If a worker files a 'zero income' return claiming a refund of all withholding and then stops filing, can New Mexico add a 50% fraud penalty on top of the back tax?

Subject

Rafael M. Romero (D&O 99-24)

Plain-English summary

Rafael Romero earned wages from U.S. West Communications. For 1994 and 1995 he and his wife filed joint New Mexico returns and paid income tax on their wages. Then his filings changed: for 1996 he filed separately, reported zero federal adjusted gross income, and demanded a refund of the entire $2,145 his employer had withheld; for 1997 he filed no return at all, even though U.S. West reported paying him about $59,000. He had also filed W-4 forms claiming he was exempt from federal withholding.

In December 1998 the Department issued estimated (provisional) assessments for 1996 and 1997 — tax, interest, and a 50% civil-fraud penalty — and filed a tax lien. Mr. Romero protested but challenged the Department's "jurisdiction," said he would not attend, and did not withdraw the protest. He then did not appear at the hearing.

The Hearing Officer denied the protest except for a downward adjustment to his real wages (granted in part, denied in part):

• Tax and interest upheld. Under Section 7-1-17(C) NMSA 1978 an assessment is presumed correct, and that presumption extends to interest (Section 7-1-3(U)). Because Mr. Romero did not appear or offer evidence, he never overcame the presumption, so his liability stood — reduced only to the actual wages shown on the W-2 forms the Department obtained.
• The 50% fraud penalty upheld. This is the part that distinguishes the case. The penalty under Section 7-1-69(C) applies to a willful intent to evade, and under Section 7-1-78 the state must prove that intent — by clear and convincing evidence. The Hearing Officer found the state met that bar through circumstantial evidence: Romero had reported and paid tax on the same kind of wages in 1994–95 (so he knew they were taxable); he filed a zero-income return demanding a refund; the Department's denial of that refund put him on notice it disagreed; his wife pointedly filed separately and paid her own tax rather than join his position; and for 1997 he simply failed to file.
• Tax lien upheld to the extent it secured the reduced assessments.

The contrast with the other two 1999 tax-protester decisions is the lesson: where a taxpayer's baseless theory rested on a genuine (if wrong) belief, the fraud penalty was dropped — but here the pattern of conduct proved willful evasion, so the 50% penalty stuck.

What this means for you

• A 50% fraud penalty is real and can be proven with circumstances, not a confession. New Mexico does not need direct proof of intent. A history of paying the tax, a sudden zero-income refund claim, notice that the Department disagrees, and then non-filing can add up to clear and convincing evidence of willful evasion.
• Filing "exempt" and claiming back all your withholding is a red flag, not a strategy. Reporting zero income on wages your employer documented invites an estimated assessment, interest, a lien, and — if the pattern shows intent — the fraud penalty.
• Skipping your hearing forfeits the case. The assessment is presumed correct, including interest. No appearance means no rebuttal, and the presumption alone establishes what you owe.
• Good-faith belief is what separates a dropped penalty from an upheld one. The penalty turns on intent. Conduct that looks like knowing evasion — especially after you've been told the position is wrong — removes the good-faith cover.

Key questions answered

How can the Department prove "willful intent to evade" if the taxpayer never admits it?
By circumstantial evidence. Here the Hearing Officer inferred intent from Romero's prior years of paying tax on the same wages, his zero-income refund claim, the Department's denial putting him on notice, his wife's decision to file separately and pay, and his failure to file for 1997. New Mexico law allows intent to be inferred; direct proof is not required.

Who has the burden on the fraud penalty?
The state. Although a Department assessment is normally presumed correct, Section 7-1-78 puts the burden on the state to prove fraud, and New Mexico applies a clear-and-convincing-evidence standard. The Department met it here.

Why were the assessments reduced?
Because they started as estimates issued when the Department lacked income information. Once it obtained Romero's actual W-2 forms for 1996 and 1997, it agreed to lower the tax, penalty, and interest to reflect his real wages (and it did not refund the 1996 withholding he had wrongly claimed back).

Did failing to show up help or hurt him?
It hurt him twice over. It left the presumption of correctness unrebutted on the tax and interest, and his silence in the face of the Department's evidence reinforced the inference of willful intent supporting the fraud penalty.

Verbatim citations

The presumption of correctness reaches penalty and interest:

Section 7-1-17(C) NMSA 1978 provides that "Any assessment of taxes or demand for payment made by the department is presumed to be correct." "Tax" is defined at Section 7-1-3(U) NMSA 1978 to include the amount of any interest or civil penalty relating to taxes.... Thus, the presumption of correctness also attaches to the interest and penalty portions of assessments....

The state's burden on the fraud penalty:

In any proceeding involving the issue of whether any person has been guilty of fraud or corruption, the burden of proof in respect of such issue shall be upon the director or the state.

Intent may be inferred:

Although none of these facts constitute direct evidence of willful intention to evade the payment of tax, it is well established that an intention to evade the payment of tax may be inferred from circumstantial evidence and direct proof is not necessary.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Rafael M. Romero
• Decision PDF: D&O 99-24

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
RAFAEL M. ROMERO, NO. 99-24
PROTEST TO ASSESSMENT NOS. 98071, 98072
AND TAX LIEN NO. 38411

DECISION AND ORDER

This matter came on for formal hearing on July 13, 1999 before Gerald B. Richardson,

Hearing Officer. Rafael M. Romero, hereinafter, “Taxpayer”, was notified of the hearing and

elected not to attend. The Taxation and Revenue Department, hereinafter, “Department”, was

represented by Mónica M. Ontiveros, Special Assistant Attorney General. Based upon the

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

FINDINGS OF FACT

1. For the 1994 tax year, the Taxpayer, together with his spouse, Doris M. Romero,

filed a New Mexico personal income tax return with the Department as married persons filing

jointly. That return reflected federal adjusted gross income in the amount of $79,855. Attached

to that return were W-2 forms for Mr. Romero showing that he received $50,917.45 in wages

from his employer, U.S. West Communications, Inc. during that year and that Mrs. Romero had

received $28,792 in wages from her employer, Santa Fe Computer Supplies Inc. For 1994, the

Taxpayer and his wife reported and paid $3,450 in New Mexico personal income taxes to the

Department.

2. For the 1995 tax year, The Taxpayer, together with his spouse, Doris M. Romero,

filed a New Mexico personal income tax return with the Department as married persons filing

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jointly. That return reflected federal adjusted gross income in the amount of $95,105. Attached

to that return were W-2 forms reflecting that Mr. Romero had received wages in the amount of

$57,673.72 from U.S. West Communications, Inc. and that Mrs. Romero had received wages in

the amount of $37,271 from Santa Fe Computer Supplies, Inc. For 1995, the Taxpayer and his

wife reported and paid $4,164 in New Mexico personal income taxes to the Department.

3. For the 1996 tax year, the Taxpayer filed a 1996 personal income tax return with

the Department as a married individual filing separately. That return reflected that the Taxpayer

reported zero federal adjusted gross income and claimed a refund in the amount of $2,145, which

was the amount of New Mexico income tax withheld from his wages received from his

employer, U.S. West Communications, Inc. during calendar year 1996. The Department did not

grant the Taxpayer a refund of the income tax withheld from his wages.

4. U.S. West Communications, Inc. issued a W-2 form to the Taxpayer for tax year

1996 which reflected that it paid him $62,105.89 in wages, tips or other compensation.

5. For the 1996 tax year, the Taxpayer’s spouse, Doris V. McBride Romero, filed a

1996 New Mexico personal income tax return with the Department as a married individual filing

separately. In that return she reported $29,011 as her federal adjusted gross income and she

reported and paid $1,088 in New Mexico personal income tax.

6. On August 21, 1996, the Taxpayer filed a federal form W-4 and delivered it to his

employer, U.S. West Communications, which claimed exemption from federal income

withholding tax for 1996.

7. On August 29, 1997, the Taxpayer filed a federal form W-4 and delivered it to his

employer, U.S. West Communications which claimed exemption from federal income

withholding tax for 1997.

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8. U.S. West Communications, Inc. issued a W-2 form to the Taxpayer for the 1997

tax year indicating that it had paid him $59,157.06 in wages, tips or other compensation. 9.

The Taxpayer filed no New Mexico personal income tax return with the Department for

tax year 1997.

10. For the 1997 tax year, the Taxpayer’s spouse, Doris V. McBride Romero filed a

New Mexico personal income tax return as a married person filing separately. In that return she

reported federal adjusted gross income in the amount of $34,232 and reported and paid $1,443 in

New Mexico personal income tax.

11. On December 4, 1998, the Department issued Assessment No. 98071 to the

Taxpayer, assessing $3,566 in personal income tax, $1,783 in penalty and $846.93 in interest for

the 1996 tax year. This assessment was a provisional or estimated assessment due to the fact that

at the time it was issued, the Department did not have information in its possession to determine

the amount of taxable income the Taxpayer had for 1996.

12. On December 4, 1998, the Department issued Assessment No. 98072 to the

Taxpayer, assessing $6,521 in personal income tax, $3,260.50 in penalty and $570.59 in interest

for the 1997 tax year. This assessment was a provisional or estimated assessment due to the fact

that at the time it was issued, the Department did not have information in its possession to

determine the amount of income the Taxpayer had in 1997.

13. On December 11, 1998, the Department filed Notice of Claim of Tax Lien No.

38411 in the records of Santa Fe County, New Mexico in the amount of $16,548.02 to secure

Assessment Nos. 98071 and 98072.

14. On December 17, 1998 the Taxpayer wrote the Secretary of the Department to

protest the assessments for 1996 and 1997 taxes, penalty and interest and the Department’s lien

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securing those assessments.

15. On February 8, 1999, the Department acknowledged the Taxpayer’s protest.

16. On May 19, 1999, the Department’s counsel filed a Request for Hearing in this

matter.

17. On June 5, 1999, the Taxpayer wrote the Department’s counsel in response to the

Request for Hearing informing the Department that he did not wish to participate in such an

action, challenging the Department’s jurisdiction to hear such an action and informing her that he

would not attend any such hearing.

18. On June 3, 1999, a letter notifying the Taxpayer that a formal hearing would be

held concerning his protest on July 13, 1999 was mailed to the Taxpayer by this Hearing Officer.

19. On June 8, 1999, the Taxpayer signed the return receipt for the letter notifying

him of the formal hearing of his protest.

20. On July 1, 1999, the Department’s counsel wrote the Taxpayer in response to his

letter of June 5, 1999 to inform him that the Department considered this matter to be a valid

protest under Section 7-1-24(A), but that if he did not wish to pursue his remedies under that

provision, that he must withdraw his protest, or the hearing would proceed. The letter enclosed a

form for withdrawing the protest.

21. The Taxpayer never filed a protest withdrawal in this matter.

22. As a result of obtaining copies of the W-2 forms issued to the Taxpayer by U.S.

West Communications, Inc. for tax years 1996 and 1997, the Department has agreed to modify

and reduce the assessments at issue herein to reflect the Taxpayer’s actual income from wages

during those years. Accordingly, Assessment No. 98071 for the 1996 tax year should be in the

amount of $1,524.46 in personal income tax, $762.23 in penalty and $514.51 in interest. The

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amount of this assessment reflects the fact that the Department did not grant the Taxpayer’s

request for a refund of the $2,144.54 in taxes withheld by his employer. Additionally,

Assessment No. 98072 for the 1997 tax year should be in the amount of $3,397 in personal

income tax, $1,430.97 in penalty and $536.62 in interest.

DISCUSSION

Section 7-1-17(C) NMSA 1978 provides that “Any assessment of taxes or demand for

payment made by the department is presumed to be correct.” “Tax” is defined at Section 7-1-

3(U) NMSA 1978 to include the amount of any interest or civil penalty relating to taxes assessed

pursuant to the provisions of the Tax Administration Act unless the context of the statutory

provision requires otherwise. Thus, the presumption of correctness also attaches to the interest

and penalty portions of assessments unless there is something in the context of the statute at issue

to indicate otherwise. Because of the presumption of correctness, the burden of proof is upon

any taxpayer protesting an assessment to present evidence contesting the factual correctness of

the assessment or legal arguments challenging the legal basis of the assessment which clearly

overcome the presumption of correctness. Archuleta v. O’Cheskey, 84 N.M. 428, 504 P.2d 638

(Ct. App. 1972). Having failed to appear to present evidence or argument in support of his

protest, the Taxpayer has not met his burden of proof in this case and the presumption of

correctness that attaches to the Department’s assessments establishes the Taxpayer’s liability for

personal income tax and interest.1

With respect to the penalty assessed in this case, the Department assessed the 50% of tax

penalty provided at Section 7-1-69(C) NMSA 1978, which imposes penalty for failure to pay tax

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As noted in Finding No. 22, the Department has agreed, based upon obtaining copies of the Taxpayer’s W-2
forms for 1996 and 1997, to reduce the amount of the assessments, which had been issued as estimated or

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when such failure is due to willful intent to evade or defeat the payment of any tax. Section 7-1-

78 of the Tax Administration Act provides as follows:

In any proceeding involving the issue of whether any person has
been guilty of fraud or corruption, the burden of proof in respect of
such issue shall be upon the director or the state.

Although Section 7-1-69(C) does not specifically use the words “fraud” or “corruption”, the

context of the provision, which imposes a steep penalty for failure to pay tax with willful intent

to evade or defeat the payment of such tax, can fairly be characterized as a fraud penalty. Section

7-1-78 does not specify the standard or degree of proof required for the state to meet its burden of

proof. The common law rule in New Mexico, however, is that proof of fraud in a civil action

must be established by clear and convincing evidence. First National Bank in Albuquerque v.

Abraham, 97 N.M. 288, 291, 693 P.2d 575 (1982).

In this case, there is ample evidence to sustain a conclusion that the Taxpayer failed to

pay income taxes in 1996 and 1997 with the willful intent to evade the payment of tax, especially

in light of the fact that the Taxpayer failed to attend the hearing to present any evidence to rebut

the evidence presented by the Department.

First, we have evidence that the Taxpayer understood that he was subject to New Mexico

personal income tax on his wages from U.S. West Communications based upon the returns he

filed jointly with his wife for tax years 1994 and 1995 in which he reported and paid tax on that

income. We also have the evidence that he filed a 1996 New Mexico income tax return

separately from his wife in which he reported that he had no income subject to tax and asked for

a refund of the $2,145 which had been withheld from his wages for New Mexico income tax

purposes. The Department denied his request for a refund, putting him on notice that the

provisional assessments. Therefore, the presumption of correctness has been overcome to the extent the original

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Department disagreed with his claim that he had no income subject to tax. We have even more

compelling evidence to indicate that Mr. Romero knew or should have known that his income

from wages was subject to tax because his wife, who also had income from wages, apparently

refused to participate in his effort to avoid paying tax on his wage income. Instead of continuing

to file jointly as a married couple as was done in previous years, she chose to file separately from

her husband for both tax years at issue and she reported and paid New Mexico personal income

tax on her income from wages. Finally, we have the fact that for 1997, after being denied a

refund of the New Mexico taxes withheld from his wages in 1996, the Taxpayer simply failed to

file any return whatsoever with the Department.

Although none of these facts constitute direct evidence of willful intention to evade the

payment of tax, it is well established that an intention to evade the payment of tax may be

inferred from circumstantial evidence and direct proof is not necessary. See, State v. Long, 121

N.M. 333, 335, 911 P.2d 227, 229 (Ct. App., 1995), Melinder v. U.S., 281 F. Supp. 451 (1968).

As discussed above, the evidence in this case is sufficient to establish an intention to

evade the payment of New Mexico personal income tax, especially in light of the fact that the

Taxpayer failed to present any evidence or argument to refute such an inference.

The final issue to be discussed is the Taxpayer’s protest to the Department’s lien. There

is no statutory presumption of correctness which attaches to the lien itself. The lien, however,

secures the two assessments at issue herein, which have been upheld insofar as the reduced

amount the Department now claims to be owing. There being no other evidence or arguments

presented by the Taxpayer to challenge the validity of the lien and the underlying assessments,

assessment amount exceeds the amounts reflected in Finding No. 22.

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the lien is upheld as valid except to the extent it exceeds the amounts the Department now

contends are owing with respect to those assessments.

CONCLUSIONS OF LAW

1. The Taxpayer filed a valid, timely, written protest, pursuant to Section 7-1-24(A)

NMSA 1978 to Assessment Nos. 98071 and 98072 and Lien No. 38411. The Taxpayer’s protest

was not withdrawn after being given an opportunity to do so. Jurisdiction lies over both the

parties and the subject matter of this protest.

2. The Taxpayer failed to present evidence or arguments to overcome the

presumption of correctness which attaches to the amount of tax and interest assessed. Thus,

Assessment Nos. 98071 and 98072 are upheld, insofar as the amounts have been reduced as

reflected in Finding No. 22, together with interest as it accrues until the assessments are paid.

3. The Department has the burden of proving by clear and convincing evidence that

penalty was properly imposed upon the Taxpayer pursuant to Section 7-1-69(C) NMSA 1978.

4. The Department met its burden of proving that penalty was properly assessed

pursuant to Section 7-1-69(C) NMSA 1978 insofar as the amounts reflected in Finding No. 22.

5. Lien No. 38411 is upheld insofar as it secures the amounts of Assessment Nos.

98071 and 98072 which have been upheld by this decision, together with interest accruing until

the assessments are paid.

For the foregoing reasons the Taxpayer’s protest is GRANTED IN PART AND DENIED

IN PART. The Department IS HEREBY ORDERED to abate those portions of Assessment Nos.

98071 and 98072 which exceed the amounts reflected in Finding No. 22, together with interest

which accrues until paid. The Department IS FURTHER ORDERED to file a partial release of

lien to reflect the portions of Assessment Nos. 98071 and 98072 which have been abated.

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DONE, this 19th day of July, 1999.

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