The Department took months to finish my audit — can I get the interest that piled up during the delay knocked off?

Plain-English summary

S & J Enterprises, Inc. was a New Mexico corporation doing commercial construction. In February 1994 the Department selected it for audit. The audit began in late April, paused when the auditor left the state for another assignment, and resumed in July. Along the way the auditor determined the company had underreported its tax liability by more than 25%, which let the Department expand the audit by three more years — so it ultimately covered six years, 1988 through 1993.

On November 24, 1994, the Department issued Assessment No. 1874545: $19,420.53 in gross receipts tax, $26.40 in compensating tax, $1,942.06 in penalty, and $3,438.11 in interest. The company paid the assessment, then filed a written protest of just one piece of it — the interest that had accrued from June 1994 until the November assessment. Its argument: the Department had let the audit drag on, and it shouldn't have to pay interest for that stretch.

Hearing Officer Julia Belles denied the protest:

• The interest is presumed correct, so the taxpayer has to disprove it. Section 7-1-17(C) gives every assessment a presumption of correctness, and because "tax" is defined to include the interest related to a tax (Section 7-1-3(U)), that presumption covers the assessed interest too. The burden was on the company.
• The delay wasn't unreasonable. A six-year audit — expanded because of the company's own underreporting, and requiring the company to track down missing nontaxable transaction certificates — took the time it took. The hearing officer found "nothing unusual or unreasonable" about it.
• Even a delay wouldn't matter. Section 7-1-67 says interest "shall be paid" on unpaid tax from the day it became due until it is paid. "Shall" makes it mandatory, not discretionary (Security Trust v. Smith), and the statute contains no provision that abates interest for any circumstance of nonpayment.
• The duty stays with the taxpayer. In New Mexico's self-reporting system, the responsibility to report and pay correctly rests on the taxpayer; it does not shift to the Department just because the Department audits. Had the company reported correctly in the first place, there would have been no interest at all.

What this means for you

Businesses being audited

Interest is not a penalty the Department can waive for good behavior or bad luck — it is the price of having used money that was owed as tax. It keeps accruing while an audit is underway, and the length of the audit, by itself, is not a defense. If you think you may have underpaid, the way to stop interest is to pay the disputed amount (as this company did) rather than to wait for the audit to end; interest stops running when the tax is paid.

Construction contractors

This company's audit was expanded to six years because it had underreported by more than 25% — often tied to missing or defective nontaxable transaction certificates (NTTCs). Keeping your NTTCs complete and on file is the practical way to avoid both the larger assessment and the interest that grows with it.

Accountants and tax professionals

The decision is a clean statement of two rules worth citing: assessed interest carries the same presumption of correctness as the underlying tax (Sections 7-1-17(C) and 7-1-3(U)), and Section 7-1-67 interest is mandatory with no delay-based abatement. Note the narrower point this case does not decide — it did not reach whether a genuinely unreasonable Department delay could ever matter, because it found no unreasonable delay here.

Common questions

Q: The Department took months to wrap up my audit. Can I get that interest removed?
A: Not on the basis of the delay. In this case the hearing officer found the audit length reasonable, and held that Section 7-1-67 makes interest mandatory in any event — there is no provision to abate interest for the circumstances of nonpayment.

Q: How do I actually stop interest from growing while I dispute an assessment?
A: Pay the tax. Interest runs until the tax is paid, so paying the disputed amount (you can still protest) stops the meter. This company paid and then protested only the interest.

Q: Why does the interest, not just the tax, get the "presumption of correctness"?
A: Because New Mexico defines "tax" to include the interest related to a tax (Section 7-1-3(U)). So the presumption in Section 7-1-17(C) attaches to the interest, and the taxpayer carries the burden of proving it wrong.

Q: Isn't it the auditor's fault the process took so long?
A: The decision says the responsibility to report and pay correctly stays with the taxpayer and doesn't shift to the Department because it audits. If the tax had been reported correctly at the outset, no interest would have accrued.

Citations and references

Statutes:

• § 7-1-17(C) NMSA 1978 — an assessment is presumed correct and the taxpayer bears the burden of proving it incorrect
• § 7-1-3(U) NMSA 1978 — "tax" is defined to include the amount of interest related to any tax
• § 7-1-67 NMSA 1978 — interest "shall be paid" on unpaid tax from the day it became due until it is paid
• § 7-1-24 NMSA 1978 — a taxpayer's right to file a written protest (basis for jurisdiction)

Case cited:

• Security Trust v. Smith, 93 N.M. 35, 596 P.2d 248 (1979) — the legislature's use of "shall" signals a mandatory rather than discretionary act

Source

• Listing: New Mexico Decisions & Orders
• Decision post: S & J Enterprise
• Decision PDF: D&O 95-08

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 S & J ENTERPRISES, INC.,
I.D. NO. 01-863367-00 6, PROTEST TO
ASSESSMENT NO. 1874545. No. 95-08

DECISION AND ORDER
This matter was heard by Julia Belles, Hearing Officer, on September 18, 1995. S & J

Enterprises, Inc. (hereinafter "Taxpayer") was represented by its bookkeeper Torey Mees. The
Taxation and Revenue Department (hereinafter "Department") was represented by Bridget A.

Jacober, Special Assistant Attorney General.

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

AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a corporation which engages in commercial construction in New

Mexico.

2. On February 18, 1994, the Department notified the Taxpayer that it had been

selected for audit.

3. The audit started on April 28, 1994.

4. The auditor requested information about certain nontaxable transaction certificates

and also requested various documentation.

5. On April 29, 1994, the auditor finished preliminary work at the Taxpayer's office.

6. In May, the auditor left the state to conduct a required out-of-state audit.

7. The Department recommenced the audit on July 14, 1994.

8. The audit was expanded an additional three years because the Department's auditor

determined that the Taxpayer underreported its tax liability by more than 25%.

9. Between July 14, 1994 and October 21, 1994, the Taxpayer and the Department had
   continual and numerous contacts about, among other things, certain nontaxable transaction

certificates.

10. On November 24, 1994, the Department issued Notice of Assessment of Taxes and

Demand for Payment No. 1874545, assessing $19,420.53 in gross receipts tax, $26.40 in

compensating tax, $1,942.06 in penalty and $3,438.11 in interest for the reporting period January

1, 1988 through December 31, 1993.

11. The Taxpayer timely paid the assessment on November 22, 1994 and the payment

was received by the Department on November 28, 1994.

12. On December 7, 1994 the Taxpayer filed a written protest of the Department's

imposition of interest on the assessment for the period from June 1994 until November 24, 1994.

DISCUSSION
The Taxpayer disputes the interest that was calculated on the assessment for the time period

from June, 1994 through November 24, 1994. Section 7-1-17(C) NMSA (1995 Repl.) provides

that there is a presumption of correctness which attaches to any assessment of tax by the

Department. "Tax" is defined to include the amount of interest related to any tax. Section

7-1-3(U) NMSA (1995 Repl.). Therefore, the presumption of correctness attaches to the

assessment of interest as well. Thus, the Taxpayer has the burden of proving that the assessment of

interest is incorrect.
The Taxpayer attempted to correctly report its taxes, pay its taxes and cooperate with all

aspects of the audit. This case arises from a miscommunication between the Taxpayer and the
auditor. The audit started on April 26, 1994 and continued through April 29, 1994. The auditor

left on April 29, 1994, after asking the Taxpayer to find certain documents. The Taxpayer was left
with the impression that the auditor would return on May 2, 1994 to review those documents and

finish the audit. The Taxpayer spent considerable time and effort to have those documents ready

for the auditor. The auditor, however, left to conduct an out-of-state audit. The audit was

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resumed on July 14, 1994. At that time, the Department requested additional information from the

Taxpayer. The field work for the audit continued through October 21, 1994. This additional time

was needed because the audit was expanded to encompass three more years because of the

Taxpayer's underreporting of its liability. This caused the Taxpayer to research and locate

additional information and additional nontaxable transaction certificates. The assessment issued

November 24, 1994.

A review of these facts does not indicate any unreasonable delay. The Department

determined that the audit needed to be expanded an additional three years. This resulted in an

audit covering six years of the Taxpayer's records. Time was also needed so that the Taxpayer

could find certain nontaxable transaction certificates, as well as supply missing information on

other nontaxable transaction certificates. After the audit was completed, the auditor's supervisor

reviewed her work to determine that the audit and the auditor's actions and calculations were

proper. There was nothing unusual or unreasonable in the time that elapsed. While the Taxpayer

could have saved a few months of interest accrual if the Department had issued its assessment

earlier, there is no provision in Section 7-1-67 NMSA 1978 (1995 Repl.), the statutory provision

governing the imposition of interest, which allows for any circumstances where the accrual of

interest is abated. It simply provides that "interest shall be paid" on any unpaid tax from the day on

which it became due, until it is paid. The legislature's choice of the word "shall" indicates a

legislative intent that the act is mandatory rather than discretionary. Security Trust v. Smith, 93

N.M. 35, 596 P.2d 248 (1979). Thus, the legislature has mandated that interest be imposed on any

unpaid taxes, regardless of the circumstances surrounding their nonpayment.

Additionally, the Taxpayer's 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. This responsibility does not shift to the Department merely because it audited the

Taxpayer to determine whether the Taxpayer had properly fulfilled its responsibility liability. If

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the Taxpayer had properly determined and reported taxes in the first place, there would be no

interest at issue. Although it would be best if a taxpayer's audit liability could be determined

expeditiously, there was nothing unreasonable about the length of time elapsed during the audit of

the Taxpayer. The audit covered six years and the Taxpayer was given time to obtain missing

information on some nontaxable transaction certificates.

CONCLUSIONS OF LAW

1. The Taxpayer timely filed a written protest, pursuant to Section 7-1-24 NMSA 1978

(1995 Repl.), to the interest portion of assessment No. 1874545 and, therefore, jurisdiction lies over

the parties and the subject matter of this protest.

2. The Department's delay in issuing Assessment No. 1874545 was not unreasonable

under the facts and circumstances of this case.

3. The Department's delay in issuing Assessment No. 1874545 is not a valid defense to

the imposition of interest on unpaid taxes and the interest was properly imposed.

For the foregoing reasons, the Taxpayer's protest is hereby denied.

Done, this 5th day of October, 1995.

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