Could a first-year New Mexico resident avoid penalty and interest after reporting only New Mexico income instead of all federal adjusted gross income?

Subject

Jim D. Dodson (D&O 98-34)

Plain-English summary

Jim Dodson became a New Mexico resident during 1993. His New Mexico Form PIT-1 instructed taxpayers to report federal adjusted gross income on Line 7, while the bold first-year-resident instructions directed them to use Form PIT-B to allocate and apportion income from inside and outside New Mexico.

Dodson believed only New Mexico income belonged on the state return. He called the Department and was told that only New Mexico income was subject to New Mexico tax, but he did not ask how to complete the forms and the employee did not volunteer that information. Dodson then excluded his California income from PIT-1 instead of reporting all federal adjusted gross income and using PIT-B. That method understated his New Mexico tax by $165.45.

A federal-state computer match found the discrepancy in 1997. The Department assessed $165.45 tax, $16.54 penalty, and $78.58 interest. Dodson protested the penalty and interest, arguing that the instructions were confusing, the employee should have explained the filing method, and the Department should have found the error sooner.

Hearing Officer Margaret B. Alcock rejected all three arguments. The written instructions clearly identified first-year residents and required PIT-B; nothing suggested reporting only New Mexico income on Line 7. The telephone advice answered the taxability question Dodson asked but did not address a filing-method question he did not ask. And in New Mexico's self-reporting system, the taxpayer — not the Department — had the duty to determine and correctly report the liability.

Interest was mandatory under Section 7-1-67(A) regardless of the reason for late payment. The reporting error also met the regulatory definition of negligence because it resulted from an erroneous belief and failure to follow clear instructions. The assessment was within the statutory period, and the protest was DENIED.

What this means for you

• Taxable income and return mechanics are different questions. Only New Mexico-source income may ultimately be taxed for part of the year, but the return can still require all federal adjusted gross income before allocation.
• First-year residents had to use PIT-B under the instructions at issue. Dodson's mistake was excluding California income directly from PIT-1 instead of allocating it through the prescribed schedule.
• A phone answer is only as complete as the question asked. Dodson asked whether California income was taxable, not how to report and allocate it.
• Ignoring clear written instructions can support negligence penalty. Being new to the state did not excuse the failure to read the bold first-year-resident directions.
• Delayed detection does not shift filing responsibility to the Department. The self-reporting system placed the initial duty on Dodson, and the assessment was timely.

Key questions answered

Was the Department wrong to say only New Mexico income was taxable?
No. The answer did not explain the separate reporting method: all federal adjusted gross income went on PIT-1, and PIT-B allocated the out-of-state portion.

Were the 1993 instructions confusing?
The Hearing Officer found they were not. They expressly addressed first-year residents in bold text and identified PIT-B as the required allocation schedule.

Why was the penalty upheld?
Dodson's erroneous belief and inattention to the instructions met the regulation's negligence definition, even without fraud or bad faith.

Why was interest upheld?
Section 7-1-67(A) made interest mandatory from the original due date until payment, regardless of why the underpayment occurred.

Verbatim citations

The first-year-resident instruction:

A first year resident of New Mexico must file using the forms PIT-1 and PIT-B to allocate and apportion income from both within and without New Mexico.

The negligence definition applied to the error:

inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.

The decision on self-reporting responsibility:

In this case, it was Mr. Dodson's responsibility to obtain the information he needed to properly report and pay his New Mexico income taxes. He cannot avoid the consequences of his reporting error by attempting to shift this responsibility to the Department.

The holdings:

Pursuant to Section 7-1-67(A) NMSA 1978, interest was properly assessed against Mr. Dodson on the late payment of a portion of his 1993 state income taxes.

Pursuant to Section 7-1-69(A) NMSA 1978, Mr. Dodson was negligent in underreporting his 1993 personal income taxes and penalty was properly imposed.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jim D. Dodson
• Decision PDF: D&O 98-34

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 JIM D. DODSON 98-34
ASSESSMENT NO. 704860

DECISION AND ORDER

This matter came on for formal hearing on June 12, 1998, before Margaret B. Alcock,

Hearing Officer. Jim Dodson appeared on his own behalf. The Taxation and Revenue Department

("Department"), was represented by Monica M. Ontiveros, Special Assistant Attorney General. Based

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

FOLLOWS:

FINDINGS OF FACT

1. Jim Dodson filed timely federal and New Mexico personal income tax ("PIT")

returns for calendar year 1993.

2. Mr. Dodson was a first-year resident of New Mexico in 1993 and was not familiar

with New Mexico's personal income tax laws.

3. The Department's 1993 Form PIT-1 and related instructions directed taxpayers to

report their federal adjusted gross income on Line 7 of the New Mexico return.

4. Mr. Dodson did not believe he should have to include the portion of his federal

adjusted gross income that he earned in California on his New Mexico return. Mr. Dodson failed to

notice the Department's instructions directing first-year residents to report all federal adjusted gross

income and then use Form PIT-B to allocate and apportion that income between in-state and out-of-

state sources.

5. Mr. Dodson called the Department to ask whether his California income was subject

to tax in New Mexico and was told that only his New Mexico income was subject to tax. Mr.

Dodson did not specifically ask how his income should be reported on Form PIT-1, nor did the

employee volunteer any information concerning the method first-year residents should use to

allocate and apportion income between New Mexico and out-of-state sources.

6. Based on his belief that only New Mexico income should be reported on his New

Mexico income tax return, Mr. Dodson ignored the Department's instructions to report all federal

adjusted gross income on Line 7 of Form PIT-1 and use Form PIT-B to allocate and apportion that

income. Instead, Mr. Dodson excluded his California income from the amount reported on Line 7 of

the New Mexico return.

7. As a result of this reporting error, Mr. Dodson underreported his 1993 New Mexico

income tax by $165.45.

8. In 1997, the Department discovered the discrepancy between the income Mr. Dodson

reported to the IRS and the income shown on his New Mexico PIT-1 return through a computer tape-

match program that compares information reported to state and federal tax authorities.

9. In May 1997, the Department sent an inquiry letter to Mr. Dodson, who responded

promptly and explained that the difference between the federal and state income reported was due to

his reporting only New Mexico income on Line 7 of his 1993 state return.

10. On May 30, 1997, the Department issued Assessment No. 704860 to Mr. Dodson in

the amount of $165.45 tax principal, representing the underreporting created by Mr. Dodson's

erroneous method of computing his 1993 state income taxes, plus $16.54 penalty and $78.58 interest.

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11. On June 3, 1997, Mr. Dodson filed a protest of the Department’s assessment of

penalty and interest.

DISCUSSION

At issue is whether Mr. Dodson is liable for the Department's assessment of penalty and

interest on his underpayment of state income tax for calendar year 1993. Mr. Dodson objects to the

assessment because the Department did not notify him of the error in his state return until May 1997,

thirty-eight months after the return was filed.

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
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, 105, 560 P.2d 167, 169 (1977). The assessment of

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

revenues. Accordingly, the reason for a late payment of tax is irrelevant to the imposition of interest.

Even taxpayers who contact the Department before a tax is due and obtain a formal extension of

time to pay the 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. 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.

Assessment of Penalty. Section 7-1-69 NMSA 1978 (1995 Repl.Pamp.) governs the

imposition of penalty during the period at issue in this protest. Subsection A imposes a penalty of two

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

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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 Mr. Dodson's underpayment of his 1993 state

income tax was the result of fraud or bad faith. What remains to be determined is whether Mr. Dodson

was negligent in failing to properly report those taxes.

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, Mr. Dodson's underpayment of his 1993 state income tax was due to his erroneous belief

that only New Mexico income should be reported on his New Mexico return and his failure to notice

the requirement that first-year residents must file a Form PIT-B to allocate and apportion out-of-state

income. At the hearing, Mr. Dodson raised three arguments to support his contention that he should not

be held liable for his misunderstanding of New Mexico law.

First, Mr. Dodson argued that the Department's instructions to the 1993 New Mexico PIT-1

return were confusing. He did not explain which portions of the instructions caused his confusion. Nor

did he explain why he did not see the paragraph on the first page of the instructions that begins with the

words "First Year Resident" in bold print. That paragraph states:

First Year Resident: A first year resident is an individual who has moved to
New Mexico during the tax year and who was a nonresident for at least one full
tax year prior to moving to New Mexico. A first year resident of New Mexico

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must file using the forms PIT-1 and PIT-B to allocate and apportion income
from both within and without New Mexico. (emphasis added).

Page 3 of the instructions lists the forms required to be attached to the long form of the PIT-1. Included

in the list is the PIT-B:

PIT-B, ALLOCATION AND APPORTIONMENT SCHEDULE—Use if
you are a full-year resident taxpayer who has income or losses from business or
property located outside New Mexico or if you are a first-year resident of New
Mexico. (emphasis added).

The evidence does not support Mr. Dodson's position that the Department's instructions were

confusing. Nothing in the instructions could be read to advise first-year residents to report only New

Mexico income on the PIT-1. Both the instructions and the form itself direct first-year residents to

report the federal adjusted gross income shown on federal Form 1040 and then use Form PIT-B to

allocate and apportion out-of-state income.

Mr. Dodson's second argument was that the Department employee with whom he spoke in

1994 should have given him better directions concerning the method of reporting his out-of-state

income. This argument is problematic for two reasons. First, Mr. Dodson does not have a clear

memory of the details of the conversation. While this is understandable given the amount of time that

has passed, it is difficult to evaluate the advice given to Mr. Dodson when there is no way to know

exactly what questions were asked. Nor is it possible to test the employee's memory of the

conversation since Mr. Dodson did not ask for the employee's name. The second problem with Mr.

Dodson's argument is that even assuming the employee failed to inform him of the reporting method to

be used by first-year residents, the Department had already provided this information in the instructions

to Forms PIT-1 and PIT-B.

Finally, Mr. Dodson argued that the Department was negligent in failing to notice the error in

his 1993 income tax return at the time the return was filed. This argument misapprehends the nature of

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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 Every person is therefore charged with the reasonable duty

to ascertain the possible tax consequences of his action. 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). In this case, it was Mr. Dodson's responsibility to obtain the information he needed to properly

report and pay his New Mexico income taxes. He cannot avoid the consequences of his reporting error

by attempting to shift this responsibility to the Department.

CONCLUSIONS OF LAW

1. Mr. Dodson filed a timely, written protest to Assessment No. 704860 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 Mr.

Dodson on the late payment of a portion of his 1993 state income taxes.

3. Pursuant to Section 7-1-69(A) NMSA 1978, Mr. Dodson was negligent in

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

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

DONE, this 15th day of June 1998.

1
Although the Department performs periodic "tape matches" that compare information reported to the IRS with
information reported to New Mexico, there is some delay before the federal tape match information is made
available to the Department. Under the Tax Administration Act, the Department has three years from the end of the
calendar year in which a tax is due to issue an assessment. Section 7-1-18(A) NMSA 1978. The May 30, 1997
assessment issued to Mr. Dodson was well within the statutory limitations period provided by the New Mexico
Legislature.

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