Could financial hardship or an accountant's bad advice excuse interest on Connie Schaekel's late-paid New Mexico gross receipts tax?

Subject

Connie Schaekel (D&O 98-29)

Plain-English summary

Connie Schaekel worked part time as an independent contractor setting up sales displays in 1993 and 1994. She deliberately limited her hours so she could spend more time with her young daughter. Although she consulted an accountant, the accountant gave incorrect advice, and Schaekel did not report or pay New Mexico gross receipts tax.

The Department issued five assessments covering 1993 and 1994. Schaekel borrowed money and paid the tax principal, then protested penalty and interest. The Department abated all penalty because she had relied on her accountant's erroneous advice. The only issue left was interest.

Hearing Officer Margaret B. Alcock held that Section 7-1-67 made interest mandatory whenever tax was not paid on time. Interest was not punishment; it compensated the state for the time value of revenue it should have received. For that reason, the accountant's mistake — while sufficient to remove negligence penalty — did not affect interest.

Schaekel also explained that paying interest would create financial hardship and could force her to work full time and place her daughter in day care. The decision found no authority to create an individual hardship exception. Section 7-1-20 allowed compromise only when the Secretary had a good-faith doubt about the taxpayer's liability, and the regulation barred abatement based on inability to pay or hardship. The protest was DENIED.

What this means for you

• Penalty and interest respond to different things. Reasonable reliance on an accountant removed Schaekel's negligence penalties, but it did not change the time value of late-paid tax.
• Interest was mandatory even for an honest mistake. The reason for late payment did not matter under Section 7-1-67.
• Financial hardship did not authorize abatement. The Department had to apply the law evenly and could not waive interest because payment was difficult.
• Compromise required doubt about liability, not inability to pay. Schaekel did not dispute that the gross receipts tax was legally due.
• A formal payment extension would not stop interest either. The decision noted that interest runs from the original due date even when a taxpayer obtains more time to pay.

Key questions answered

Why did bad accounting advice remove penalty but not interest?
Penalty addressed negligence, so reasonable professional reliance mattered. Interest compensated for delayed payment and was imposed regardless of fault.

Could the Hearing Officer reduce interest because Schaekel had to borrow the tax principal?
No. Section 7-1-67 provided no hardship exception and made interest mandatory.

Could the Secretary compromise the interest?
Only if there was a good-faith doubt about legal liability. The regulation did not permit compromise based on inability to pay or hardship.

Did Schaekel still dispute the gross receipts tax itself?
No. She paid the tax principal; the hearing addressed only interest after the Department abated penalty.

Verbatim citations

The mandatory-interest rule:

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...

The purpose of interest:

The assessment of interest is not designed to punish taxpayers, but to compensate the state for the time value of unpaid revenues.

The hardship limit:

The Secretary may not abate an assessment based on the taxpayer's inability to pay the tax or on the fact that payment will create a hardship.

The holding:

Pursuant to Section 7-1-67 NMSA 1978, interest was properly assessed against Ms. Schaekel for the late payment of gross receipts tax due on income she earned as an independent contractor during 1993 and 1994.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Connie Schaekel
• Decision PDF: D&O 98-29

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 CONNIE SCHAEKEL 98-29
ID. NO. 02-318456-00 6
ASSESSMENT NOS. 2179170-2179173 & 2180004

DECISION AND ORDER

This matter came on for formal hearing on May 14, 1998 before Margaret B. Alcock,

Hearing Officer. Connie Schaekel appeared on her own behalf. The Taxation and Revenue

Department ("Department") was represented by Frank D. Katz, Chief Counsel. Based on the evidence

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

FINDINGS OF FACT

1. During 1993 and 1994, Ms. Schaekel worked part-time as an independent contractor

setting up sales displays. Ms. Schaekel chose to limit her hours of work in order to spend more time

with her young daughter.

2. Although Ms. Schaekel consulted an accountant concerning her tax liabilities, she

was given incorrect advice and did not report or pay gross receipts tax on her receipts from working

as an independent contractor.

3. On September 27, 1997, the Department issued four assessments of gross receipts

tax, penalty and interest to Ms. Schaekel:

Assessment No. Report Period Tax Penalty Interest

2179172 June 1993 $308.74 $30.87 $192.96
2179170 December 1993 $308.74 $30.87 $169.81
2179173 June 1994 $284.43 $28.44 $135.10
2179171 December 1994 $284.43 $28.44 $113.77
On October 3, 1997, the Department issued Assessment No. 2180004 for the 1994 reporting period

in the amount of $615.38 gross receipts tax, $61.56 penalty, and $296.15 interest.

4. Ms. Schaekel paid the tax principal assessed. On October 24, 1997, she filed a

protest to the assessment of penalty and interest.

5. The Department subsequently abated the penalty based on Ms. Schaekel's reliance on

the erroneous advice of her accountant.

DISCUSSION

At issue is whether Ms. Schaekel is liable for the interest assessed on her underpayment of

gross receipts tax. Ms. Schaekel testified that she had to borrow money to pay the tax principal and

that it will be a financial hardship for her to pay the additional assessment of interest. After her

divorce, Ms. Schaekel made a conscious decision to limit her hours of work, and consequently her

income, in order to spend more time with her daughter. She believes that she is being penalized for

this choice and will have to obtain full-time work and place her daughter in day care in order to pay

off the assessment.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of taxes

made by the Department is presumed to be correct, and it is the taxpayer's burden to overcome this

presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Section

7-1-3(U) NMSA 1978 defines tax to include not only the amount of tax principal imposed but also,

unless the context otherwise requires, “the amount of any interest or civil penalty relating thereto."

Accordingly, the presumption of correctness of an assessment of taxes also applies to the assessment

of interest. See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M.

795, 779 P.2d 982 (Ct. App. 1989).

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Assessment of Interest. Section 7-1-67 NMSA 1978 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
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).

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). 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. 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. Section

7-1-13(E) NMSA 1978.

Ms. Schaekel asks the Department to consider that the assessment of interest will create a

financial hardship and may limit her ability to work a part-time schedule in order to spend time with her

daughter. The Department is required to apply the law even-handedly and cannot make exceptions

based on individual circumstances. Section 7-1-20 NMSA 1978 provides that the Secretary of the

Department may compromise an assessed tax when he has a good faith doubt as to the taxpayer's

liability for payment of the tax. The Secretary may not abate an assessment based on the taxpayer's

inability to pay the tax or on the fact that payment will create a hardship. See, Regulation 3 NMAC

1.6.14.

CONCLUSIONS OF LAW

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1. Ms. Schaekel filed a timely, written protest to Assessment Nos. 2179170-2179173 &

2180004 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 NMSA 1978, interest was properly assessed against Ms.

Schaekel for the late payment of gross receipts tax due on income she earned as an independent

contractor during 1993 and 1994.

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

DONE, this 19th day of May 1998.

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