If you overreported gross receipts tax in some months and underreported in others, can you offset the two to cut the interest you owe — and does an earlier refund mean the state agreed you owed nothing?

Subject

Lenya Reese (D&O 99-21)

Plain-English summary

Lenya Reese owned St. Francis Birth & Family Center. Her accountant had registered the business for gross receipts tax as a corporation, even though it was never incorporated and ran as a sole proprietorship, so she filed her gross receipts tax under a corporate ID number. In 1997 the Department received IRS data on the business income she reported on her 1994 federal Schedule C, could not find matching gross receipts filings under her name, and assessed about $1,811.81. After she pointed to the corporate ID, the Department checked those filings, found she had still underreported her 1994 receipts (by $7,124.88, mostly insurance payments she wrongly thought were exempt), and adjusted the assessment to $445.29 in tax, $49.34 penalty, and $255.43 interest. She admitted the underreporting but disputed how the interest and penalty were figured.

The Hearing Officer denied the protest on two arguments:

• No offsetting overpaid months against underpaid months. In some 1994 months Reese had overreported, in others underreported. She wanted the overpayments to cancel the interest and penalty on the underpayments. But New Mexico treats the two directions asymmetrically: interest on an underpayment "shall be paid" automatically from the day after the tax was due (Section 7-1-67(A)), while an overpayment produces a credit or interest only if the taxpayer files a written claim for refund (Regulation 3 NMAC 1.9.8) — and interest runs on the overpayment only if the Department then fails to refund within 120 days (Section 7-1-68(D)(5)). The Court of Appeals confirmed in Amoco Production Co. v. Taxation and Revenue Department that this scheme does not allow offsetting overpayments against underpayments to shrink the interest owed to the state.
• A prior refund is not a clean bill of health. Reese had sent the Department $138.74 in 1995 with no return; the Department flagged a possible overpayment, she filed a refund claim, and it was refunded. She argued that granting the refund meant the state agreed she owed nothing for prior periods. Not so: at the time, the Department had no idea she had underreported, and in a self-reporting system (Section 7-1-13) a refund based on the taxpayer's own numbers is not a determination that those numbers were right. The Department was therefore not estopped from later assessing the underpayment.

What this means for you

• Overpaying one month does not automatically wipe out interest for a month you underpaid. New Mexico does not net the two. Interest on underpayments accrues by statute; recovering an overpayment requires a separate, written refund claim.
• To get anything back for an overpayment, file a claim for refund. The Department cannot credit or refund an overpayment on its own, and interest runs in your favor only if it misses the 120-day deadline after your claim.
• A refund you received is not proof the state approved your returns. Especially in a self-reporting system, a refund reflects your own reported figures. The Department can still audit and assess later-discovered underpayments, with penalty and interest.
• "My accountant set it up that way" doesn't shift the duty. Registering as a corporation that never existed and filing under the wrong ID did not excuse the underreporting; the taxpayer remains responsible for reporting correctly.
• Know what's taxable before you exclude it. The underreporting here came from insurance payments the owner wrongly assumed were exempt from gross receipts tax.

Key questions answered

Why couldn't the overpaid months cancel out the underpaid months?
Because New Mexico treats overpayments and underpayments differently. Interest on an underpayment accrues automatically from the due date under Section 7-1-67(A), while an overpayment yields a credit or interest only through a written refund claim (and only if the Department misses a 120-day deadline). Amoco Production Co. confirms the two cannot be netted to reduce interest owed to the state.

How do you actually recover an overpayment?
File a written claim for refund (Regulation 3 NMAC 1.9.8). The Department cannot refund or credit an overpayment without one, and interest accrues in your favor only if it fails to refund within 120 days of the claim.

Did the 1995 refund mean the Department agreed she owed no more tax?
No. The refund was based on her own self-reported figures, and the Department did not yet know about the underreporting. A refund is not a determination that the underlying returns were correct, so the Department was not estopped from assessing the shortfall later.

Did registering as a corporation help her?
No. The business was never incorporated, and although she filed under a corporate ID, the Department's review of those filings still showed she had underreported her 1994 receipts, so the tax, penalty, and interest were due.

Verbatim citations

Interest on underpayments is automatic (Section 7-1-67(A), as quoted in the decision):

payment of interest on underpayments of tax "shall be paid to the state on such amount from the first day following the day on which the tax becomes due...."

No netting of overpayments against underpayments (discussing Amoco Production Co.):

In Amoco Production Company v. New Mexico Taxation and Revenue Department, 118 N.M. 72, 878 P.2d 1021 (Ct. App. 1994), the court of appeals confirmed that this statutory scheme does not allow the offsetting of overpayments against underpayments in order to reduce the amount of interest due to the state.

A refund is not a determination of correctness:

In this case, the Department's 1995 refund was based on Ms. Reese's own self-reporting of gross receipts tax—the refund did not represent a determination that that her reporting was correct.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lenya Reese
• Decision PDF: D&O 99-21

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
LENYA REESE
d/b/a St. Francis Birth and Family Center 99-21
ID No. 02-351575-00 9
ASSESSMENT NO. 2205272

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 14, 1999, before Margaret

B. Alcock, Hearing Officer. Lenya Reese appeared on her on behalf. The Taxation and Revenue

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

General. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. During calendar year 1994, Lenya Reese owned a business known as St. Francis

Birth & Family Center.

2. At the time the business was set up, Ms. Reese's accountant registered St. Francis

Birth & Family Center for payment of gross receipts tax as a corporation

3. Although no steps were ever taken to incorporate the business, which was operated as

a sole proprietorship, Ms. Reese filed gross receipts tax returns under the corporate tax identification

number obtained by her accountant.

4. In 1997, the Department received information from the IRS concerning Ms. Reese's

business income as reported on Schedule C of her 1994 federal income tax returns.

5. When the Department investigated, it determined that no gross receipts tax reports

had been filed in 1994 for a business registered in Ms. Reese's name. The Department did not check

the records of corporate taxpayers because income from corporations should not be reported on

Schedule C of the owners' federal income tax returns.

6. On January 2, 1998, the Department mailed Ms. Reese a notice of assessment of

$1,811.81 in gross receipts tax, penalty and interest due on the business income reported on Schedule

C of her 1994 federal income tax return.

7. On January 8, 1998, Ms. Reese filed a protest to the Department's assessment,

explaining that her business was registered with the Department as a corporation and had reported

and paid gross receipts tax under the corporate identification number.

8. After checking the corporate identification number provided by Ms. Reese, the

Department determined that the amount reported as gross receipts from the business during 1994 was

less than the amount of business income Ms. Reese reported on her 1994 Schedule C.

9. This reporting discrepancy represented insurance payments Ms. Reese received

during 1994 but which she erroneously believed were not subject to gross receipts tax.

10. The Department adjusted its assessment to reflect the tax reported under the

corporate identification number and determined that Ms. Reese was still liable for $445.29 gross

receipts tax, $49.34 penalty and $255.43 interest.

DISCUSSION

At the hearing, Ms. Reese acknowledged that she underreported her 1994 gross receipts by

$7,124.88. The matter at issue is whether the Department correctly calculated the tax, penalty and

interest due on this underpayment.

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The Department's method of calculating tax, penalty and interest is set out on a worksheet

introduced as Exhibit B. The Department first determined the amount by which receipts were either

underreported or overreported during each month of 1994. It then calculated tax, interest and

penalty for each of the nine months in which there was an underreporting of receipts. The

Department did not offset or credit Ms. Reese with any interest or penalty for the three months in

which receipts were overreported.

Ms. Reese maintains she should receive a credit for the overreported months. This could be

done by applying the amount of overpayment in one month against any underpayment in the next

month, thereby reducing the tax, penalty and interest due for the underreported months.

Alternatively, the Department could credit the taxpayer with interest on any overpayments of tax.

The interest due the taxpayer on overpayments would then offset the taxpayer's liability for interest

on underpayments of tax in other months. While these methodologies have a certain logic, they are

contrary to the legislature's statutory scheme for payment of interest.

With respect to overpayments of tax, no refund or credit can be made by the Department until

the taxpayer files a written claim for refund. See, Regulation 3 NMAC 1.9.8. No interest is due on

overpaid taxes unless the Department fails to refund the taxes within one hundred and twenty days of

the date the claim for refund is filed. See, Section 7-1-68(D)(5) NMSA 1978. In contrast, payment of

interest on underpayments of tax "shall be paid to the state on such amount from the first day following

the day on which the tax becomes due....". Section 7-1-67(A) NMSA 1978. In short, New Mexico's

statutory scheme for the payment and reporting of taxes treats overpayments and underpayments

differently. In Amoco Production Company v. New Mexico Taxation and Revenue Department, 118

N.M. 72, 878 P.2d 1021 (Ct. App. 1994), the court of appeals confirmed that this statutory scheme does

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not allow the offsetting of overpayments against underpayments in order to reduce the amount of

interest due to the state.

Ms. Reese's second argument is that she should not be liable for interest or penalty on her

1994 underpayments of tax because the Department granted her a refund of tax in 1995. Ms. Reese

mailed the Department a check for $138.74 sometime in 1995. The payment was not accompanied

by a tax return, nor did Ms. Reese indicate what tax period or assessment the payment was intended

to cover. At that time, the Department had not received the IRS information which was later used to

determine Ms. Reese's underreporting of receipts during 1994. Accordingly, the Department notified

Ms. Reese of a potential overpayment of tax and requested that she either file a return to which the

payment could be applied or file a claim for refund. Ms. Reese filed a claim for refund and received

a check from the Department in the amount of $138.74.

Ms. Reese believes that by granting her claim for refund in 1995, the Department was

representing that she had no tax liability for prior periods. At the time the refund was made,

however, the Department had no way of knowing that Ms. Reese had failed to report gross receipts

tax on a portion of her business income. New Mexico has a self-reporting tax system and 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 and pay those liabilities to the state. See, Section 7-

1-13, NMSA 1978. While the Department makes every effort to advise taxpayers of the status of their

accounts, the ultimate responsibility for payment of tax remains with the taxpayer. In this case, the

Department's 1995 refund was based on Ms. Reese's own self-reporting of gross receipts tax—the

refund did not represent a determination that that her reporting was correct.

CONCLUSIONS OF LAW

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1. Lenya Reese filed a timely, written protest to Assessment No. 2205272, and jurisdiction

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

2. Ms. Reese is not entitled to offset overpayments of tax in one month against

underpayments in another month, nor is she entitled to interest on the overpayments.

3. The Department's 1995 refund of tax did not constitute a final determination of Ms.

Reese's gross receipts tax liability for prior periods, and the Department is not estopped from assessing

Ms. Reese interest and penalty on later discovered underpayments of tax for prior periods.

4. Ms. Reese is liable for tax, interest and penalty in the amounts shown on the

Department's Exhibit B.

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

DATED May 12, 1999.

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