On April 8, 2015, the Department assessed the Taxpayers for personal income tax, penalty and interest for the personal income tax period ending on December 31, 2010. On April 10, 2015, the Taxpayer filed a protest of the assessment. The Taxpayers timely filed 2010 personal income tax returns with both the IRS and New Mexico. The Department detected a discrepancy between the Taxpayers’ federal and state returns as part of the tape match program. On October 19, 2014, the Department sent a notice of limited scope audit commencement for the 2010 personal income tax year because of this discrepancy. The main issue is a misreporting on line 8 of the New Mexico PIT-1 form, on which a taxpayer is to report the amount of state and local income tax or general sales tax deduction claimed on their federal itemized deduction. Due to a misunderstanding by the Taxpayers, the amount entered on their PIT-1 was much lower than the amount shown on their Schedule A. There were two other minor discrepancies related to an arithmetic error and a transposition of numbers. There errors resulted in the Taxpayers underreporting their state personal income tax liability by 46%. The Taxpayers did not understand the discrepancy at issue, and argued that there was only one minor error. Also, the Taxpayers argued that the statute of limitations had lapsed by the time the assessment was issued. Section 7-1-18 provides a normal three-year statute of limitations for assessment, but the statute of limitations is extended to six years when a tax liability was underreported by more than 25%. The Department made the assessment within four years from the end of the calendar year in which the tax was due, which is timely under the extended statute of limitations. The Hearing Officer found that the Taxpayers were properly assessed, and were subject to interest under Section 7-1-67 NMSA 1978, as well as the penalty for negligence under Section 7-1-69 NMSA 1978. The Taxpayers’ protest was denied.
Floyd & Anna Rivera