My extra tax only got pinned down years later after the IRS adjusted my return — does interest really run all the way back to the original due date?

Plain-English summary

Donald Duszynski, a New Mexico resident, invested in a tax shelter in 1984. By 1988 he realized it didn't shelter his income, so he amended his 1984 federal return on June 15, 1988 and paid the IRS his estimate of the added tax. The IRS didn't finalize his additional federal liability until early 1993. Through the federal-state information-sharing agreement, the Department learned his federal taxable income had gone up and, on October 30, 1993, issued Assessment No. 560523: $1,373.00 tax, $1,767.73 interest, and $137.30 penalty. He protested; the Department later abated the penalty, leaving a fight over the interest that accrued from April 16, 1985 to June 1993.

His argument turned on Section 7-1-13(C), which says that after a federal adjustment a taxpayer must file an amended New Mexico return within 30 days and pay any additional tax with it. He read that to mean his tax wasn't really "due" until the 1993 federal adjustment, so interest shouldn't start until 30 days after he filed the amended return.

Hearing Officer Julia Belles denied the protest:

• The due date never moved. New Mexico income tax for 1984 was due April 15, 1985 (Section 7-2-12), and Section 7-1-67(A) starts interest the day after the tax was due — here, April 16, 1985. Section 7-1-13(C) only sets a deadline to file an amended return; it does not change the original due date of the tax.
• "Tax" includes interest. Under Section 7-1-3(U), "tax" includes related interest. So when the amended return came due, both the additional tax and the interest that had already built up were owed. There was no ambiguity to resolve in the taxpayer's favor.
• The refund statutes don't apply. He pointed to statutes setting special interest timing for overpayments (Sections 7-1-68 and 7-1-26(D)), but there was no overpayment here — those rules don't govern interest on an underpayment, which Section 7-1-67(A) addresses directly.
• The IRS's delay didn't help him. The IRS taking until 1993 to finalize the liability did not change New Mexico's due date or its interest calculation. He could have filed an amended New Mexico return back in 1988 (when he amended federally) and paid then to stop the interest — but he waited for the federal number to be final, and interest kept running.

What this means for you

If a federal audit or amended return increases your income

New Mexico piggybacks on your federal taxable income, and the interest clock on any resulting New Mexico deficiency runs from the original April 15 due date for that year — not from the date the IRS finishes its work or the date you file an amended state return. A long federal process can mean years of accrued state interest.

How to limit the interest

If you already know (or reasonably estimate) that a federal change will raise your New Mexico tax, you can file an amended New Mexico return and pay without waiting for the IRS to finalize everything. Paying stops the interest; waiting lets it accrue. Duszynski did this federally but not with New Mexico, and that gap is what cost him.

Accountants and tax professionals

The decision cleanly separates two things taxpayers conflate: Section 7-1-13(C)'s 30-day amended-return deadline after a federal adjustment versus the due date of the underlying tax under Section 7-2-12. Interest under Section 7-1-67(A) keys to the due date, and Section 7-1-3(U)'s definition of "tax" folds accrued interest into what must accompany the amended return. Overpayment-interest provisions have no bearing on a deficiency.

Common questions

Q: The IRS took years to adjust my return. Doesn't interest start when that's finalized?
A: No. New Mexico interest runs from the original due date of the tax (April 15 following the tax year). The IRS's timing doesn't change that or the interest calculation.

Q: Doesn't filing an amended return within 30 days of a federal change reset my due date?
A: No. Section 7-1-13(C) gives you a deadline to file the amended return and pay; it does not move the underlying tax's due date. Interest has already been accruing since that original due date.

Q: How could I have avoided the interest?
A: By filing an amended New Mexico return and paying the additional tax as soon as you know a federal change will raise your state tax, rather than waiting for the IRS to finalize the number. Payment stops interest from accruing.

Citations and references

Statutes:

• § 7-1-67(A) NMSA 1978 — interest accrues on unpaid tax from the first day after it becomes due, until it is paid
• § 7-1-13(A) NMSA 1978 — taxpayers are liable for tax at and after the transaction giving rise to it, until payment
• § 7-1-13(C) NMSA 1978 — a federal adjustment requires filing an amended New Mexico return within 30 days, with payment of any additional tax
• § 7-2-12 NMSA 1978 — individual income tax returns and tax are due on or before the 15th day of the 4th month after the taxable year
• § 7-1-3(U) NMSA 1978 — "tax" includes the amount of any interest relating thereto
• § 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: Donald Duszynski
• Decision PDF: D&O 96-03

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 DONALD DUSZYNSKI
PROTEST TO ASSESSMENT NO. 560523. No. 96-03

DECISION AND ORDER

This matter was heard on December 18, 1995 by Julia Belles, Hearing Officer. Mr.

Duszynski (Taxpayer) was represented by Vidal Oaxaca, Esq. and the Taxation and Revenue

Department (Department) was represented by Bruce J. Fort, 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 resident of New Mexico who pays personal income tax.

2. In 1984, the Taxpayer decided to invest in a tax shelter.

3. By 1988, the Taxpayer realized the investment did not provide shelter from tax

liability and sought advice on how to deal with this problem.

4. On June 15, 1988, the Taxpayer amended his 1984 federal income tax return to

adjust his income to reflect the money that was invested in the tax shelter.

5. The Taxpayer paid the Internal Revenue Service (IRS) the anticipated tax liability

which he estimated when he amended his 1984 federal income tax return.

6. The IRS did not resolve the issue of the Taxpayer's tax liability until the early

1993 and sent the Taxpayer notice of his additional tax liability on June 14, 1993.

7. Pursuant to the information sharing agreement between the Department and the

IRS, the Department received information that the Taxpayer's federal taxable income upon which

New Mexico bases its income tax calculations was adjusted and, on 10/30/93, the Department

sent the Taxpayer Notice of Assessment No. 560523 assessing $1,373.00 in tax, $1767.73 in
interest and $137.30 penalty.

8. On November 17, 1993, Taxpayer timely filed a written protest to Assessment No.

560523.

9. On February 9, 1994, the Department abated the penalty on Assessment No.

560523.

DISCUSSION
The Taxpayer disputes the interest that was calculated on his late payment of taxes for the

time period April 16, 1985 to June 1993. The Taxpayer argued that the statutes in effect in

1993, when the federal adjustment was made, should apply. The Department argued the statutes

in effect in 1984, when the tax was due, were applicable, but agreed to use the 1993 statutes since

there were no material differences.

Section 7-1-67(A) NMSA 1978 establishes the way in which interest will be assessed.

"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). Thus, the imposition and calculation of interest is governed by the due date for the tax

at issue. The Taxpayer was liable for taxes as he earned income in New Mexico, which made

him subject to the Income Tax Act, Section 7-1-2 NMSA 1978. The Taxpayer was required to

pay taxes on his personal income tax under the provision of Section 7-1-13(A). Section

7-1-13(A) NMSA 1978 mandates: "[T]axpayers are liable for tax at the time of and after the

transaction or incident giving rise to tax, until payment is made. Taxes are due on and after the

date on which their payment is required, until payment is made." To determine the due date, we

refer to the pertinent provision of the Income Tax Act, Section 7-1-12 NMSA 1978, which

provides: "[t]he return required and the tax imposed on individuals under the Income Tax Act

are due and payment is required on or before the fifteenth day of the fourth month following the

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end of the taxable year."

The Taxpayer argues that Section 7-2-12 NMSA 1978 is modified by Section 7-1-13(C)

NMSA 1978 which addresses the filing of an amended return and payment of any additional tax

because of an adjustment made at the federal level. The Taxpayer argues that, pursuant to

Section 7-1-13(C) NMSA 1978, the filing of an amended federal tax return changed the due date

of his tax liability so that the accrual date for the interest should start from July of 1993 when the

IRS adjusted his federal income tax liability. Section 7-1-13(C) NMSA 1978 states: "[i]f any

adjustment is made in the basis for computation of any federal tax, the taxpayer affected shall,

within thirty days, file an amended return with the department. Payment of any additional tax

due shall accompany the return." (emphasis added) The Taxpayer argued that under this

provision he was not liable for additional taxes until his federal tax liability was adjusted. He

then had thirty days to file his amended return. He claims that interest would start to accrue

thirty days after filing the amended return.

The Taxpayer misunderstands the operation of these two statutes and confuses the due

date for income taxes with the requirement for payment of taxes due because of the filing of an

amended return. Section 7-1-13(C) NMSA 1978, which Taxpayer relies upon, establishes a

time limit within which to file an amended return and requires that the payment be filed with the

return. It does not change or modify the due date for payment of taxes on income earned in

1984, which was April 15, 1985. As the tax was due on April 15, 1985, interest accrued on the

deficiency starting April 16, 1985. Section 7-1-67(A) NMSA 1978.

The Taxpayer argued that Section 7-1-13(C) NMSA 1978 refers to "tax" and does not

include interest as part of what is due thirty days after a federal adjustment. The Taxpayer used

Section 7-1-67(A) to buttress his argument. That is, interest only starts to accrue after the tax is

due so tax cannot include interest. The Taxpayer pointed out that if this interpretation is given

weight, then Section 7-1-13(C) NMSA 1978 becomes ambiguous and the ambiguity should be

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resolved in his favor. This argument ignores the clear and unambiguous definition of "tax" set

out at Section 7-1-3(U) which provides:
'tax' means the total amount of each tax imposed and required to be paid, withheld and
paid or collected and paid under provision of any law made subject to
administration and enforcement according to the provisions of the Tax
Administration Act and, unless the context otherwise requires, includes the
amount of any interest or civil penalty relating thereto...(emphasis added)

As interest is included in the definition of 'tax' and there is nothing in the context of

Section 7-1-13(C) NMSA 1978 addressing interest whatsoever, the payment of both interest and

taxes is due thirty days after the federal adjustment. With this argument the Taxpayer is trying

to create an ambiguity where none exists. As explained earlier, under Section 7-2-13 NMSA

1978, the Taxpayer was liable for its 1984 income taxes on April 15, 1985. Any tax unpaid at

that time would cause the addition of interest under Section 7-1-67(A) NMSA 1978 until all tax

was paid. Thus, at the time the Taxpayer filed his amended return, additional interest was

already owed on the additional tax due and Section 7-1-13(C) NMSA 1978 requires that this be

paid, in addition to the tax, at the time the amended return is filed.

The Taxpayer relied on statutes dealing with tax refunds, Sections 7-1-68 and 7-1-26(D)

NMSA 1978, to illustrate that the legislature contemplated and enacted laws to have specific

time periods for dealing with interest that accrues on refunds and argued that the concepts

embodied in those provisions of laws should be applied to this case. The Taxpayer used the
statutory scheme for refunds as an example to demonstrate that the legislature can and does

change the time periods by which interest is calculated. While it is true that the Legislature has
provided for a different methodology and time periods for the calculation of interest on

overpayments of tax, there is no overpayment of tax at issue in this case and those statutes are not
pertinent to decide the date when the interest accrues on an underpayment of tax, a matter

specifically addressed by Section 7-1-67(A) NMSA 1978.

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The Taxpayer admitted that the reason he filed his amended return with the IRS was to

avoid the assessment of penalty and the accrual of interest for his 1984 tax liability. New

Mexico calculates income tax based on the federal taxable income. The Taxpayer could have

filed an amended return with the Department at the same time he filed an amended return with

the IRS and avoided the accrual of further interest. Instead, he chose to wait until his federal

liability was finalized. The consequence of this action within New Mexico's statutory scheme is

that interest accrued on this liability until it was paid.

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. 560523 and, therefore, jurisdiction

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

2. The date on which Taxpayer's tax was due was April 15, 1985.

3. The IRS's delay in adjusting the Taxpayer's federal income tax liability does not

operate to change the due date of the Taxpayer's liability to the Department or the calculation of

interest on whatever portion of the Taxpayer's liability to the Department which remained unpaid.

4. "Tax" is defined by Section 7-1-3(U) NMSA 1978 and includes interest in the

definition, consequently, the presumption of correctness attaches to the assessment of interest.

5. The statutory scheme involving refunds is not relevant to the issue of interest that

accrues on a tax deficiency.

For these reasons, the Taxpayer's protest is hereby denied.
Done this 17th day of January, 1996.

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