for the June 1994 combined-reporting-system period, the company's $25,426.39 check — hand-delivered on Monday, July 25 — needed to arrive by Friday, July 22 to be timely. It was late, and the Department assessed a $508.53 penalty plus interest (the company dropped its interest protest, leaving only the penalty).

The cause was a staffing gap: the company's new accountant, hired that April with only a week of training, was never told the company was subject to Section 7-1-13.1. He knew a special rule existed for large taxpayers but, buried in catching up six-months-behind financials, never ran the calculation to see whether it applied here.

Hearing Officer Gerald Richardson denied the protest:

• A penalty for a Section 7-1-13.1 failure requires negligence. Section 7-1-69 is puzzling — Subsection C imposes a penalty for missing the Section 7-1-13.1 method, but routes it to Subsection A (the negligence penalty) when that applies. Read together, the Legislature meant one penalty, gated on taxpayer negligence.
• There was ample negligence. Under Regulation TA 69:3 (which includes inaction where action is required, and inattention/carelessness), the accountant's failure to check whether the special rule applied — despite knowing such rules exist and that this payment topped $25,000 — was negligent. He was the company's employee, so his negligence is the company's negligence, and the company's failure to train him was itself negligent.
• Delegating to an accountant is no shield. Handing tax duties to an accountant "does not insulate the Taxpayer from the consequences of negligent omissions" by that accountant (El Centro Villa Nursing Center v. Taxation and Revenue Department).
• A clean past record doesn't matter. The company's commendable history of on-time payments was "simply irrelevant" — the only question was whether this late payment was due to negligence, and it was.

What this means for you

Large taxpayers under Section 7-1-13.1

If your average monthly tax payments reach $25,000, confirm whether the special-payment rule applies to you — and remember that paying by New Mexico check means the Department must have the check one banking day early. Your effective deadline is earlier than the 25th; calendar it that way, and account for weekends (a Monday delivery can already be too late).

When staff or accountants change

A personnel handoff is a classic trigger for this kind of miss — and it will not excuse the penalty. The outgoing person's failure to pass on tax-calendar knowledge and the incoming person's failure to verify the rules are both negligence that lands on the company. Document your filing obligations (including Section 7-1-13.1 status) so they survive a transition.

Accountants and tax professionals

Two rules to internalize: an employee/agent's negligent omission is attributed to the taxpayer (El Centro Villa), and a good compliance history is not a defense to a negligence penalty on a specific late payment. If you know a client is near the $25,000 threshold, run the calculation — knowing the rule exists but not checking whether it applies is itself negligence under TA 69:3.

Common questions

Q: We're normally perfect on payments. Doesn't that count against the penalty?
A: No. The hearing officer called a good payment history "irrelevant." The only issue is whether the specific late payment resulted from negligence.

Q: It was our accountant's oversight, not the owner's. Are we still liable?
A: Yes. The accountant is your agent/employee, so the negligence is attributed to the business, and delegating tax duties doesn't insulate you from the accountant's negligent omissions.

Q: How do I avoid this under Section 7-1-13.1?
A: Make sure the Department receives your New Mexico-bank check at least one banking day before the 25th (earlier still if a weekend intervenes), or use a payment method that isn't subject to the one-banking-day-early rule. Treat your deadline as before the 25th, not on it.

Citations and references

Statutes and regulation:

• § 7-1-13.1 NMSA 1978 — special payment requirements for large taxpayers; a New Mexico check must be received at least one banking day before the due date
• § 7-1-69 NMSA 1978 — civil penalty; Subsection C for Section 7-1-13.1 failures, Subsection A for negligence, with only one penalty imposed
• Regulation TA 69:3 — definition of taxpayer negligence (including inaction where action is required, and inattention or carelessness)
• § 7-1-24 NMSA 1978 — a taxpayer's right to file a written protest (basis for jurisdiction)

Case cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — delegating tax duties to an accountant does not insulate the taxpayer from the accountant's negligent omissions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Robert A. Woods Construction, Inc.
• Decision PDF: D&O 95-05

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
ROBERT A. WOODS CONSTRUCTION, INC. No. 95-05
I.D. NO. 01-887807-00 5, PROTEST
TO ASSESSMENT NO. 1832030.

DECISION AND ORDER
This matter came on for hearing on August 3, 1995 before Gerald B. Richardson, Hearing
Officer. Robert A. Woods Construction, Inc. (hereinafter "Taxpayer") was represented by Mr.

John M. Moloney, accountant for the Taxpayer. The Taxation and Revenue Department

(hereinafter "Department") was represented by Bridget A. Jacober, Esq.

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

as follows:

FINDINGS OF FACT

1. Since at least January of 1994, the Taxpayer has been subject to the requirements

of Section 7-1-13.1 NMSA 1978, which imposes special tax payment requirements upon

taxpayers whose average tax payment during the previous calendar year for certain groups of taxes

equalled or exceeded $25,000.

2. In paying its tax liability under the combined reporting system for the June 1

through June 30, 1994 reporting period, the Taxpayer hand delivered its return and tax payment in

the amount of $25,426.39 to the Department on Monday, July 25, 1994. The payment was made

by check drawn on a New Mexico financial institution.

3. The normal due date for taxes paid under the combined reporting system is the

25th day of the month following the month in which the taxable event occurred.

4. Section 7-1-13.1 requires that for those taxpayers who are subject to its special

payment provisions and who choose to make payment with a check drawn on any New Mexico

financial institution, the Department must receive that check at least one banking day prior to the

due date.

5. In order for the Taxpayer's tax payment of July 25th 1995 to have been timely, the

Department would have had to receive the payment on Friday, July 22, 1994, which is one

banking day prior to the normal due date of July 25, 1994.

6. Mr. John Moloney was hired as the Taxpayer's accountant in April of 1994. He

received only one week of training on the financial and accounting systems of the Taxpayer from

his predecessor. The predecessor did not inform Mr. Moloney that the Taxpayer was subject to

the special payment provisions of Section 7-1-13.1. The predecessor informed Mr. Moloney that

the Taxpayer's taxes were due on the 25th of the month and that he usually drove over the

Department's office a few days prior each month to file the Taxpayer's return and make payment

of taxes.

7. At the time Mr. Moloney was hired the Taxpayer's financial statements were six

months behind being current. Mr. Moloney focused his attention during the first months on the

job getting the financial statements up to date. Although Mr. Moloney was generally aware of

the special payment provisions for taxpayers whose average monthly tax payments equal or

exceed $25,000, Mr. Moloney never made the calculations to determine whether the Taxpayer

was subject to the special payment provisions of Section 7-1-13.1.

8. On July 29, 1994, the Department issued to the Taxpayer Assessment No.

1832030, assessing penalty in the amount of $508.53 and interest in the amount of $317.83 based

upon the Taxpayer's late payment of taxes for the June, 1994 reporting period.

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9. On August 12, 1994, the Taxpayer filed a written protest to Assessment No.

1832030.

10. The Taxpayer has dropped its protest of the interest portion of Assessment No.

1832030.

DISCUSSION
The sole issue to be determined is whether the Taxpayer should be held liable for penalty

for failing to make timely payment of taxes under the special payment provisions of Section

7-1-13.1. Penalty is imposed pursuant to Section 7-1-69 NMSA 1978 (1993 Repl. Pamp.). Two

parts of that statute are relevant for our discussion here. Subsection C specifically addresses the

imposition of penalty for failure to make payment in accordance with Section 7-1-13.1, and

provides as follows:
In the case of failure to pay the amount of tax required to be paid in accordance with
Section 7-1-13.1 NMSA 1978 in the manner required by that section, there shall be
added to the amount due a penalty of two percent of the amount due except that, if a
penalty is required to be imposed by this subsection and a penalty is also required to
be imposed under Subsection A of this section, the penalty shall be imposed and
collected pursuant to Subsection A of this section only.

Subsection A is the general penalty provision which applies when there has been a failure to make

a timely payment or report of taxes due to taxpayer negligence. It provides in relevant 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 . . .
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; . . . .

The interplay of these two subsections of Section 7-1-69 is somewhat puzzling.

Subsection C applies to the specific situation which occurred in this case, the failure to make

payment in accordance with Section 7-1-13.1. However, it directs that penalty be imposed,

instead, under Subsection A, when Subsection A is applicable. The one thing that is clear from

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the reading of the two subsections in pari materia, is that the legislature intended that only one

penalty be imposed upon taxpayers who fail to comply with Section 7-1-13.1. The standard to be

applied in determining whether penalty should be imposed is less than clear. Subsection C

simply mandates the imposition of penalty for failure to make payment in accordance with Section

7-1-13.1 and does not qualify the imposition of penalty upon the existence of taxpayer negligence

or any other condition which might provide some sort of excuse for noncompliance. It provides,

however, that if penalty is required to be imposed under Subsection A, that penalty is imposed

under the standards of Subsection A, which looks to whether taxpayer negligence was involved.

These two subsections can be harmonized if a requirement of taxpayer negligence is imposed

before penalty is applied to taxpayers who have failed to comply with Section 7-1-13.1 and that

will be the approach applied in this case.

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Taxpayer negligence is defined in regulation TA 69:3 to mean:
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.

Under the facts of this case there is ample evidence of taxpayer negligence. First, there

was the failure of the Taxpayer's former accountant and employee to adequately train Mr.

Moloney about the applicability of the special payment provisions to the Taxpayer's monthly tax

payments. We also have Mr. Moloney's admission that, because of the press of other matters, he

never made the calculations to determine if the special payment provisions applied to his

employer. Given that Mr. Moloney admitted to knowing about the special payment provisions

for taxpayers with large monthly liabilities and given the fact that the payment at issue herein

exceeded $25,000, Mr. Moloney should have at least had some question as to whether his

employer fell within the category of taxpayers who are subject to Section 7-1-13.1. Mr.

Moloney's failure to determine whether Section 7-1-13.1 applied would qualify as negligence

under at least the second and third definitions of negligence in TA 69:3. Since Mr. Moloney was

acting as an employee of the Taxpayer, any negligence by him would also be attributable to the

Taxpayer. Additionally, the delegation of the tax payment and reporting responsibilities by the

Taxpayer to its accountant does not insulate the Taxpayer from the consequences of negligent

omissions on the part of the Taxpayer's accountant. El Centro Villa Nursing Center v. Taxation

and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct.App. 1989).

Finally, the Taxpayer argues that its previous excellent record for timely payment and

reporting of taxes should be taken into consideration in determining whether penalty should be

applied. While the Taxpayer's record with respect to the payment of taxes is commendable and

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demonstrates compliance with the law, the Taxpayer's payment record with respect to tax

payments is simply irrelevant to the instant matter. What is at issue is whether the failure to

make timely payment in this instance was due to taxpayer negligence. The Taxpayer's former

reporting history is neither at issue, or probative of whether negligence existed with respect to the

late payment at issue herein.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1832030 pursuant

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

this protest.

2. The Taxpayer was subject to the special payment provisions of Section 7-1-13.1

for the June, 1994 reporting period.

3. The Taxpayer failed to comply with the special payment provisions of Section

7-1-13.1 in making payment of its taxes for the June, 1994 reporting period.

4. The Taxpayer was negligent in failing to provide its new accountant, Mr. Moloney

with proper training concerning its tax payment and reporting requirements pursuant to Section

7-1-13.1.

5. The Taxpayer's accountant was negligent in failing to determine that the special

payment requirements of Section 7-1-13.1 applied to the Taxpayer.

6. The negligence of the Taxpayer's accountant, as an employee of the Taxpayer, is

attributable to the Taxpayer.

7. Because of Taxpayer negligence in failing to make proper payment of taxes for the

June 1994 reporting period, penalty was properly imposed pursuant to Section 7-1-69 NMSA

1978.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

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DONE, this 21ST day of August, 1995.

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