BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  3

DATE:  February 18, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB-930

SPONSOR:  Representative Varela

BILL SHORT TITLE:  New Mexico Taxpayer Bill of Rights

CONFLICTS, DUPLICATES, COMPANIONS: SB-770 is identical.

DESCRIPTION: This bill establishes a “New Mexico Taxpayers Bill of Rights”. With some notable exceptions, this bill simply restates existing taxpayer rights, remedies and procedures in somewhat less technical language than that of current statute. The only substantial expansion of taxpayer rights is that taxpayers may recover litigation costs if they prevail against the Department. If the Department establishes that its position in the proceeding was based upon a reasonable application of the law to the facts of the case, then no attorney’s fees are required. A subtle expansion of taxpayer rights is to codify in statute a position that the Department has taken in numerous cases, but on a case by case basis. No penalty will be assessed against a taxpayer if the failure to pay an amount of tax when due results from a mistake of law or fact made in good faith and on reasonable grounds. This is bolstered by a change in the standard of judging when a penalty is appropriate from “disregard of rules and regulations” to “willful disregard of Department rules and regulations.” Though the amendments do not exactly parallel recent changes in federal law and regulations, they seek, by and large, to remedy perceived unfair treatment of certain taxpayers by the Taxation and Revenue Department and thus are similar in spirit to certain provisions of the IRS Restructure and Reform Act of 1998.

EFFECTIVE DATE:  July 1, 2001

FISCAL IMPACT:  none

ADMINISTRATIVE IMPACT: minimal. The Department’s Taxpayer Information section has already prepared a Taxpayer’s Rights brochure and will mail this with FY 2002 CRS tax forms. Most of the major impacts of the 1999 version of this bill have been eliminated.  The one area of contention will be attorney’s fees. Although most hearings and lawsuits are decided substantially in the Department’s favor, the “substantially prevail” test is not particularly precise. In the case where the Department concedes even a portion of its initial case, the protestant will, presumably, apply for attorney’s fees, which will be, in turn, subject to a separate protest hearing. The standard is rebuttable by the Department, which can show rule or regulation in its favor. Only if the Department deliberately violates its own published guidelines will the plaintiffs be awarded attorney’s fees. Virtually all the instances where the Department goes against its own published rules are settled in the taxpayers favor prior to hearing. 

There is a possible FTE impact (and corresponding money) caused by the increase in protests over interpretation of the Taxpayer Bill of Rights provisions, such as “individual employees are not paid, evaluated or promoted on the basis of the amount of assessments or collections from taxpayers”. These provisions are unenforceable and, if brought up as issues in hearing or civil suit, will not alter the underlying facts of a case.

TECHNICAL ISSUES:
1.	A prominent feature of the bill amends 7-1-69 NMSA 1978 to exempt from penalty taxpayers whose failure to pay resulted from a “mistake of law or fact made in good faith on reasonable grounds.” By imposing a penalty only when a taxpayer knows and intentionally disregards the law, it will penalize only fraud and remove from the taxpayer the responsibility for determining what is and isn’t taxable. Under current circumstances, the Department frequently abates penalty upon a determination of the Secretary that the taxpayer relied on competent (but wrong) advice, or, in other circumstances, kicks in the penalty to accomplish a settlement. This discretionary procedure has served the state and taxpayers well and should not be changed.

SUBSTANTIVE ISSUES AND ANALYSIS:  
1)	The 1999 version of this bill required, as this one requires, the Department to develop a Taxpayer Rights brochure phrased in simple terms. Despite the fact that  the 1999 bill did not pass, the Department felt that this brochure was long overdue. We have made considerable effort to prepare a brochure that will be mailed with the June 2001 version of the CRS packets.

2)	Presenting the same right in two different ways, in Sections 1-3 of this bill and in the already compiled portions of the Tax Administration Act, is likely to cause some confusion and some totally unnecessary litigation.  If the taxpayers already have rights, no useful purpose is served by re-stating them.  

3)	While the proposed 7-1-29.1 NMSA 1978 causes the Department some concern, we believe we can adopt new procedures and policies that will conform the Department to a somewhat changed standard. Here are the facts: 7-1-29.1 NMSA 1978 requires that the Department pay the “reasonable” administrative and/or litigation costs incurred by taxpayers who (substantially) prevail in disputes with the Department in which the Department’s position is determined to have been “unreasonable.” Reasonable costs include Department imposed fees, court costs, filing fees, expert witnesses, analysis and other case preparation costs, attorney and CPA fees. The Department’s position is deemed unreasonable if the Department failed to follow its own published guidelines and/or if the assessment was not supported by “substantial evidence” at the time it was made. The Department believes this has rarely occurred.

The burden of proving reasonableness is on the Department at this stage. Roughly 1,000 formal protests are filed with the Department annually.  More than two-thirds of these cases are resolved at the protest stage. Most of the remaining cases are settled.  Sixty or so are decided by written decision in the administrative process. Of these, perhaps four will be heard by the Court of Appeals. In addition, about six claims for refund are made in District Court annually. Lawyer’s fees in a typical gross receipts audit protest might total $10,000 but may be much higher depending on the size of the assessment and whether or not the case is appealed. For example, in a recent corporate income tax hearing, lawyers for the plaintiff charged in excess of $4,000 per hour for a hearing that lasted four days. Statistics as to the percentage of protests in which the Department ultimately prevails are not available on a case-by-case basis, but the Department estimates that on an annual basis, taxpayers are ultimately found liable for roughly 66% of the amount formally protested.

The bill will force a change in audit procedures because the Department will have to carry the burden of proof when a taxpayer’s records are incomplete, ambiguous, or contradictory. This will consume more time per audit and the Department will conduct fewer audits. The small, but positive, probability of having to pay attorney’s fees could cause the Department to avoid litigating close cases, especially when the liability in question was small relative to the taxpayer’s attorney’s fees. A more lenient Departmental attitude could encourage non-compliance.

Assessments not based on “substantial evidence” or Department guidelines are extremely rare. The proposed language encourages additional litigation even though a taxpayer’s chances of recouping his costs are  very slim. This will cost both the Department and the taxpayer, regardless of who prevails. Any fiscal impact to the Department will probably result from more protests and increased litigation, not paying taxpayer costs. The costs to the Department of changing audit procedures, increased protests, and protracted litigation could be substantial, but are impossible to predict at present.

An unintended consequence of these new rules will be to make the Department more cautious in its dealings with taxpayers. If informal or informational letters, brochures and the like are used with any frequency as evidence of the Department’s failure to follow its own guidelines (whether or not the allegation is true), the Department will tend to give real advice only in formal, legalistic formats.

OTHER IMPACTS AND ISSUES:  
Non-compliance is inversely proportional to penalty rates and approximately inversely proportional to perceived verification and assessment rates. Thus, this bill, may encourage non-compliance. If each audit conducted by the Department takes more time and resources, this will decrease the actual audit and verification rate. This lower audit rate may stimulate non-compliance.

SECTION BY SECTION DESCRIPTION:
Section #	NMSA 1978	Description	
1	NEW	Names the act as “New Mexico Taxpayer Bill of Rights” Declares the purpose of the act (1) guarantee that rights, privacy and property are protected in the course of tax assessment, collection and enforcement; (2) assure that taxpayers are treated with “dignity and respect”; (3) recast the various taxpayer rights contained in various places in the Tax Administration Act into one non-technical description of these rights.	
2	NEW	This section enumerates in plain language various taxpayer rights, largely those contained in other sections of the Tax Administration Act and in the substantive tax acts. This enumeration expands existing rights only to the extent of Subsection E, “the right to obtain simple, non-technical information that explains the procedures, remedies and rights available ... “. Another substantive provision is Subsection M, “individual employees of the department are not paid, evaluated or promoted on the basis of the amount of assessments or collections from taxpayers.” Other expansions of taxpayer rights and remedies are included by amendment of existing statute. See, particularly, sections x, y and z of the bill.	
3	NEW	The Department must develop and distribute a plain-language brochure that describes and explains taxpayers rights established by this bill. These brochures are to be mailed to taxpayers with semiannual CRS returns and annual PIT forms.	
4	NEW	If a taxpayer “prevails” (defined as “substantially prevailed”) in a judicial or administrative protest, the taxpayer must be granted lawyers costs and fees. No countervailing awarding of Department costs is allowed against the taxpayer if the Department prevails. The awarding of attorney’s fees is only required if the Department does not follow written guidance, such as statute, regulations, rulings or technical advice memoranda or if an assessment was not based on substantial evidence available to the auditor at the time of assessment.	
5		The current standard for imposing the 2% per month penalty is “negligence or disregard of rules and regulations”. This bill increases that standard to negligence or “willful disregard”. This may, practically, be the same standard as under current law.	
6		The provisions of this act are effective July 1, 2001.