If New Mexico assesses gross receipts tax because a store reported far higher receipts to the IRS than it did to the state, can the taxpayer beat the assessment without records to explain the gap?

Plain-English summary

A general store in Truchas, New Mexico reported $81,048.36 in gross receipts to the state Taxation and Revenue Department for 1993 and paid gross receipts tax on that amount. But on its federal Schedule C, the same store reported $168,835.00 in receipts for 1993. Under an IRS–state information-sharing agreement, the Department learned of the gap and, in December 1996, assessed the store an extra $4,477.82 in gross receipts tax plus penalty and interest for 1993.

The store's owner, Mrs. Ercilia Tafoya, protested. Her husband had run the store and handled all its books and taxes; he became ill with cancer in 1993 and died in June 1994, and the store's records were not kept after his death. She had no personal knowledge of how the returns were prepared and no records to show the state figure was the correct one.

The Hearing Officer denied the protest. New Mexico law presumes an assessment is correct, which puts the burden on the taxpayer to prove otherwise. Mrs. Tafoya had no records or other evidence to rebut the assessment. An amended federal return that H&R Block prepared to lower the Schedule C figure did not help, because it was not based on any actual store records. The Hearing Officer even independently checked the IRS figure against the Schedule C attached to the store's 1993 New Mexico income tax return and found it confirmed the higher receipts. The Department had already abated the penalty, so only the additional tax and interest remained.

What this means for you

Small-business owners

If you report one set of receipts to the IRS and a smaller set to New Mexico, the Department can and does cross-check the two through its IRS information-sharing agreement and bill you for the difference. When the numbers don't match, the state's figure is presumed correct unless you can prove your actual receipts with records. Keep your own sales records — bank deposits, register tapes, invoices — so you can substantiate the right number if you're ever assessed.

Family businesses where one spouse or partner keeps the books

This case is a hard lesson in what happens when the person who handled the books is gone and the records weren't preserved. Sympathy for an honest owner in a genuinely difficult situation did not change the outcome, because the law required evidence, not just good faith. If one person runs the finances, make sure someone else knows where the records are and that they survive a death or departure.

Accountants and tax preparers

An amended return filed just to make the federal number match the state number carries no weight if it isn't grounded in the taxpayer's actual books. Here the amended Schedule C was disregarded precisely because it was reverse-engineered to the state figure rather than built from records. To rebut a New Mexico assessment under § 7-1-17(C), you need documentation of the true receipts, not a conforming return.

Common questions

Q: Why did the store lose even though the owner was clearly honest?
A: The Hearing Officer expressly found Mrs. Tafoya honest and sympathized with her situation, but New Mexico law presumes an assessment is correct and requires the taxpayer to present evidence to overcome it. Without records, she could not meet that burden, and honesty alone is not evidence of the correct receipts figure.

Q: How did the Department know the store under-reported?
A: New Mexico's Taxation and Revenue Department has an information-sharing agreement with the IRS. The IRS told the Department that the store's 1993 federal Schedule C showed $168,835 in receipts, far more than the $81,048 reported to the state, and the Department assessed the difference.

Q: Did the amended federal return fix the problem?
A: No. H&R Block amended the Schedule C to match the lower state figure, but the amendment was not based on the store's actual records. Because it was not grounded in real books, it did not prove the true receipts and did not rebut the assessment.

Q: Does this decision apply to my business?
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 shows how the Hearing Officer applies the presumption of correctness, but your facts and records may lead to a different result.

Citations and references

Statute and case law:

• § 7-1-17(C) NMSA 1978 — an assessment made by the Department is presumed correct, placing the burden on the taxpayer to disprove it
• Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (Ct. App. 1975) — taxpayer contesting an assessment must present evidence disputing its factual correctness

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Tafoya’s Store
• Decision PDF: D&O 97-43

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
TAFOYA’S STORE, ID. NO. 01-001230-00 3 NO. 97- 43
PROTEST TO ASSESSMENT NO. 2091234

DECISION AND ORDER

THIS MATTER came on for formal hearing on November 5, 1997 before Gerald

B. Richardson, Hearing Officer. Tafoya’s Store, hereinafter, “Taxpayer” was represented

by Mrs. Ercilia Tafoya, who owned the store together with her deceased husband, Mr.

Ruben Tafoya. 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:

FINDINGS OF FACT

1. For many years, Mr. and Mrs. Ruben Tafoya operated a general store in

Truchas, New Mexico. Mr. Tafoya was responsible for running the store and handling its

business affairs. Mrs. Tafoya was not involved in or knowledgeable about the business

affairs of the store.

2. In 1993, Mr. Tafoya was diagnosed with cancer and became too sick to

manage the store. Mr. and Mrs. Tafoya’s son helped run the store after his father’s

illness. Mr. Tafoya died on June 2, 1994.

3. For calendar year 1993 the Taxpayer reported to the Department that it had

gross receipts of $81,048.36 and gross receipts tax was paid to the Department on that

amount.

4. For calendar year 1993, the Taxpayer reported to the Internal Revenue

Service (“IRS”) on Federal Schedule C that it had gross receipts from the operation of the

store in the amount of $168,835.00.

5. The Department has an information sharing agreement with the IRS

whereby the Department and the IRS share information concerning taxpayers who reside

in New Mexico. Pursuant to that information sharing agreement the IRS provided the

Department information concerning the Taxpayer’s gross receipts as reported on

Schedule C for the 1993 tax year.

6. Based upon the discrepancy in the amount of gross receipts reported to the

IRS and to the Department, on December 27, 1996 the Department issued Assessment

No. 2091234, assessing $4,477.82 in gross receipts tax, $447.84 in penalty and $2,266.90

in interest for the period of January through December, 1993.

7. On February 3, 1997, the Taxpayer filed a written protest to Assessment

No. 2091234 and requested a retroactive extension of time to file the protest.

8. The Department granted the Taxpayer’s request for an extension of time to

file its protest.

9. The Department has abated the penalty assessed.

10. Because Mr. Tafoya handled all of the business affairs of the store,

including the filing of taxes and the keeping of business records, Mrs. Tafoya had no

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knowledge of how the figures were arrived at for the Taxpayers filings with the IRS or

with the Department for tax year 1993.

11. The records of the store were not retained after Mr. Tafoya’s death.

12. After receiving the Department’s assessment, Mrs. Tafoya went to H&R

Block to discuss the discrepancy in the receipts reported, since H&R Block prepared the

Schedule C. for Mr. and Mrs. Tafoya’s 1993 federal return.

13. H&R Block told Mrs. Tafoya that they would take care of the problem.

They prepared an amended 1993 federal return and amended the Schedule C. gross

receipts to match that which was reported to the Department.

14. The amended return was not based on Taxpayer records or other

information provided to H&R Block with respect to the actual amount of the Taxpayer’s

gross receipts during 1993.

DISCUSSION

The sole issue to be determined herein is the propriety of the Department’s

assessment for additional gross receipts tax and interest based upon the discrepancy in

the Taxpayer’s gross receipts as reported to the IRS and to the Department.

Section 7-1-17(C) NMSA 1978 provides that there is a presumption of correctness

which attaches to any assessment by the Department. This places the burden upon a

taxpayer contesting an assessment to present evidence to dispute the factual correctness of

the assessment. Champion International Corp. v. Bureau of Revenue, 88 N.M. 411,

540 P.2d 1300 (Ct. App. 1975).

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Unfortunately, Mrs. Tafoya was unable to present evidence to rebut the

presumption of correctness of the assessment. Mr. Tafoya ran the store and handled its

books and taxes. Mrs. Tafoya had no personal knowledge of how the tax returns were

prepared and she had no records to dispute that the amount of gross receipts as reported

on the Taxpayer’s 1993 Federal Schedule C were incorrect. The amended return prepared

by H&R Block was not prepared from the Taxpayer’s records or other information

provided by Mrs. Tafoya. Thus, the burden of proof was not met by the Taxpayer in this

case.

This is an unfortunate situation. Mr. Tafoya took care of the affairs of the small

store he owned with his wife and Mrs. Tafoya was left without information or records to

explain the discrepancy in reported gross receipts after Mr. Tafoya’s death. Mrs. Tafoya

is an honest person who would not attempt to deceive the taxing authorities. She

admitted that she did not have records or other information with which to dispute the

correctness of the assessment. She also admitted that she did not provide any records

upon which H&R Block could have based its amended 1993 tax return. She only asked

for consideration of her unfortunate situation.

In order to assure himself that the Department’s assessment was not based upon

erroneous information or a mistake by the IRS, this hearing officer investigated the

correctness of the information obtained from the IRS about the Taxpayer’s 1993 Schedule

C. His investigation revealed that the Taxpayer’s had also attached the 1993 Federal

Schedule C to their 1993 New Mexico Personal Income Tax return. A review of the

Schedule C., which was signed by Mrs. Tafoya, confirmed the correctness of the

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information provided by the IRS to the effect that the Taxpayer’s reported gross receipts

were $165,835.00

In light of the fact that the Taxpayer was unable to present any evidence to dispute

the factual correctness of the assessment, the Taxpayer’s protest must be denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2091234

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

2. The Taxpayer has failed to carry its burden of proving that the

Department’s assessment is incorrect.

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

DONE, this 16th day of November, 1997.

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