If you underpay New Mexico income tax by mistake and the state doesn't catch it for years, can you avoid the interest and penalty because the notice was late?

Plain-English summary

Harold and Betty Burris filed their 1993 federal and New Mexico income tax returns on time, but left off $5,074.35 of Social Security income because Mr. Burris believed it was exempt. In 1994 the IRS corrected the federal return and the couple paid the additional federal tax. They did not realize they also had to amend their New Mexico return to match the higher federal adjusted gross income, so the state underpayment sat uncorrected.

In 1997 the Department caught the mismatch through a computer "tape match" comparing state and federal filings, and issued Assessment No. 703160 for $771.92 — $490.11 in additional 1993 income tax, a $49.01 penalty, and $232.80 of interest. The Burrises paid the tax but protested the penalty and interest, arguing the state waited far too long (more than three years after they filed, more than two years after the IRS caught it) to tell them.

The Hearing Officer denied the protest:

• Interest is mandatory, not discretionary. Section 7-1-67 says interest "shall" be paid on tax not paid when due — no exceptions. Interest isn't a punishment; it compensates the state for the time value of money it was owed, so the reason for the late payment (and the state's own delay) is irrelevant. Even taxpayers with a formal extension owe interest from the original due date.
• The underpayment was negligent. The 10% penalty under § 7-1-69(A) applies to a failure to pay when due "due to negligence." New Mexico is a self-reporting system: taxpayers, who know their own affairs best, must determine and report their liability, and every person is charged with a duty to learn the tax consequences of their actions (Tiffany Construction). Once the IRS adjusted their federal income, § 7-1-13(C) required them to file an amended state return within 90 days; not knowing that obligation is still negligence.
• The delay changed nothing. The § 7-1-69(A) penalty maxes out at 10% after five months. Even if the Department had assessed back in late 1994/early 1995, the penalty would have been exactly the same amount. The state's timing had no effect on what the couple owed.

What this means for you

Individuals whose federal return gets corrected

If the IRS changes your federal income — an audit, a matching notice, an agreed adjustment — New Mexico requires you to file an amended state return and pay any additional state tax within 90 days. New Mexico starts from your federal adjusted gross income, so a federal change almost always changes your state tax too. Don't wait for the state to send a bill; the duty to fix it is yours.

Anyone hoping a state's slow notice will wipe out penalty and interest

It generally won't. Interest is mandatory and runs from the original due date regardless of why payment was late or how long the state took to notice. And the negligence penalty tops out at 10% after five months, so a state's delay usually doesn't increase (or decrease) it — arguing "you told me too late" rarely helps.

Accountants and tax professionals

This decision is a clean statement of two mandatory-collection principles: § 7-1-67 interest is non-discretionary and compensatory, and § 7-1-69(A) negligence is measured against the ordinary-care standard in Regulation 3 NMAC 1.11.10 in a self-reporting system. Flag the § 7-1-13(C) 90-day amended-return trigger for any client who accepts an IRS adjustment — it's the exact obligation the Burrises missed.

Common questions

Q: The state didn't tell me for three years — why do I still owe interest?
A: Because interest is mandatory under § 7-1-67. It compensates the state for money it was owed and never received on time; the reason for the delay, including the state's own timing, doesn't excuse it.

Q: I honestly didn't know I had to amend my state return. Isn't the penalty unfair?
A: The negligence penalty applies precisely to honest mistakes made without ordinary care. New Mexico is a self-reporting system, and taxpayers are charged with knowing their obligations — including the § 7-1-13(C) duty to amend the state return within 90 days of an IRS adjustment. Lack of awareness is still negligence.

Q: Would I have owed less if the state had caught it sooner?
A: No. The § 7-1-69(A) penalty reaches its 10% maximum after five months, so an earlier assessment would have produced the same penalty. Interest, meanwhile, keeps running until you pay, so a later payment means more interest — not less.

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 and negligence penalties after an unamended federal adjustment, 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")
• § 7-1-69(A) NMSA 1978 — 2% per month penalty (max 10%) for failure to pay due to negligence
• § 7-1-13(B) NMSA 1978 — taxpayers must determine and report their own liability; § 7-1-13(C) — amended state return required within 90 days of an IRS adjustment to federal income
• § 7-1-18 NMSA 1978 — the Department has three years from the end of the calendar year the tax is due to assess; § 7-1-24 NMSA 1978 — protest procedure
• Regulation 3 NMAC 1.11.10 — defines negligence as failure to exercise ordinary business care and prudence, inaction where action is required, or inadvertence/carelessness/erroneous belief

Case law cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" makes the interest assessment mandatory, not discretionary
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — every person has a reasonable duty to ascertain the tax consequences of their actions; failure to do so is negligence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Harold and Betty Burris
• Decision PDF: D&O 98-12

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 HAROLD AND BETTY BURRIS 98-12
ASSESSMENT NO. 703160

DECISION AND ORDER

This matter came on for formal hearing on February 27, 1998 before Margaret B. Alcock,

Hearing Officer. Harold D. Burris appeared by telephone on behalf of himself and Mrs. Burris

(“Taxpayers”). The Taxation and Revenue Department ("Department"), was represented by Bruce J.

Fort, Special Assistant Attorney General. At the close of the hearing, it was agreed that the record

would be kept open for a period of one week to give Mr. Burris time to review Department’s Exhibit

A and submit any objection to the exhibit to the hearing officer. No objection having been filed, the

Taxpayers’ protest to Assessment No. 703160 was submitted for decision on March 6, 1998. Based

on the evidence in the record and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Harold and Betty Burris filed timely federal and New Mexico personal income tax returns

for calendar year 1993.

2. In preparing the Taxpayers' 1993 income tax returns, Mr. Burris failed to report $5,074.35

of social security income because he believed this income was exempt from tax.

3. In July 1994, the Internal Revenue Service (“IRS”) notified the Taxpayers that additional

tax was due on the social security income omitted from their 1993 federal return. In late 1994 or
early 1995, after several months of correspondence, the Taxpayers agreed to the IRS adjustment and

paid the additional tax due.

4. The Taxpayers did not realize that they were required to amend their state return to reflect

the change in their federal adjusted gross income. Accordingly, the Taxpayers did not take any

action to correct the error in their 1993 New Mexico income tax return resulting from the omission

of social security income on their original federal return.

5. In 1997, the Department discovered the discrepancy between the income reported to the

IRS and the amount shown on the Taxpayers' state return through a computer "tape match" that

compares information reported to state and federal tax authorities.

6. On May 23, 1997, the Department issued Assessment No. 703160 in the amount of

$771.92, representing $490.11 of additional income tax for calendar year 1993, penalty of $49.01

and interest of $232.80.

7. On May 30, 1997, the Taxpayers filed a protest of the Department’s assessment of penalty

and interest.

DISCUSSION

At issue is whether the Taxpayers are liable for interest and penalty assessed on their

underpayment of state income tax for calendar year 1993. The Taxpayers object to the assessment

because the Department did not notify them of the error in their state return until more than three

years after the return was filed and more than two years after the IRS discovered the error in the

Taxpayers’ federal income tax return.

Assessment of Interest. Section 7-1-67 governs the imposition of interest on late payments of

tax and provides, in pertinent part:

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

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the first day following the day on which the tax becomes due, without a
regard to any extension of time or installment agreement, until it is
paid... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). Thus, the legislature has

directed the Department to assess interest whenever taxes are not timely paid and has provided no

exceptions to the mandate of the statute.

The assessment of interest is not designed to punish taxpayers, but to compensate the state

for the time value of unpaid revenues. Thus, the reason for a late payment of tax is irrelevant to the

imposition of interest. Even taxpayers who obtain a formal extension of time to pay tax are liable for

interest from the original due date of the tax to the date payment is made. While one may argue that

the rate of interest is excessive in comparison with current market rates, that is a matter within the

sound discretion of the legislature. The Department does not have authority to substitute its own

judgment for that of the legislature in setting the rate of interest to be imposed.

Assessment of Penalty. Section 7-1-69, NMSA 1978 (1995 Repl.Pamp. and 1996 Supp.)

governs the imposition of penalty during the periods at issue in this protest. Subsection A imposes a

penalty of two percent per month, up to a maximum of ten percent:

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...

The statute imposes penalty based on negligence (as opposed to fraud) for failure to timely pay tax.

There is no contention on the part of the Department that the Taxpayers’ failure to report and pay tax on

their social security income was the result of bad faith or fraud. What remains to be determined is

whether the Taxpayers were negligent in failing to report their taxes properly.

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Taxpayer "negligence" for purposes of assessing penalty is defined in Regulation 3 NMAC

1.11.10 as:

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.

In this case, the Taxpayers' failure to report their social security income on their original federal and

state returns was due to Mr. Burris’ erroneous belief that his social security income was not subject to

tax. The Taxpayers’ failure to amend their New Mexico tax return once the reporting error was

discovered by the IRS was due to the Taxpayers’ lack of knowledge of New Mexico’s tax laws.

The Taxpayers argue that the Department should have notified them of the error in their 1993

income tax return in a more timely manner. This argument misapprehends the nature of New Mexico’s

self-reporting tax system. It is the obligation of taxpayers, who have the most accurate and direct

knowledge of their activities, to determine their tax liabilities and accurately report those liabilities to

the state. See, Section 7-1-13(B), NMSA 1978. There are insufficient government resources available

for the Department to continually audit every taxpayer to determine whether he or she has fully

complied with state tax laws.1 Thus, the New Mexico courts have held that every person is charged

with the reasonable duty to ascertain the possible tax consequences of his or her actions, and the failure

to do so constitutes negligence for purposes of Section 7-1-69(A). Tiffany Construction Co. v. Bureau

1
Although the Department performs periodic "tape matches" that compare information reported to the IRS with
information reported to the state, there is a delay of one to two years before the federal tape match information is
made available to the Department. Under Section 7-1-18 NMSA 1978, the Department has three years from the end
of the calendar year in which a tax is due to issue an assessment.

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of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348

(1977).

While there is no question that the Taxpayers’ underreporting of tax in this instance was

inadvertent and unintentional, it still remains that the Taxpayers were in the best position to know

whether their tax return was complete and accurate at the time it was filed. Even if the mistake was

not realized immediately, the Taxpayers discovered there was a problem when they were assessed

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

determining taxable income, i.e., federal adjusted gross income, the adjustment to income by the IRS

should have alerted the Taxpayers to the need to amend their state tax return. Section 7-1-13(C)

NMSA 1978 specifically requires a taxpayer whose federal adjusted gross income has been changed

as a result of an IRS audit to file an amended state return and pay additional tax due within 90 days

of the federal adjustment. The Taxpayers’ lack of awareness of their legal obligations constitutes

negligence for purposes of the civil penalty imposed by Section 7-1-69(A).

Finally, it should be noted that the penalty imposed by Section 7-1-69(A) reaches a

maximum of 10 percent after five months from the original due date of the tax. Even if the

Department had issued its assessment at the time the Taxpayers accepted the IRS adjustment to

income in late 1994 or early 1995, the amount of penalty assessed at that time would have been

exactly the same as it was in 1997. Thus, the delay between the IRS assessment and the state

assessment had no effect on the Taxpayers’ liability for New Mexico’s civil penalty on the late

payment of their 1993 income tax.

CONCLUSIONS OF LAW

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1. The Taxpayer filed a timely, written protest to Assessment No. 703160 pursuant to

Section 7-1-24 NMSA 1978, and jurisdiction lies over the parties and the subject matter of this protest.

2. Pursuant to Section 7-1-67(A) NMSA 1978, interest was properly assessed against the

Taxpayers for late payment of a portion of their 1993 personal income taxes.

3. Pursuant to Section 7-1-69(A) NMSA 1978, the Taxpayers were negligent in

underreporting their 1993 personal income taxes and penalty was properly imposed.

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

DONE, this 11th day of March 1998.

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