On January 3, 2014, the Department assessed the Taxpayers for personal income tax principal and interest for the tax year ending December 31, 2010. On January 10, 2014, the Department assessed the Taxpayers for income tax principal, penalty and interest for the tax year ending December 31, 2011. The Taxpayers protested both assessments on January 27, 2014. The Taxpayers used a tax service to prepare and file their personal income taxes for the years in question. The Taxpayers believed that this preparer was a CPA or an accountant, but never took action to actually check her credentials. The tax preparer advised the Taxpayers that income from working as an active duty officer for the Public Health Service was exempted from income tax. The exemption under Section 7-2-5.11 NMSA 1978 is only applies to active duty armed forces members. Under federal law, Public Health Service officers are part of the uniformed services not the armed forces. Therefore, the Taxpayers did not qualify for the exemption under Section 7-2-5.11 NMSA 1978. The Taxpayers argued that because they relied on a tax preparer in erroneously claiming the exemption, penalty and interest should not be imposed. Because Section 7-1-67 NMSA 1978, states that interest shall be applied, the Department has no discretion to abate interest. Furthermore, the Taxpayers’ error constituted negligence subject to penalty under Section 7-1-69 NMSA 1978. The Taxpayers were unable to show that they relied on the advice of a competent tax accountant or that their error resulted from a mistake of law made in good faith on a reasonable grounds. Therefore, there was no basis to abate the penalty assessment and the Taxpayers’ protest was denied.
Tulian Brown & Deborah Yellowhorse