If you genuinely can't afford to pay a tax bill, can New Mexico waive the interest — or the tax itself?

Subject

Diane Gonzales (D&O 99-04)

Plain-English summary

Diane Gonzales worked part of 1994 as a home health provider for an elderly woman in Taos. She did not know New Mexico's gross receipts tax applies to people in the business of providing services in the state, and even though her CPA reported the income as self-employment on her federal Schedule C, the accountant never mentioned the gross receipts tax.

Through the Department's information-sharing agreement with the IRS, the state learned about her 1994 self-employment income, found no record she had reported or paid gross receipts tax on it, and in March 1998 issued Assessment No. 2233049 for $614.64 tax, $61.44 penalty, and $334.20 interest. She protested only the penalty and interest — she did not dispute owing the tax — and her real argument was that she was unemployed and unable to pay. The Department had already abated the penalty.

Hearing Officer Gerald B. Richardson denied the protest. Two settled principles drove the result:

• Interest is mandatory (Section 7-1-67(A)). The statute says interest "shall" be paid on any tax not paid when due, and "shall" is mandatory (State v. Lujan). There is no exception — it doesn't matter why the tax went unpaid, and interest keeps running until it is paid.
• Inability to pay is not a defense, and the state can't just forgive the debt. The Department may only compromise an assessment where there is a good-faith doubt about whether the taxpayer actually owes the tax (Section 7-1-20; Regulation 3 NMAC 1.6.14) — not because of hardship. And the New Mexico Constitution (Article IV, Section 32) forbids releasing any debt owed to the state except by payment or a proper court proceeding.

A footnote noted one built-in limit: under Section 7-1-19, the Department cannot take action to collect on an assessment after ten years from the date of assessment — but that limits enforcement, it does not forgive the debt.

What this means for you

• Providing services in New Mexico can trigger gross receipts tax even for an individual. Home health work, consulting, and other self-employment services are subject to gross receipts tax. Reporting the income on a federal Schedule C does not satisfy — or substitute for — the state gross receipts tax.
• "I can't afford it" won't reduce a valid tax bill or its interest. Hardship is not a legal defense. The Department has no authority to waive a properly-owed tax or the interest on it because the taxpayer is broke.
• A compromise requires doubt about liability, not sympathy. The only door to reducing a tax through compromise is a genuine, good-faith dispute about whether you actually owe it. If you concede the tax is correct (as here), that door is closed.
• Interest keeps accruing until you pay. Because it runs automatically, delay only increases the total. If you owe, paying sooner — or setting up an installment arrangement — limits the interest.
• Ask your preparer specifically about state gross receipts tax. A CPA who prepares your federal return may not flag New Mexico gross receipts tax on your service income unless you ask.

Key questions answered

Did she have to pay the tax even though she didn't know it applied?
Yes. She conceded the gross receipts tax was properly imposed on her home health receipts; not knowing about it is not a defense. Her only requests were to waive the interest and, ultimately, the tax itself for hardship — both denied.

Why couldn't the Department waive the interest?
Section 7-1-67(A) makes interest mandatory ("shall be paid") with no exceptions. Interest is imposed any time tax is unpaid, for as long as it is unpaid, regardless of the reason.

Can the Department forgive a tax for someone who truly cannot pay?
No. It may compromise an assessment only where the Secretary has a good-faith doubt about the taxpayer's liability (Section 7-1-20; Regulation 3 NMAC 1.6.14), and the New Mexico Constitution (Article IV, Section 32) bars releasing a debt to the state except by payment or a court proceeding. Inability to pay is not a basis to compromise.

Is there any time limit that helps?
Only on collection. Section 7-1-19 stops the Department from acting to collect on an assessment after ten years from the assessment date. That limits enforcement; it does not extinguish or forgive the underlying debt.

Verbatim citations

Interest is mandatory (Section 7-1-67(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.

Inability to pay is not a basis to abate:

The fact that a taxpayer does not have the financial ability to pay an assessment does not provide the Department with a basis for abating the assessment.... The Secretary may not abate an assessment based on the taxpayer's inability to pay the tax.

The constitutional bar on releasing state debts:

Article IV, § 32 of the New Mexico Constitution prohibits the release of any debt owing to the state except by the payment of the debt or by a proper proceeding in court.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Diane Gonzales
• Decision PDF: D&O 99-04

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
DIANE GONZALES NO. 99-04
ID. NO. 02-360716-00 5, PROTEST TO
ASSESSMENT NO. 2233049

DECISION AND ORDER

This matter came on for formal hearing on January 19, 1999 before Gerald B.

Richardson, Hearing Officer. Diane Gonzales, hereinafter, “Taxpayer”, represented herself at the

hearing. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Javier Lopez, 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 worked as a home health provider for an elderly woman in Taos for

part of 1994.

2. The Taxpayer was not aware of New Mexico’s gross receipts tax and its

applicability to persons engaged in the business of providing services in New Mexico.

3. The Taxpayer had her 1994 personal income taxes done by a certified public

accountant. The Taxpayer’s income from providing home health services was reported as

income from self-employment on federal Schedule C of the Taxpayer’s 1994 federal income tax

return.

4. The Taxpayer’s accountant did not inform her about New Mexico’s gross receipts

tax or its applicability to her receipts from providing home health services.

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5. The Department has an information sharing agreement with the Internal Revenue

Service (IRS) whereby the IRS provides the Department with information concerning the federal

tax reporting by New Mexico residents.

6. As a result of this agreement, the IRS provided the Department information about

the Taxpayer’s 1994 self-employment income.

7. As a result of this information and the fact that the Department had no record that

the Taxpayer had reported or paid gross receipts tax upon her receipts from providing home

health services, on March 13, 1998, the Department issued Assessment No. 2233049 (“the

assessment”) to the Taxpayer.

8. The assessment assessed $614.64 in gross receipts tax, $61.44 in penalty and

$334.20 in interest for the period of January, 1994 through December, 1994.

9. On April 11, 1998, the Taxpayer filed a protest to the assessment. The Taxpayer

protested the imposition of penalty and interest and did not protest the gross receipts tax

assessed.

10. The Taxpayer is unemployed and is unable to pay the assessment.

11. The Department has abated the penalty portion of the assessment.

DISCUSSION

The Taxpayer disputes the assessment on the grounds that she is financially

unable to pay the assessment. She is presently unemployed and has no way to make payments

towards the assessment.

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

provides as follows:

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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 not paid in a timely manner. Interest is imposed any time that

taxes are not paid when they are due, and for the period of time that they are unpaid.

The Taxpayer asks the Department to abate the assessment of interest because she is unable

to pay it, and as it continues to accrue, it becomes even more difficult or impossible to pay. The

Taxpayer also asks for abatement of the tax principal for the same reason, inability to pay, even

though she does not dispute that the tax was properly imposed upon her receipts from performing

home health services. The fact that a taxpayer does not have the financial ability to pay an

assessment does not provide the Department with a basis for abating the assessment. Section 7-1-20

NMSA 1978 is the provision of the Tax Administration Act which sets out the Department’s

authority to compromise assessments of tax. It 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. Regulation 3 NMAC 1.6.14.

In this case, there is no basis to find that there is a good faith doubt as to the Taxpayer’s

liability for the tax. The Taxpayer has admitted that there is a legal basis to assess the gross

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receipts tax, and Section 7-1-67 contemplates no exception to the imposition of interest when

taxes were not paid when they were due. Thus, the Department has no legal authority under

Section 7-1-20 to compromise the assessment. Additionally, Article IV, § 32 of the New Mexico

Constitution prohibits the release of any debt owing to the state except by the payment of the

debt or by a proper proceeding in court. Thus, there is simply no basis to compromise or release

the assessment of tax and interest regardless of whether Ms. Gonzales is ever able to pay the

assessment.1

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2233049 and

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

2. Interest was properly imposed for the failure to pay gross receipts taxes when they

were due.

3. Gross receipts tax was properly imposed upon the Taxpayer’s receipts from

performing home health services in New Mexico in 1994.

5. There is no good faith doubt about the Taxpayer’s liability for gross receipts tax

and interest under the facts of this case and so the Department lacks the authority to compromise

the assessment pursuant to § 7-1-20 NMSA 1978.

6. Inability to pay is no defense to a proper assessment of tax and interest.

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

DONE, this 27th day of January, 1999.

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Although the Constitution prohibits the forgiveness of any debts owing the state, the Legislature has limited the
Department’s authority to take actions to enforce and collect tax debts. Section 7-1-19 NMSA 1978 prohibits the
Department from taking any action to collect taxes due under an assessment after ten years from the date of the
assessment.

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