If you accidentally leave a W-2 off your return and the state doesn't catch it for years, can you avoid the interest that piled up?

Plain-English summary

Jerry Anaya, Sr. had H&R Block prepare his 1992 state and federal returns. The returns left off $2,688 of wages from a second job at Lovato's Lounge — he couldn't tell whether he had misplaced that W-2 or H&R Block had overlooked it. The IRS later assessed him about $100 more in federal tax, which he paid without looking into why. Through its IRS "tape match," the Department caught the same discrepancy and, in November 1996, issued Assessment No. 687052 for $155.90 in additional 1992 income tax, a $15.59 penalty, and $83.79 in interest. Mr. Anaya protested only the interest, objecting that more than three years had passed — letting interest pile up — before the state assessed him.

The Hearing Officer denied the protest:

• Interest is mandatory. Section 7-1-67 says interest "shall" be paid on tax not paid when due, with no exceptions, so why the tax was late — and how long the state took to notice — doesn't matter.
• It's compensation, not punishment. Interest reimburses the state for the time value of revenue it should have had; the rate is the Legislature's call, and the Department can't waive it.
• The responsibility to report correctly was the taxpayer's. He had the W-2 and was in the best position to file an accurate return. The earlier IRS adjustment should have tipped him off that his New Mexico return likely needed fixing too, since both start from federal adjusted gross income — and § 7-1-13(C) requires filing an amended state return and paying any additional tax within 90 days of a federal adjustment.
• Tape-match delay is built in. The Department doesn't even get IRS data until more than a year after returns are filed, then must sift tens of thousands of returns — so interest will often accrue significantly before an assessment issues. Unfortunate, but the taxpayer controls whether there's an underpayment to accrue interest on in the first place.

What this means for you

Anyone who leaves income off a return by mistake

Even an honest omission — a lost W-2, a form your preparer missed — leaves you owing interest from the original due date until you pay, no matter how long the state takes to find it. Interest isn't a penalty and can't be waived for a good reason. The practical lesson: make sure every W-2 and 1099 is on your return before you file, because the interest clock starts at the due date.

If the IRS adjusts your federal return

Treat a federal change as a signal to fix your state return right away. New Mexico starts from your federal adjusted gross income, so a federal adjustment usually means more state tax — and § 7-1-13(C) gives you just 90 days to file an amended New Mexico return and pay. Waiting for the state to send a bill only lets interest grow.

Accountants and tax professionals

A concise statement that § 7-1-67 interest is mandatory and compensatory, unaffected by the length of the Department's tape-match lag. Flag the § 7-1-13(C) 90-day amended-return trigger for any client who accepts an IRS adjustment — and reconcile every wage and information return before filing, since the taxpayer, not the preparer's oversight, bears the interest.

Common questions

Q: The state took over three years to bill me — why do I still owe all that interest?
A: Because interest is mandatory under § 7-1-67 and runs from the due date until payment. The reason for the delay, including the state's own tape-match lag, doesn't reduce it.

Q: It was an honest mistake — a missing W-2. Doesn't that matter for the interest?
A: Not for interest, which is compensation for the state being paid late, not a penalty for fault. (Mr. Anaya protested only the interest here, not the small penalty.)

Q: How was I supposed to know my state return was wrong?
A: You had the W-2 and were in the best position to file accurately. And once the IRS adjusted your federal tax, that should have prompted you to amend your state return within 90 days under § 7-1-13(C), since New Mexico builds on your federal income.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico treats interest on a late-caught underpayment, but your facts may differ.

Citations and references

Statutes:

• § 7-1-67(A) NMSA 1978 — interest on tax not paid when due is mandatory ("shall"), from the due date until paid, with no exceptions
• § 7-1-13(C) NMSA 1978 — a taxpayer whose federal income is adjusted must file an amended New Mexico return and pay additional tax within 90 days

Case law cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — the word "shall" makes the interest assessment mandatory rather than discretionary

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jerry Anaya, Sr.
• Decision PDF: D&O 97-35

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
JERRY ANAYA, SR. NO. 97-35
PROTEST TO ASSESSMENT NO. 687052

DECISION AND ORDER

This matter came on for formal hearing on September 17, 1997 before Gerald B.

Richardson, Hearing Officer. Mr. Jerry Anaya, Sr., hereinafter, "Taxpayer", represented himself

at the hearing. The Taxation and Revenue Department, hereinafter, "Department", was

represented by Gail MacQuesten, Special Assistant Attorney General. Based upon the evidence

and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer had his 1992 state and federal income tax returns prepared by H &

R Block.

2. Sometime after filing his federal return, the Taxpayer was assessed approximately

$100 of additional federal tax for tax year 1992. The Taxpayer simply paid the additional tax

without investigating the basis for the additional assessment.

3. Pursuant to its information sharing agreement with the Internal Revenue Service

("IRS"), the Department receives information from the IRS providing information as to the

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income tax reporting information the IRS has on New Mexico residents. The Department then

compares that information with the information it has in its records concerning taxpayer reporting

and determines if there are any discrepancies. This comparison is called a tape match.

4. As a result of information received from the IRS, on November 6, 1996 the

Department issued the Taxpayer Assessment No. 687052, assessing $155.90 in additional

personal income tax, $15.59 in penalty and $83.79 in interest for the 1992 tax year.

5. On December 5, 1996, the Taxpayer filed a timely, written protest to the interest

portion of Assessment No. 687052.

6. After receiving the Department's assessment, the Taxpayer investigated the source

of the discrepancy between the income reported to the Department by the IRS and that which he

reported. The Taxpayer discovered that the discrepancy was due to the failure to report an

additional $2,688 of income which was received during tax year 1992 from the Taxpayer's

employment by Lovato's Lounge. The Taxpayer was unable to determine whether his failure to

report this income was due to his misplacement of his W-2 form from Lovato's Lounge or

whether H & R Block overlooked the W-2 form.

7. The Taxpayer had received an refund from the Department of $161.75 for tax year

1992 based upon the information contained in the Taxpayer's 1992 personal income tax return.

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DISCUSSION

The sole issue to be determined herein is whether the Taxpayer is liable for the interest

assessed due to his underreporting of income for tax year 1992. The Taxpayer objects to the

assessment of interest because of the more than three years that passed between the filing of his

return and the assessment of tax, which allowed interest to accrue during that time.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax deficiencies

and provides as follows:

A. 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)

It is a well settled rule of statutory construction that the use of the word "shall" in a statute

indicates that the provisions are intended to be mandatory rather than discretionary, unless a

contrary legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167

(1977). Applying this rule to Section 7-1-67, the statute requires that interest be paid to the state

on any unpaid taxes and no exceptions to the imposition of interest are countenanced by the

statute. Thus, it doesn't matter why taxes were unpaid. Interest is imposed for the period of time

that they are unpaid.

The Taxpayer's argument essentially conceives of interest as a penalty imposed to punish a

taxpayer for the late payment of taxes. This argument misapprehends the nature of the assessment

of interest. Interest is imposed to compensate the state for the lost value of having tax revenues at

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the time they are required to be paid. Those tax revenues could have been invested by the state

and interest earned upon those revenues, until the state needed to use the money to meet its

obligations. While one may disagree with the rate of interest set by the legislature, as being

excessive in comparison with market rates of interest, that is a matter within the sound discretion

of the legislature, and the Department is without authority to substitute its own judgment for that

of the legislature in setting the rate of interest to be imposed.

The Taxpayer's argument also misapprehends where the burden of correctly reporting and

paying taxes lies. Although it is unfortunate that there was such a long lapse of time between the

filing of the Taxpayer's 1992 income tax return and when the Department issued its assessment,

nonetheless, the primary responsibility for reporting and paying taxes correctly lies with the

Taxpayer. The Taxpayer is the one who has the information, such as W-2 forms and other books

and records to allow him to properly report and pay taxes in a timely manner. While there is no

question that the Taxpayer's underreporting of tax in this instance was inadvertent and

unintentional, it still remains that the Taxpayer was in the best position to know if his tax return

was complete and accurate at the time it was filed. Even if the mistake was not realized

immediately, the Taxpayer found out that there was some problem when he was assessed

additional tax by the IRS. Since both the Department and the IRS use the same starting point in

determining taxable income, that is, federal adjusted gross income, any adjustments to income by

the IRS should have tipped off the Taxpayer that there may also need to be an adjustment to his

state tax return. In fact, whenever there is an adjustment of a federal tax liability, § 7-1-13(C)

NMSA 1978 requires that taxpayers file an amended state return and pay any additional taxes due

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within ninety days of the federal adjustment. Thus, in this case the Taxpayer was on notice well

before the Department even received the federal tape match information that additional state tax

may be due.

There is a lapse of over a year from the due date for federal and state returns before the

Department even receives the information from the IRS with which to compare the amounts

reported to the two taxing agencies. Then the Department must cross check over 30,000 returns

and investigate the basis for the discrepancies and determine whether the discrepancy signifies an

underreporting of tax. Thus, there will always be well over a year and often several years before

the Department will assess tax on any differential. Because the § 7-1-67 mandates that interest be

imposed on any unpaid taxes from the date they are due until the date they are paid, there will

often be a significant accrual of interest. While this is unfortunate, as noted above, the Taxpayer

is in the best position to determine if his taxes are being accurately reported and is in the best

position to assure that there is no basis for assessing interest on the underpayment of tax.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 687052 and

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

2. Interest was properly assessed due to the Taxpayer's underpayment of tax for tax

year 1992.

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

DONE, this 26th day of September, 1997.

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