Category: Tax Defense

On March 18, 2026, Judge Ronald L. Buch of the United States Tax Court denied a motion for partial summary judgment in Docket No. 17513-24, and the motion he turned away was the taxpayers’ own. Benjamin A. Rogovy and Carol J. Castellon Miranda wanted a pretrial ruling that nine Bitcoin hard forks in 2017 and 2018 produced no income.

The case was tried in Seattle in April 2026, and the final post-trial brief was due September 25. No opinion has issued. For a Santa Fe or Los Alamos holder with Bitcoin in cold storage in 2017, the better questions are whose appellate law governs and whether that year is even open.

What is actually pending in Rogovy v. Commissioner?

The notice of deficiency was mailed August 15, 2024. Per the petition and Bloomberg Tax, it determined about $24.5 million in 2017 and 2018 deficiencies with about $4.9 million in penalties, much of it not fork income. Judge Buch’s order puts the fork adjustments at $9,389,527 of S corporation K-1 income and $2,689,298 of other income.

Contrary to some commentary, petitioners filed the motion, the Commissioner opposed it, and the court denied it because the parties dispute “whether the hard forks were realization events” and whether the couple had complete dominion over the forked coins. Nothing here predicts the outcome.

How does the IRS apply the dominion and control test to a hard fork?

26 U.S.C. § 61(a) taxes “all income from whatever source derived,” which Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955), read to reach “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Rev. Rul. 2019-24, 2019-44 I.R.B. 1004, treats an airdrop the holder controls as ordinary income, and a taxpayer “not able to exercise dominion and control” as having no receipt.

Chief Counsel Advice 202114020 names the August 1, 2017 Bitcoin Cash fork. A holder with sole control of the private key had 2017 income at the fork; an exchange customer whose platform did not yet support the coin had income when support arrived. It is not precedent, but it signals how an examiner will read a cold-storage file.

Petitioners rely on Treas. Reg. § 1.451-2(a): income is not constructively received when control is “subject to substantial limitations or restrictions.” The order describes experts split on how risky extraction was and a dispute over whether Mr. Rogovy knew of most forks.

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Which appellate court’s law would govern a New Mexico holder’s hard fork case?

Under Golsen v. Commissioner, 54 T.C. 742, 757 (1970), the Tax Court follows the court of appeals to which appeal lies once that court has decided the issue, citing “efficient and harmonious judicial administration.” An individual’s appeal under 26 U.S.C. § 7482(b)(1)(A) goes to the circuit of “the legal residence of the petitioner.” The Rogovy petition lists a Nevada address, which points to the Ninth Circuit. A New Mexico resident goes to the Tenth Circuit, where Golsen itself arose.

No published Tenth Circuit decision on hard forks or airdrops was located on review. Judge Buch cited Harrington v. Commissioner, T.C. Memo. 2021-95, on substantial barriers to control, and the Tenth Circuit affirmed that case in an unpublished order and judgment, No. 22-9000 (10th Cir. Nov. 30, 2022), that turned on fraud and limitations rather than receipt. A New Mexico petitioner would argue mainly from Supreme Court and Tax Court authority.

How do valuation and S corporation ownership complicate fork income?

The IRS virtual currency FAQs assume a price exists: A26 uses what an exchange records, and A28 uses the value of what was given up, which for a fork recipient is nothing. The Bitcoin Cash memorandum accepts “any reasonable method,” but for thin forks in Rogovy like Bitcoin God the number can swing with the venue and hour chosen. Wallet logs and the date keys were first loaded into fork-capable software pick the year, and the year picks the price.

26 U.S.C. § 1366 passes S corporation income to shareholders with its character kept “as if such item were realized directly from the source.” It cannot say who received the coins. The petition says Mr. Rogovy treated them as personal; the IRS treated his Bitcoin as property of Velorum, Inc., his S corporation, and the order notes some purchases ran through Velorum’s bank account. A New Mexico owner whose entity bought Bitcoin should expect the paper trail to matter.

How do the penalty and limitations rules apply to 2017 and 2018 forks?

Section 6662(a) adds 20 percent for a substantial understatement under § 6662(b)(2), which § 6662(d)(1)(A) sets for individuals at the greater of 10 percent of the correct tax or $5,000. The defense is reasonable cause under § 6664(c)(1), and Treas. Reg. § 1.6664-4(b)(1) credits “an honest misunderstanding of fact or law.” Chronology helps: Notice 2014-21 said nothing about forks, and Rev. Rul. 2019-24 arrived in October 2019, after every fork in the case.

Section 6501(a) allows three years from filing, six under § 6501(e)(1)(A) if omitted gross income tops 25 percent of the amount stated, and longer with written consents under § 6501(c)(4). The petition says the couple signed two extensions and contests both periods. Once a petition is docketed, § 6503(a)(1) suspends assessment until the decision is final, plus 60 days.

What would a 2017 fork look like for a Santa Fe couple today?

Assume a Santa Fe couple held 40 BTC in a hardware wallet on August 1, 2017, with $200,000 of joint taxable income before the fork. At a hypothetical $500 per Bitcoin Cash, the fork adds $20,000 of ordinary income. Rev. Proc. 2016-55 taxed 2017 joint income between $153,100 and $233,350 at 28 percent, so the added tax is $5,600. Correct tax is $48,484.50, so the $5,000 floor governs, and $5,600 clears it for a $1,120 penalty plus interest. At $300 a coin the understatement is $3,360, under the floor.

New Mexico follows: NMSA 1978 § 7-2-2 builds base income from federal adjusted gross income, so fork income reaches the PIT-1, and NMSA 1978 § 7-1-13(E) requires a federal adjustments report within 180 days after a final determination.

Still, a 2017 return filed in April 2018 ordinarily closed in 2021, or 2024 under the six-year rule, absent consents or fraud. The live exposure is a later sale. Form 1099-DA reports gross proceeds for sales on or after January 1, 2025, and basis for certain transactions from January 1, 2026, per an IRS fact sheet. FAQ A25 ties basis to the amount included in income, awkward for a couple who reported nothing. The Form 1040 digital asset question counts a hard fork airdrop as a yes.

An honest mistake in an open year calls for an amended return; the Voluntary Disclosure Practice is for people who “have willfully failed to comply,” and it is mid-redesign, as the firm’s post on the redesign and New Mexico’s managed audit explains.

Glenshaw Glass element	IRS position	Taxpayers’ position (per the order)	New Mexico holder’s proof problem
Accession to wealth	New coins with market value are income (Rev. Rul. 2019-24; CCA 202114020)	Not raised in the motion	Showing no real buyer existed
Clearly realized	Receiving a spendable new asset is realization	No conversion event; Bitcoin interest unchanged	Proving nothing moved that year
Complete dominion	Actual and constructive receipt; risk was limited	Substantial risk and no notice of most forks	Proof of key custody and what the holder knew
Year of receipt	Fork date for a holder controlling the keys	Unclaimed coins were never received	Wallet logs and key-import dates
Amount	Fair market value by any reasonable method	Values disputed in the petition	Defending a price source

Frequently Asked Questions

Do I owe tax on a Bitcoin hard fork if I never claimed the new coins?

The IRS says a fork alone is not income, but new coins you control are ordinary income at fair market value. Its 2021 Chief Counsel Advice treats a 2017 Bitcoin Cash holder who alone controlled the private key as receiving coins at the fork. The pending Rogovy case tests that view.

Who moved for summary judgment in Rogovy v. Commissioner?

The taxpayers did. Benjamin Rogovy and Carol Castellon Miranda sought partial summary judgment in Tax Court Docket No. 17513-24, arguing nine hard forks produced no income. Judge Ronald L. Buch denied it on March 18, 2026, citing factual disputes. The case remains pending after an April 2026 trial.

Would a Rogovy decision control a New Mexico taxpayer’s case?

Not automatically. Under Golsen v. Commissioner, the Tax Court follows the court of appeals where an appeal would lie, which for an individual is the circuit of legal residence. A New Mexico resident appeals to the Tenth Circuit, where no published hard fork decision was located.

Does unreported fork income affect my New Mexico income tax?

Generally, yes. New Mexico’s personal income tax starts from federal adjusted gross income under NMSA 1978 § 7-2-2, so federal fork income flows to the state return, and NMSA 1978 § 7-1-13 requires a report within 180 days of a final IRS adjustment. State-law questions go to New Mexico-licensed counsel.

Can the IRS still assess tax on a 2017 hard fork in 2026?

Usually not. The normal period is three years from filing, or six when omitted gross income exceeds 25 percent of the gross income reported. Written consents or a fraudulent return extend it, and a Tax Court petition suspends the period while the case runs.

Will Form 1099-DA show my forked coins?

Only when you sell them through a broker. Brokers report gross proceeds on Form 1099-DA for digital asset sales on or after January 1, 2025, and basis for certain transactions on or after January 1, 2026. The form does not report the fork, and basis in forked coins equals the amount included in income.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico taxpayers in IRS audit defense over digital asset adjustments, in Tax Court litigation, and in penalty abatement requests, as part of its tax defense practice.

Phillip Zagotti is an Attorney and CPA admitted to practice before the Internal Revenue Service and the United States Tax Court. He is licensed by the State Bar of California and holds a Texas CPA license; he is not licensed by the State Bar of New Mexico, and the firm works alongside New Mexico-licensed counsel on state-law questions. On forum, see the firm’s guide to choosing between the Tax Court and a refund suit. To discuss unreported crypto income or an IRS notice, contact North Star Law Firm.

The mailing date on a notice of deficiency matters first. A taxpayer in Roswell or Las Cruces then has 90 days to petition the United States Tax Court, or 150 days if the notice is addressed to a person outside the United States. 26 U.S.C. § 6213(a). That window is also when a New Mexico taxpayer picks a courtroom, because four federal forums can decide a federal tax liability, and they differ on prepayment, juries, speed and appellate precedent. Once a petition goes in, § 6512(a) all but closes off a refund suit for that year.

What does the 90-day clock on a notice of deficiency actually control?

Section 6213(a) does two jobs. It sets the window, and it freezes the government: no assessment and “no levy or proceeding in court for its collection” until the period has run and, if a petition is filed, the Tax Court’s decision is final. That freeze makes the Tax Court the default forum: nothing has to be paid to get in, the fee is $60, and petitions go through DAWSON. The cost of that door is the others.

Where does a New Mexico taxpayer actually try a Tax Court case?

The Tax Court lists Albuquerque among its trial locations, noting: “No permanent courtroom. See notice of trial for address.” A petitioner names a city on Form 5, and sessions are uneven. The Spring 2026 term calendared an Albuquerque session for the week of April 6, 2026, marked hybrid; the Fall 2026 forecast for September 7 through December 14, 2026 lists 26 places of trial without Albuquerque, though “REMOTE (Virtual)” appears.

Small tax case treatment under § 7463 is available when $50,000 or less is in dispute for any one taxable year, and the trade is finality: such a decision “shall not be reviewed in any other court.” Who may appear turns on the court’s own bar: Tax Court Rule 200 asks an attorney applicant for a certificate of good standing from the highest court of any state.

What does paying first buy in a refund suit in D.N.M. or the Court of Federal Claims?

A refund suit runs in reverse. In Flora v. United States, 362 U.S. 145 (1960), the Supreme Court read 28 U.S.C. § 1346(a)(1) to require “full payment of the assessment before an income tax refund suit can be maintained.” Section 7422(a) bars suit until a claim has been duly filed, the claim must be timely under § 6511(a), and § 6532(a)(1) blocks suit for six months unless it is disallowed sooner, then bars it two years after a disallowance.

Prepayment buys a jury. The Court of Federal Claims shares that jurisdiction under 28 U.S.C. § 1491(a)(1), but only the district court seats one: 28 U.S.C. § 2402 makes a § 1346(a)(1) action triable “by the court with a jury” at either party’s request. That trial runs in the District of New Mexico, at the Pete V. Domenici U.S. Courthouse in Albuquerque, with Justice Department Tax Division trial attorneys opposite instead of IRS Chief Counsel.

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When can a bankruptcy court decide the tax, and what does a CDP hearing add?

A fourth door opens in bankruptcy. Under 11 U.S.C. § 505(a)(1) the court may determine the amount or legality of a tax, fine or penalty “whether or not previously assessed, whether or not paid,” and whether or not previously adjudicated, in chapters 7, 11, 12 and 13 by way of § 103(a). Section 505(a)(2)(A) withholds it where the amount was already adjudicated before filing, § 505(a)(2)(B) delays refund determinations for up to 120 days, and § 505(b) covers taxes the estate incurs.

The collection due process route is narrower. Section 6330 gives 30 days to request a hearing and another 30 to petition the Tax Court, but the liability can be contested only where the taxpayer got no notice of deficiency and no earlier chance to dispute it.

Where does the appeal go, and why does the Tenth Circuit matter before trial?

Venue follows the taxpayer under § 7482(b)(1): an individual’s legal residence, an entity’s principal place of business. For New Mexico that is the Tenth Circuit in Denver. “The Tax Court’s legal conclusions are subject to de novo review, and its factual findings can be set aside only if clearly erroneous.” Petersen v. Commissioner, 924 F.3d 1111, 1114 (10th Cir. 2019). A Court of Federal Claims case goes to the Federal Circuit, 28 U.S.C. § 1295(a)(3).

That map matters before filing. Under Golsen v. Commissioner, 54 T.C. 742 (1970), where the court of appeals to which appeal lies “has already passed upon the issue before us, efficient and harmonious judicial administration calls for us to follow the decision of that court.” Fed. R. App. P. 13(a)(1)(A) allows 90 days to appeal after entry of the decision, and appealing does not stop collection without the § 7485(a) bond, “not exceeding double” the appealed deficiency.

What happens on the New Mexico side of the same dispute?

State tax disputes run separately. NMSA 1978 § 7-1-24 allows 90 days to protest an assessment of tax over $50, heard by the Administrative Hearings Office under the Administrative Hearings Office Act, not by the Taxation and Revenue Department, with appeal to the New Mexico Court of Appeals within 30 days of the decision. NMSA 1978 § 7-1-25. The federal result loops back: § 7-1-13 calls for a federal adjustments report within 180 days of the final determination date. See also the firm’s gross receipts tax audit guide.

How does this play out for a Roswell dairy owner, and who computes the number?

Take a hypothetical. A dairy owner outside Roswell gets a notice of deficiency mailed October 5, 2026 for tax year 2023: $68,000 plus the § 6662(a) accuracy-related penalty, “20 percent of the portion of the underpayment,” or $13,600. The 90th day is Sunday, January 3, 2027, so § 7503 moves it to Monday, January 4. An S case is off the table above $50,000. Interest has run since the 2023 return came due, § 6601(a), at the 7 percent IRS rate compounded daily for the quarter beginning October 1, 2026, about $1,400 a quarter. A deposit under § 6603 stops that meter without conceding the case.

Paying the $81,600 plus interest, filing a claim, waiting six months and suing in the District of New Mexico buys a jury, at the cost of $95,000 the herd may need more. If the dairy is already in a Chapter 11 or Chapter 12 case, the bankruptcy court reaches the same figures under § 505(a)(1) with no prepayment.

Tax Court Rule 91(a)(1) requires the parties to stipulate “to the fullest extent” fairly reachable, and a stipulation is a conclusive admission, so it gets built from milk checks, feed invoices and depreciation schedules, while the administrative file and the Appeals officer’s workpapers show what the government already accepts. After the opinion, Rule 155 confines each side’s computation “strictly to consideration of the correct computation.” Section 7491 can shift the burden of proof where the taxpayer offers credible evidence and has cooperated, and § 7430 caps cost recovery by the 28 U.S.C. § 2412(d)(2)(B) net worth limits, $2,000,000 for individuals and $7,000,000 for businesses.

Forum	Pay first?	Fact finder	Key deadline	Appeal to
Tax Court deficiency	No	Judge	90 days, 150 if abroad	Tenth Circuit
D.N.M. refund suit	Yes, in full	Jury if asked	Two years from disallowance	Tenth Circuit
Federal Claims	Yes, in full	Judge	§ 6532(a)(1) window	Federal Circuit
Bankruptcy § 505	No	Judge	Subject to § 505(a)(2)	District court, BAP
Tax Court CDP	No	Judge	30 days to petition	Tenth Circuit

Frequently Asked Questions

How long does a New Mexico taxpayer have to file a Tax Court petition?

Under 26 U.S.C. § 6213(a) the petition is due within 90 days after the notice of deficiency is mailed, or 150 days if the notice is addressed to a person outside the United States. Assessment and levy are barred while it runs.

Does the Tax Court hold trial sessions in Albuquerque?

Albuquerque is a listed Tax Court trial location with no permanent courtroom, so the notice of trial gives the address. The Spring 2026 term listed an Albuquerque session for the week of April 6, 2026 as hybrid; the Fall 2026 forecast omits it.

Do I have to pay the tax before filing an IRS refund lawsuit in New Mexico?

Yes. In Flora v. United States, 362 U.S. 145 (1960), the Supreme Court held that 28 U.S.C. § 1346(a)(1) requires full payment of the assessment before a refund suit can proceed in district court. A refund claim comes first under § 7422(a).

Can a taxpayer get a jury in a federal tax case?

Only in a district court refund suit. Tax Court and Court of Federal Claims trials are before a judge. Under 28 U.S.C. § 2402, a section 1346(a)(1) action against the United States is tried with a jury on either party’s request.

Can a bankruptcy court determine how much a debtor owes the IRS?

Often, yes. Under 11 U.S.C. § 505(a)(1) the court may determine the amount or legality of any tax, fine or penalty, whether or not previously assessed, paid or contested. Section 505(a)(2)(A) withholds that power if the matter was adjudicated before filing.

Where does a Tenth Circuit tax appeal come from, and what is the deadline?

For an individual, 26 U.S.C. § 7482(b)(1) sends review of a Tax Court decision to the circuit of the taxpayer’s legal residence, the Tenth Circuit for New Mexico. Fed. R. App. P. 13(a)(1)(A) allows 90 days from entry of the decision.

How North Star Law Firm Can Help

North Star Law Firm handles federal tax controversy for New Mexico taxpayers and businesses, from examination through appeal: IRS audit defense, IRS Appeals and collection due process hearings, and United States Tax Court litigation, including the forum analysis that belongs inside the 90-day petition window. The broader tax defense practice covers liens, levies, penalties and collection alternatives.

Phillip Zagotti is an Attorney and CPA admitted to practice before the Internal Revenue Service and the United States Tax Court. He is licensed by the State Bar of California and holds a Texas CPA license; he is not licensed by the State Bar of New Mexico, and the firm works alongside New Mexico-licensed counsel on state-law questions. Also see the firm’s post on the 2026 Ways and Means tax administration bills. To discuss a notice of deficiency or which forum fits a dispute, contact North Star Law Firm.

A Mississippi auditor pulled a construction company’s bank statements for 2017 through 2020, scheduled every deposit and issued a sales tax assessment of $220,362. The company never denied the deposits; its position was that most of the money was not its revenue, since some belonged to five other businesses the same shareholder owned and some was the shareholder funding payroll.

New Mexico business owners meet that arithmetic from two directions. The IRS uses the bank deposits method when it believes a return understates income, and the New Mexico Taxation and Revenue Department runs similar reconstructions in gross receipts tax audits of contractors. Either way the assessment arrives presumed correct, and federal rules govern most of the dollars.

How does an auditor turn bank deposits into taxable income?

In DiLeo v. Commissioner, 96 T.C. 858 (1991), the Tax Court held that bank deposits are prima facie evidence of income, while requiring the government to account for nontaxable sources of which it has knowledge. Clayton v. Commissioner, 102 T.C. 632 (1994), accepted such an analysis as reasonable after rejecting the percentage estimate the IRS tried first.

26 U.S.C. § 6001 requires every person liable for tax to keep such records as the Secretary prescribes, and Treas. Reg. § 1.6001-1(a) turns that into permanent books sufficient to establish gross income, deductions, and credits. A contractor with no job-cost ledger tied to bank activity has supplied the reason for a reconstruction.

What did the Mississippi Court of Appeals decide in ABG Contractors?

In ABG Contractors, Inc. v. Graham, No. 2025-CA-00329-COA (Miss. Ct. App. Aug. 18, 2026), the court reversed summary judgment for the Mississippi Department of Revenue and remanded for trial. The taxpayer had produced bank statements for six entities owned by one individual, separate employer identification numbers, formation filings, ledger entries flagging shareholder contributions, and contracts for jobs in other counties, which raised genuine factual disputes the presumption could not survive.

The ruling is procedural, but for a New Mexico reader those categories are the ones that move a federal examiner, and nearly all are accounting records.

How strong is the presumption of correctness in a federal tax case?

Welch v. Helvering, 290 U.S. 111 (1933), sets the baseline: the Commissioner’s “ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong.” Tax Court Rule 142(a)(1) puts the burden on the petitioner except as a statute provides otherwise.

The Tenth Circuit, which hears New Mexico appeals, marks the limit. Erickson v. Commissioner, 937 F.2d 1548 (10th Cir. 1991), a cash expenditures case, stated that “[n]aked or purely arbitrary assessments are not entitled to a presumption of correctness,” that some reasonable foundation is necessary to preserve it, and that the government must show the taxpayer received income from the activity charged. Rey v. Commissioner, T.C. Memo. 2016-58, found that showing satisfied by the bank records themselves, which a working contractor’s account will supply.

When does 26 U.S.C. § 7491 shift the burden to the IRS?

Section 7491(a)(1) shifts the burden of proof to the Secretary where a taxpayer introduces credible evidence on a factual issue relevant to income, estate, or gift tax liability. The conditions in § 7491(a)(2) do the real work: substantiation, required records, and cooperation with reasonable requests for information, documents, and interviews. Cooperation is where audits are lost, since an owner who stops answering the examiner forfeits a shift his documents would have earned.

Entities carry an extra condition: under § 7491(a)(2)(C) a partnership, corporation, or trust must meet the net worth requirement of 26 U.S.C. § 7430(c)(4)(A)(ii), incorporating 28 U.S.C. § 2412(d)(2)(B), of net worth no greater than $7,000,000 and no more than 500 employees. Individuals face no such cap, and § 7491(c) gives the Secretary the burden of production on penalties against an individual.

Facing a Bank Deposits Audit in New Mexico? Contact Us Now

What makes a New Mexico contractor’s deposits look like unreported income?

Three patterns produce most of the gap. Related entities sharing an owner, a bookkeeper, and a bank move money between accounts to cover payroll, and every landing is a deposit. Owners fund working capital with contributions and shareholder loans, neither of which is income. Gross receipts tax is deposited gross.

State and federal treatment differ there. NMSA 1978 § 7-9-3.5(A)(3)(b) excludes gross receipts tax payable for the reporting period from the state tax base. Federally, the reimbursement enters receipts and is offset by the deduction 26 U.S.C. § 164(a) allows for state and local business taxes. Net income is zero either way, if someone shows the examiner both halves.

Here an attorney and CPA does what a litigator cannot, because the rebuttal is a schedule, not a brief. Each deposit gets a line with its date, amount, payor, ledger account, and the document proving its character: a promissory note, an equity entry, an invoice showing separately billed tax. Reported receipts then reconcile against the information returns the IRS holds, including Forms 1099-NEC and any Form 1099-K, issued above $20,000 in more than 200 transactions.

How would a Las Cruces contractor rebut a $310,000 reconstruction?

Take a hypothetical. A Las Cruces general contractor taxed as an S corporation files its 2023 return and draws a 2025 examination. Deposits to the operating account total $2,100,000. The ledger was never reconciled, so the examiner calls $310,000 unreported income.

Deposit category	Amount	Proof	Effect
Capital contribution	$120,000	Equity entries, source statement	Not income; removed
Transfers from owner’s other LLC	$95,000	Sending statement, separate EIN	Not its income; removed
Equipment loan proceeds	$60,000	Note and payoff schedule	Loan, not income; removed
Gross receipts tax remitted	$35,000	Invoices, filed returns	Offset by the § 164 deduction
Total in dispute	$310,000	Full schedule	Adjustment to zero

Because S corporation income flows to the shareholder, the $310,000 lands on a Form 1040. At a 32 percent marginal rate the tax is $99,200, substantial under 26 U.S.C. § 6662(d)(1)(A) (the greater of 10 percent of the tax required to be shown or $5,000), so the 20 percent accuracy-related penalty under § 6662(a) adds $19,840. At the 7 percent underpayment rate set for the quarter beginning October 1, 2026, two and a half years of interest adds roughly $19,000. Four deposit categories carry $138,000.

How does New Mexico’s own presumption of correctness work?

NMSA 1978 § 7-1-17(C) provides that any assessment of taxes or demand for payment made by the department is presumed to be correct, and NMSA 1978 § 7-1-24 requires a protest to be filed with the secretary within ninety days, under the Administrative Hearings Office Act.

A federal adjustment does not stay federal. NMSA 1978 § 7-1-13(E) requires a taxpayer with final net-positive federal adjustments from an IRS audit or amended return to file a federal adjustments report within 180 days of the final determination date. State audit mechanics appear in the firm’s New Mexico gross receipts tax audit guide.

What should you do when the 30-day letter or notice of deficiency arrives?

A 30-day letter closes the examination with a proposed adjustment and offers a protest to the IRS Independent Office of Appeals, which the agency describes as resolving disputes without litigation. A notice of deficiency starts a clock instead: under 26 U.S.C. § 6213(a) the taxpayer has 90 days from mailing, or 150 days if the notice is addressed to a person outside the United States, to petition the United States Tax Court. Filing preserves the record without foreclosing settlement through IRS Appeals.

Frequently Asked Questions

What is the bank deposits method?

It is an indirect reconstruction: the examiner totals deposits and treats them as receipts. In DiLeo v. Commissioner, 96 T.C. 858 (1991), the Tax Court held bank deposits are prima facie evidence of income, subject to nontaxable sources the government knows of.

Must the IRS show anything before the presumption of correctness applies?

A minimum, yes. Welch v. Helvering, 290 U.S. 111 (1933), presumes the determination correct. But the Tenth Circuit held in Erickson v. Commissioner, 937 F.2d 1548 (10th Cir. 1991), that naked or purely arbitrary assessments receive no presumption without some reasonable foundation.

How does 26 U.S.C. section 7491 shift the burden of proof?

Under 26 U.S.C. § 7491(a)(1), a taxpayer who introduces credible evidence shifts the burden to the Secretary. Section 7491(a)(2) conditions that on substantiation, required records, and cooperation. A corporation, partnership, or trust must also meet the § 7430(c)(4)(A)(ii) net worth test.

Are shareholder contributions and owner loans taxable income to the business?

No. A capital contribution increases the owner’s basis and a loan creates a repayment obligation, so neither is gross income to the company. Proof matters more than the label: equity entries and a signed note are what sent ABG Contractors back for trial.

Does New Mexico gross receipts tax deposited into a business account count as income?

It is deposited gross, so it looks like revenue. NMSA 1978 § 7-9-3.5(A)(3)(b) excludes New Mexico gross receipts tax payable for the reporting period from gross receipts. Federally, the reimbursement enters receipts and is offset by the 26 U.S.C. § 164(a) deduction.

How long do you have to respond to a notice of deficiency?

Ninety days from mailing, or 150 days if the notice is sent to a person outside the United States, under 26 U.S.C. § 6213(a). Saturdays, Sundays, and District of Columbia holidays do not count as the last day. Missing it forfeits Tax Court review.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico taxpayers whose income has been rebuilt from bank records, whether by a federal or state examiner. The firm assembles the deposit-by-deposit schedule from the general ledger and loan and equity records, reconciles reported receipts against information returns, and presses the § 7491 conditions so the burden question is decided on a full record. That is IRS audit defense, and the firm also handles New Mexico gross receipts tax matters.

Phillip Zagotti, JD/CPA, is an attorney and CPA admitted to the United States Tax Court who practices before the Internal Revenue Service. For New Mexico state-law questions the firm works alongside New Mexico-licensed counsel. The accounting side is what makes a deposits case winnable. See also the firm’s note on the redesigned IRS voluntary disclosure practice and New Mexico managed audits. If an examiner has proposed an adjustment built from your bank statements, contact North Star Law Firm before the deadlines run.

A notice of federal tax lien recorded with the Bernalillo County Clerk does not stop an Albuquerque homeowner from listing a house. It stops the closing. Title companies will not insure around it, and lenders will not fund a refinance that leaves the United States in first position. The way through is one of two certificates: a discharge under 26 U.S.C. § 6325(b), or a subordination under § 6325(d).

Two New Mexico facts change the arithmetic: this is a community property state, and the state’s $150,000 homestead exemption does not bind the United States.

Where does a federal tax lien on a New Mexico home get recorded?

Under 26 U.S.C. § 6321, an unpaid tax becomes “a lien in favor of the United States upon all property and rights to property … belonging to such person” once the person “neglects or refuses to pay the same after demand,” and § 6322 dates it to the assessment. Nothing is recorded at that point.

Filing goes to priority. Section 6323(a) makes the lien invalid against purchasers, security interest holders, mechanic’s lienors and judgment lien creditors until notice is filed, and § 6323(f)(1)(A) puts real property notices in the one office “designated by the laws of such State.” New Mexico’s Uniform Federal Lien Registration Act made that designation: NMSA 1978 § 48-1-1(A) requires recording with “the county clerk of the county in which the real property … is situated,” so a Las Cruces house means the Dona Ana County Clerk. Subsection (B) routes personal property notices to the county clerk where the owner resides, not the secretary of state.

Does the lien reach the whole house when only one spouse owes the tax?

Section 6321 reaches property “belonging to” the taxpayer, and state law decides what that means. United States v. National Bank of Commerce, 472 U.S. 713 (1985), held that state law controls the nature of the taxpayer’s interest. Drye v. United States, 528 U.S. 49 (1999), restated it: state law creates rights, federal law designates which are taxed. United States v. Craft, 535 U.S. 274 (2002), reached a husband’s entireties interest despite Michigan law.

NMSA 1978 § 40-3-8 makes property acquired during marriage community unless it is separate, and § 40-3-9(A) treats a debt incurred before marriage as separate. Section 40-3-10(A) reaches the debtor spouse’s separate property first and that spouse’s community half next, barring either spouse’s interest from answering for the other’s separate debt. Section 40-3-11 orders community debts differently. IRM 25.18.4.8 puts New Mexico among states allowing collection of premarital debts from the liable spouse’s 50 percent community interest; IRM 25.18.4.9 allows 100 percent only for post-marital obligations.

Does New Mexico’s $150,000 homestead exemption keep the IRS out of the house?

It does not. NMSA 1978 § 42-10-9 exempts $150,000 of a primary residence from “attachment, execution or foreclosure by a judgment creditor” and from bankruptcy, a figure the 2023 exemption amendments set, as the firm’s post on New Mexico’s exemption overhaul explains.

The United States is not bound by it. United States v. Rodgers, 461 U.S. 677 (1983), held that 26 U.S.C. § 7403 lets a district court order sale of an entire property, not just the taxpayer’s fractional interest, over a non-delinquent spouse’s homestead right, with that spouse compensated. The Court listed the considerations: prejudice to the government from a partial-interest sale, the third party’s expectation against forced sale, dislocation risk, and the relative value of the interests. Administrative levy is narrower: § 6334(a)(13)(B) exempts a principal residence, and § 6334(e)(1) lifts that only on a district judge’s written approval.

Facing a Closing Deadline With an IRS Lien? Contact Us Now

What separates a discharge from a subordination, and how does the 45-day clock run?

A discharge frees one parcel and leaves the rest of the lien intact. Section 6325(b) offers five routes, all on Form 14135 (Rev. 11-2024): (b)(1), remaining property worth double the debt plus senior liens; (b)(2)(A), payment of the government’s interest as the Secretary values it; (b)(2)(B), no value; (b)(3), proceeds held as a fund under the same liens; and (b)(4), a deposit or bond from a non-liable owner, with § 7426(a)(4) allowing 120 days to sue for a lower value.

Subordination removes nothing; it moves the lien behind the one creditor a refinance lender cares about. Form 14134 (Rev. 10-2024) offers § 6325(d)(1), payment equal to the interest subordinated, and § 6325(d)(2), a determination that the government will realize more. Publications 783 and 784 both ask for the application 45 days before the transaction date, sent to IRS Advisory Consolidated Receipts. A separate 45-day rule in § 6323(d) protects a lender’s security interest from advances made before the 46th day after lien filing. Neither is withdrawal under § 6323(j) or release under § 6325(a), due 30 days after full satisfaction.

What does this look like for an Albuquerque couple selling at $425,000?

Consider a hypothetical. A married couple owns a North Valley home in Albuquerque bought during the marriage, so it is community property under § 40-3-8. One spouse owes a $95,000 assessed 2019 balance predating the marriage, a separate debt under § 40-3-9(A). The lien notice was recorded with the Bernalillo County Clerk on April 9, 2025. They contract October 5, 2026 at $425,000, closing December 11, with a $260,000 payoff and $28,000 of costs, so the Form 14135 package goes out by October 27.

Under § 6325(b)(2)(A) the payment is the government’s interest: fair market value less senior encumbrances, or $425,000 less $260,000, leaving $165,000 of equity. Because the debt is premarital and separate, the lien reaches that spouse’s community half, consistent with § 40-3-10(A) and IRM 25.18.4.8. Half of $165,000 is $82,500, under the $95,000 lien, so a balance survives the sale. If the IRS allows the $28,000 of costs off the top, net equity is $137,000 and its share is $68,500, a $14,000 spread that turns on the appraisal and the settlement statement.

Change one fact. If $40,000 of the down payment traces to premarital separate funds and the split cannot be settled before closing, § 6325(b)(3) fits: the house sells on schedule and the disputed sum is held subject to the liens of the United States.

What does an attorney and CPA check that a closing agent will not?

The government’s interest is an accounting exercise first, built from the appraisal Publication 783 requires and the title report, reduced only for truly senior encumbrances. Two numbers problems break closings. The first is a stale payoff: interest runs under 26 U.S.C. § 6601(a), and the failure-to-pay addition under § 6651(a)(2) accrues at 0.5 percent of unpaid tax per month, capped at 25 percent, so an October quote will not match the December wire. The second is sequencing: turning $68,500 of equity into cash changes the reasonable collection potential behind a pending offer in compromise, and a current installment agreement is a listed basis for withdrawal under § 6323(j). New Mexico’s own lien needs its own release: NMSA 1978 § 7-1-37 makes an assessed state tax a lien on the person’s property, recorded under § 7-1-38 by the Taxation and Revenue Department.

Route	What the IRS receives	Form	New Mexico use
§ 6325(b)(1)	Nothing; remaining property worth double the debt	14135	One of several Bernalillo County parcels
§ 6325(b)(2)(A)	Its interest in the parcel sold	14135	Most Albuquerque sales with equity
§ 6325(b)(2)(B)	Nothing; no value found	14135	Underwater Farmington property
§ 6325(b)(3)	Proceeds held in escrow	14135 plus escrow	Closing amid a community property dispute
§ 6325(d)(1), (d)(2)	The subordinated amount, or better collection	14134	Santa Fe refinance needing first position

Frequently Asked Questions

Where is a notice of federal tax lien recorded on a New Mexico home?

Under 26 U.S.C. section 6323(f)(1)(A) the notice goes wherever the state designates. NMSA 1978 section 48-1-1(A) designates the county clerk where the real property sits, so an Albuquerque house means the Bernalillo County Clerk. Personal property notices go to the owner’s county clerk.

Does an IRS lien discharge cancel the rest of the tax debt?

No. A certificate of discharge under 26 U.S.C. section 6325(b) removes one described parcel from the federal tax lien, letting a buyer take clear title. The assessment survives and the lien continues elsewhere. Only a release under section 6325(a) ends it everywhere.

Can the IRS collect one spouse’s premarital tax debt from a New Mexico home?

In part. NMSA 1978 section 40-3-10(A) bars either spouse’s interest from answering for the other’s separate debt, and a premarital tax balance is separate under section 40-3-9(A). IRM 25.18.4.8 places New Mexico among states allowing collection from the liable spouse’s community half.

Does New Mexico’s $150,000 homestead exemption stop a federal tax lien?

No. NMSA 1978 section 42-10-9 shields $150,000 of a primary residence from judgment creditors, but United States v. Rodgers, 461 U.S. 677 (1983), held that 26 U.S.C. section 7403 permits a court-ordered sale of the whole property despite a state homestead right.

How far before a closing should Form 14135 or Form 14134 be filed?

IRS Publication 783 asks for the discharge application 45 days before the transaction date, and Publication 784 says the same for Form 14134. That window assumes a complete package: a disinterested appraisal, a title report, the contract, and a closing statement.

What is the difference between a lien withdrawal, a release, and a discharge?

Withdrawal under 26 U.S.C. section 6323(j) removes the public notice, available where filing was premature or an installment agreement exists. Release under section 6325(a) ends the lien everywhere after full satisfaction. Discharge under section 6325(b) frees one parcel but leaves the debt.

How North Star Law Firm Can Help

North Star Law Firm handles federal tax lien work for New Mexico taxpayers and business owners: valuing the government’s interest from an appraisal and a title report, assembling a Form 14135 or Form 14134 application on the 45-day schedule Publications 783 and 784 describe, and pressing for an escrow under 26 U.S.C. section 6325(b)(3) when a payoff question cannot be settled before closing. It also handles offers in compromise and installment agreements.

Phillip Zagotti, JD/CPA, is an Attorney and CPA admitted to practice before the Internal Revenue Service and the United States Tax Court. He is not licensed by the State Bar of New Mexico, and the firm works alongside New Mexico-licensed counsel on state-law questions. More is at federal tax liens and tax defense, alongside the firm’s post on how the IRS does offer in compromise math. If a closing date is set and a lien is on the title commitment, contact North Star Law Firm.

A retired couple in Las Cruces with a peso savings account in Ciudad Juarez, a Sandia engineer who never closed an account in Bangalore, and a Santa Fe transplant drawing a British pension all owed the same report on April 15, 2026, and none filed it. What is left is the FBAR deadline October 15, 2026, the last date a 2025 FinCEN Form 114 is timely.

Foreign account reporting problems in New Mexico are rarely about hidden money. Dona Ana County families bank on both sides of the line, the labs recruit scientists born abroad, and retirees reach Taos with a pension account still held overseas. The FBAR is an information report under the Bank Secrecy Act, not a tax return, but its penalties live in Title 31.

Where does the October 15, 2026 FBAR deadline come from?

Section 2006(b)(11) of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Pub. L. No. 114-41, provides that “[t]he due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15.” The IRS FBAR page says a filer is “allowed an automatic extension to October 15 if you fail to meet the FBAR annual due date of April 15.” For 2025 accounts that is October 15, 2026.

31 C.F.R. § 1010.306(c) still sets the due date at “June 30 of each calendar year,” text predating the 2015 statute that was never conformed. The statute controls; the stale regulation misleads.

Which New Mexico households and businesses owe an FBAR?

Under 31 C.F.R. § 1010.350, a United States person with a financial interest in, or signature or other authority over, a foreign account reports it once the aggregate maximum value of all such accounts passes $10,000 during the year.

The New Mexico patterns cluster. Border families in Sunland Park, Santa Teresa, and Columbus keep a Mexican account for a parent in Palomas. A Mexican AFORE retirement account sits at a foreign institution, and § 1010.350(c) reaches cash-value insurance, annuities, and pooled funds. Researchers at Los Alamos and Sandia hold dormant home-country accounts, and a New Mexico LLC is a United States person under § 1010.350(b) even when disregarded. Form 8938 is a separate report, which the IRS comparison of Form 8938 and FBAR requirements starts at $50,000 for a single filer living in the United States.

Fideicomiso beach property trips people up. Rev. Rul. 2013-14, 2013-26 I.R.B., holds that a Mexican land trust whose bank trustee only holds and transfers legal title “is not a trust” under Treas. Reg. § 301.7701-4(a). The FBAR item is the peso account opened alongside it.

Is a bank account on tribal land in New Mexico foreign?

No. 31 C.F.R. § 1010.100(hhh) defines the United States as “[t]he States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.” An account at a branch on Pueblo land is domestic. The test is where the account sits, not who owns the institution: a United States bank branch in Ciudad Juarez is foreign, and a Mexican bank branch in Albuquerque is not.

What is the FBAR penalty, and how much did Bittner narrow it?

31 U.S.C. § 5321(a)(5) sets two tiers. The non-willful cap is $10,000, with an exception in § 5321(a)(5)(B)(ii) barring any penalty where the violation “was due to reasonable cause” and the balance “was properly reported.” Section 5321(a)(5)(C) raises the willful ceiling to $100,000 or half the balance, whichever is greater.

Both caps are indexed. 31 C.F.R. § 1010.821 sets $16,536 non-willful and $165,353 willful for penalties assessed on or after January 17, 2025, with no 2026 increase: OMB Memorandum M-26-11 (April 17, 2026) told agencies there would be “no updated cost-of-living adjustment multiplier for 2026.”

In Bittner v. United States, 598 U.S. 85 (2023), the Supreme Court held the non-willful maximum “accrues on a per-report, not a per-account, basis.” Section 5321(b)(1) gives Treasury six years to assess, and IRM 4.26.16 leaves the examiner discretion over “the amount of the penalty, if any,” with a warning letter as an alternative.

Facing a Missed FBAR Deadline in New Mexico? Contact Us Now

What are the three ways to fix a missed FBAR after October 15?

The first is a delinquent filing: the late report goes through the BSA e-filing system with a reasonable cause statement built on § 5321(a)(5)(B)(ii) and IRM 4.26.16. The standalone Delinquent FBAR Submission Procedures page no longer resolves on irs.gov, and the parallel page for delinquent international information returns says nothing about FBARs.

The second is the Streamlined Domestic Offshore Procedures, open only where the failures “resulted from non-willful conduct.” It takes three years of amended returns, six years of FBARs, a certification, and 5 percent of the highest year-end value of the unreported assets.

The third is the IRS Criminal Investigation Voluntary Disclosure Practice, for willful conduct. It runs on Form 14457 and buys no immunity: a disclosure “will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.” The IRS proposed redesigning it in IR-2025-124 (December 22, 2025) and has published no final program.

Has the Tenth Circuit said what makes an FBAR violation willful?

No published Tenth Circuit decision setting the civil FBAR willfulness standard turned up on review, so New Mexico filers argue against out-of-circuit authority. In United States v. Hughes, No. 23-15712 (9th Cir. Aug. 21, 2024), the Ninth Circuit held that “willful violations of the FBAR statute include both knowing and reckless violations,” requiring proof that the filer “clearly ought to have known that there was a grave risk” the requirement was not met. That court joined the Third, Fourth, Sixth, Eleventh, and Federal Circuits, all reasoning from Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007). The damaging fact is rarely the account; it is the Schedule B question answered no year after year.

What would a missed FBAR cost a Las Cruces couple?

Take a hypothetical. A Las Cruces couple held three Mexican accounts in 2025: Banorte checking, BBVA Mexico savings, and an investment account. Combined maximum value was $140,000, the December 31 total $132,000, and unreported interest about $3,200 a year. No FBAR was filed for 2019 through 2025.

Non-willful exposure across the six years open under § 5321(b)(1) runs to $16,536 per report, or $99,216 for one spouse and double that if each spouse files. Streamlined Domestic Offshore instead produces 5 percent of $132,000, or $6,600, plus roughly $2,100 of tax. A willful finding would carry a $165,353 ceiling, since half of $140,000 is less.

NMSA 1978 § 7-2-2 builds New Mexico base income from adjusted gross income under Internal Revenue Code § 62, so the same interest raises the state return. NMSA 1978 § 7-1-13 calls for a “federal adjustments report” within 180 days.

This is where an attorney who also holds a CPA license earns the fee. Per the FBAR Reference Guide, the report carries “a reasonable approximation of the greatest value” during the year, converted at the Treasury rate for December 31. The streamlined base uses year-end values, so the two diverge whenever an account peaks mid-year.

Approach	Basis	Result	Left open
Six late FBARs	$16,536 per report	$99,216 per spouse	Tax on interest
Per-account theory, rejected	$16,536 per account-year	$297,648	Foreclosed
Warning letter, IRM 4.26.16	Examiner discretion	No penalty	Tax and interest
Streamlined Domestic Offshore	5 percent of $132,000	$6,600 plus $2,100	No criminal shield
Willful finding	$165,353 or half of $140,000	$165,353, one year	Criminal exposure

Frequently Asked Questions

When is the FBAR for 2025 foreign accounts due?

April 15, 2026 was the regular due date, and October 15, 2026 is the automatic extended date. Section 2006(b)(11) of Pub. L. No. 114-41 sets April 15 with a maximum six-month extension ending October 15. A report filed later is delinquent.

What is the FBAR penalty for a non-willful failure to file?

31 U.S.C. § 5321(a)(5)(B)(i) caps the non-willful penalty at $10,000, adjusted by 31 C.F.R. § 1010.821 to $16,536 for penalties assessed on or after January 17, 2025. OMB Memorandum M-26-11 cancelled the 2026 adjustment. Under Bittner v. United States, 598 U.S. 85 (2023), the cap is per report.

Does an account at a bank on tribal land in New Mexico go on an FBAR?

No. 31 C.F.R. § 1010.100(hhh) defines the United States to include Indian lands as defined in the Indian Gaming Regulatory Act, along with the States, the District of Columbia, and the Territories. An account on Pueblo or Navajo Nation land is domestic.

Does Mexican beach property held in a fideicomiso have to be reported?

Rev. Rul. 2013-14 holds that a Mexican land trust whose bank trustee only holds and transfers legal title is not a trust under Treas. Reg. § 301.7701-4(a), which removes the foreign trust reporting question. The FBAR item is the peso account opened alongside it.

How does the Streamlined Domestic Offshore 5 percent penalty work?

The penalty equals 5 percent of the highest aggregate year-end value of the unreported foreign financial assets across the covered periods, three years of amended returns and six years of FBARs. The taxpayer must certify non-willful conduct: negligence, inadvertence, mistake, or good faith misunderstanding.

Do unreported foreign accounts change a New Mexico income tax return?

Only through the income, since New Mexico has no FBAR. NMSA 1978 § 7-2-2 computes base income from adjusted gross income under Internal Revenue Code § 62, so foreign interest on an amended federal return raises New Mexico income. NMSA 1978 § 7-1-13 requires a report within 180 days.

How North Star Law Firm Can Help

North Star Law Firm handles federal tax controversy for New Mexico clients, including delinquent FBAR filings, reasonable cause submissions, and streamlined packages. Phillip Zagotti, JD/CPA, practices before the IRS and the United States Tax Court and holds a Texas CPA license, which matters where rebuilding six years of account values decides the outcome. The firm’s tax defense practice covers penalty abatement and unfiled tax returns, and exit tax and expatriation planning uses the same records. Phillip Zagotti is not licensed by the State Bar of New Mexico; for New Mexico state law the firm works alongside New Mexico-licensed counsel.

The choice among the three paths narrows once the IRS makes contact. See also the firm’s notes on FBAR penalty relief changes in 2026 and the proposed redesign of the IRS Voluntary Disclosure Practice. To discuss a missed FBAR before October 15, 2026, contact North Star Law Firm.

A rebuilt IRS Voluntary Disclosure Practice is weeks away. IRS-CI published a proposal (IR-2025-124) on December 22, 2025, took comments through March 22, 2026, and on August 25, 2026, the head of IRS-CI said the final version, with a 120-day resolution target and upfront screening in place of a full examination, should arrive within about two months. As of September 12, 2026, nothing has been published, the IRS page warns that the proposal creates no rights for early applicants, and the December release set the effective date at six months after final publication.

For a New Mexican, that is half the problem. New Mexico’s income tax starts from federal adjusted gross income, so every dollar confessed to the IRS lands on a Santa Fe desk within months, and the state has no voluntary disclosure program, only a managed audit under NMSA 1978 § 7-1-11.1. The order of filing is where the money is saved or lost.

What does the IRS actually propose to change?

The current practice, described in IRM 9.5.11.9, runs through Form 14457: Part I asks for preclearance, Part II follows within 45 days with a narrative of the noncompliance, then six years of returns. The price is a civil fraud penalty of 75 percent of the understatement for the single highest year, plus a 50 percent willful FBAR penalty on the highest aggregate balance.

The proposal keeps the six-year window and the Form 14457 gateway, caps international information return penalties at $10,000 per return per year, and changes the penalty math. Amended returns would draw the 20 percent accuracy-related penalty under 26 U.S.C. § 6662 for each year. Delinquent returns would draw failure-to-file but not failure-to-pay penalties. FBAR violations would be penalized per year at an amount the IRS has not fixed; the August remarks put it in the 20 to 30 percent range, but nothing in writing confirms that. The August remarks also placed digital assets inside the general program. The National Taxpayer Advocate’s February 26, 2026 response flagged the catch: 20 percent on six years can cost more than 75 percent on one, and the three-month full-payment rule shuts out anyone who cannot write the check.

Why does a federal disclosure force a New Mexico decision?

Under NMSA 1978 § 7-2-2, base income is federal adjusted gross income with state modifications, so an amended Form 1040 that adds $90,000 adds $90,000 to the New Mexico return for that year, taxed at up to 5.9 percent. NMSA 1978 § 7-1-13 then requires a federal adjustments report within 180 days of the final determination date, and for an amended federal return that date is the day the amendment was filed. Miss it and the Taxation and Revenue Department gets a fresh three-year assessment window under § 7-1-18(E).

Under NMSA 1978 § 7-1-18 the state’s assessment limit is three years, six for a return that understates liability by more than 25 percent, seven for no return, and ten for fraud, so a five-year federal disclosure usually opens state years TRD could not otherwise reach.

Is a New Mexico managed audit the state’s version of voluntary disclosure?

Close, and the difference bites. The Multistate Tax Commission’s member list says it plainly: New Mexico has no voluntary disclosure program, only managed audits. Under § 7-1-11.1 the taxpayer signs an agreement with the Secretary, waives the limitation period for the covered years, and audits its own records by a deadline. NMSA 1978 § 7-1-69 imposes no penalty on tax that results from a managed audit, and NMSA 1978 § 7-1-67 waives interest if the audit is finished on time and the assessment is paid in full within 180 days of mailing.

The eligibility rules in TRD’s FYI-404 are the trap: no existing audit, no dispute with the Department over the same transactions, no criminal investigation for the periods at issue. Because the federal amended return triggers a reporting duty to TRD, filing federally first means racing the state’s data-matching against your own application. The safer sequence is a managed audit application through the Taxpayer Access Point before, or alongside, Part II.

Unreported Income or Accounts in New Mexico? Contact Us Now

Who in New Mexico should be paying attention?

Four groups keep showing up: Los Alamos and Sandia scientists who arrived from abroad or retired to Santa Fe after careers overseas, with a foreign pension or account never reported on an FBAR; oil and gas royalty owners in Lea and Eddy Counties whose 1099-MISC income never reached a return; cash-heavy galleries, restaurants, and contractors in Albuquerque and Las Cruces; and crypto traders from 2021 and 2022, now that Form 1099-DA reporting is live. Cannabis is different: the federal practice excludes illegal-source income, and the IRS treats marijuana income that way even where the state has legalized it.

What does the math look like for a Santa Fe gallery owner?

Take a Canyon Road gallery, a single-member LLC, that took $450,000 of art sales in cash and wires from 2021 through 2025 and left them off Schedule C and its New Mexico gross receipts returns: $90,000 a year, with federal income and self-employment tax on the omitted profit of roughly $27,000 per year, $135,000 in all.

Under the current practice, the 75 percent fraud penalty lands on the highest year: $20,250. Under the proposal, 20 percent applies to every year: $27,000. For a domestic case the new regime costs slightly more, exactly the Taxpayer Advocate’s point; its gains are speed and no fraud finding on the record. Foreign account cases can flip: a per-year FBAR penalty near the inflation-adjusted non-willful figure (about $16,500 in 2025) totals roughly $100,000 over six years, against a $300,000 willful penalty on a $600,000 account.

Now the state. At Santa Fe’s combined gross receipts tax rate of about 8.2 percent, the gallery owes roughly $36,900 in GRT, plus New Mexico income tax of roughly $24,000 to $26,500 on the added base income. Outside a managed audit, § 7-1-69 adds a negligence penalty of 2 percent per month up to 20 percent, about $12,000, or 50 percent for intent to evade, about $31,000, plus daily interest. Inside a managed audit, finished on schedule and paid within 180 days, both lines read zero, a bigger swing than the federal old-versus-new difference.

Feature	Federal VDP (current)	Federal VDP (proposed)	NM managed audit
Gateway	Form 14457 Parts I and II	Form 14457, electronic	Agreement via TAP
Years covered	Six	Six	As agreed; limitation waived
Income tax penalty	75% fraud, highest year	20% accuracy, each year	None; interest waived too
Foreign account penalty	50% willful FBAR	Per-year amount, not yet set	Not applicable
Payment deadline	Full pay or installment plan	Full pay within three months	180 days from assessment

Should a New Mexican file the preclearance request now or wait?

It turns on whether the IRS already has your name. Timeliness under IRM 9.5.11.9 ends when the IRS opens an examination or investigation or receives third-party information; a 1099-DA, a whistleblower’s Form 211, or a foreign bank subpoena can each close the door without notice. With an offshore account or a live crypto trail, filing Part I now locks in timeliness; penalty terms follow whatever rules govern when Part II is accepted. For a domestic case with a small highest-year understatement, the single-year 75 percent structure may be the better deal.

What should not happen is a quiet amended return. It buys no criminal protection, and $90,000 of new Schedule C income in each of five years is the pattern classifiers exist to catch. On the state side it starts the 180-day clock under § 7-1-13 with none of a managed audit’s protection, and NMSA 1978 § 7-1-73 makes willfully subscribing a false return a second-degree felony once the tax exceeds $20,000.

What goes wrong when the two disclosures are not coordinated?

The recurring failure is a gap between the federal narrative and the state filings. Part II of Form 14457 states what was omitted; if it says cash sales went unreported, TRD’s GRT case is made, and gross receipts tax never appears on a federal return. A second failure is cash, because the federal three-month full-pay rule and the state’s 180-day rule land within weeks of each other. And the accountant’s point lawyers skip: an amended Schedule C changes self-employment tax, the qualified business income deduction, and current-year estimates, so the 2026 return has to match.

Frequently Asked Questions

Has the new IRS voluntary disclosure program been released yet?

Not as of September 12, 2026. IRS Criminal Investigation published proposed changes on December 22, 2025 and said on August 25, 2026 that the final version was about two months away. Until then the existing practice governs, and early applicants get no guarantee of the new terms.

Does New Mexico have a voluntary disclosure program for back taxes?

No. New Mexico offers a managed audit under NMSA 1978 § 7-1-11.1 instead. The taxpayer signs an agreement with the Taxation and Revenue Department, audits its own records, and owes no penalty or interest if it finishes on time and pays within 180 days.

If I amend my federal return, do I have to amend my New Mexico return?

Yes. NMSA 1978 § 7-1-13 requires a federal adjustments report within 180 days after the final determination date, which for a taxpayer-filed amendment is the day it was filed. New Mexico income tax starts from federal adjusted gross income, so the added income flows straight into the state return.

How far back can the New Mexico Taxation and Revenue Department assess tax?

Under NMSA 1978 § 7-1-18, the general limit is three years from the end of the calendar year the tax was due, six years when a return understates tax by more than 25 percent, seven years when no return was filed, and ten years for a fraudulent return filed with intent to evade.

Will the proposed IRS penalties be lower than the current 75 percent fraud penalty?

Not always. The proposal applies a 20 percent accuracy-related penalty to each of six years instead of 75 percent to the single highest year, so a steady multi-year omission can cost about the same or more. The real savings are in foreign account cases, where a per-year FBAR penalty replaces the 50 percent willful penalty.

Can a New Mexico cannabis business use the IRS voluntary disclosure practice?

Probably not. The IRS practice excludes income from illegal sources, and the IRS treats marijuana income as illegal under federal law even where the state has legalized it. The Taxpayer Advocate asked for a narrower exclusion; the proposal did not deliver one.

How North Star Law Firm Can Help

North Star Law Firm represents individuals and business owners correcting unreported income, unfiled returns, foreign accounts, or digital asset transactions with the IRS, and works with New Mexico-licensed counsel on the Taxation and Revenue Department side, including managed audit applications. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court, and prices the federal and state exposure together before a Form 14457 is filed. The firm’s tax defense practice covers unfiled returns, penalty abatement, and gross receipts tax matters; an earlier post on 2026 FBAR penalty changes covers the foreign account side.

If you are holding years of unreported income and weighing whether to file now or wait, contact North Star Law Firm for a confidential review.

The IRS has spent five years building residency cases against Americans who claimed to have moved to Puerto Rico for its tax incentives, and the campaign has produced grand jury subpoenas, a guilty plea, and a government audit finding that half the recipients never filed the form that announces the move. The details are Puerto Rican; the method isn’t. The New Mexico Taxation and Revenue Department runs the same play against people who kept a house in Santa Fe, a job in Hobbs, or a spouse in Las Cruces while telling the state they now live in Texas. Anyone contemplating that move should study how the federal cases are built, because the state case looks the same.

What has the IRS actually done about Act 60?

Puerto Rico’s Act 60, which consolidated Acts 20 and 22 in 2019, offers bona fide residents a zero percent Puerto Rico tax on gains accrued after the move and a four percent rate on export services income, and because 26 U.S.C. § 933 excludes Puerto Rico-source income of bona fide residents from federal tax, the combined result can approach zero. The IRS opened a compliance campaign on the investor decrees in January 2021 and by July 2023 had identified roughly 100 high-income individuals for potential criminal referral. In June 2025 a Florida investor pleaded guilty to backdating an S corporation election to shield about $30 million in pre-residency gains, with restitution near $15.3 million. In September 2025 a major law firm received a grand jury subpoena for its Act 20 and 22 client files. And in December 2025 the Government Accountability Office reported that of 5,852 investor decrees issued from 2012 through 2024, only about half of the 2021 recipients had filed Form 8898, the statement that notifies the IRS of a move to a territory, and that recipients’ federal tax paid dropped by an average of $127,143. The $1,000 penalty under § 6688 for a missing form is the least of it: an audit turns on proving where the taxpayer was, day by day, and people who skipped the form tend to have skipped the documentation.

How does the federal residency test work?

Under 26 U.S.C. § 937(a) and Treas. Reg. § 1.937-1, a bona fide resident of Puerto Rico must satisfy three tests every year. The presence test is met by 183 days in the territory or by alternatives such as 549 days over three years with at least 60 each year. The tax home test requires the taxpayer’s principal place of business to be there. The closer connection test borrows the factors from § 301.7701(b)-2(d): permanent home, family, personal belongings, voting, driver’s license, banking, and organizational ties. Two features make these audits brutal. A day counts if the taxpayer is present “at any time during the day,” and the IRS rebuilds the calendar from airline records, cell tower data, card charges, and toll transponders. And under § 6501(c)(3), a taxpayer who filed no federal return because he believed all income was excluded has no statute of limitations at all.

How does New Mexico decide who is a resident?

New Mexico taxes residents on all income and nonresidents only on New Mexico-source income, so the definition carries the weight. Under NMSA 1978 § 7-2-2(S), a resident is anyone domiciled in New Mexico during any part of the year, or anyone physically present in the state for 185 days or more, with an exception, for the period after the change only, for a person who moved his abode to another state intending to remain there permanently. The regulation at 3.3.1.9 NMAC defines domicile as the true, fixed home to which a person intends to return after an absence, and lists thirteen factors the Department weighs: homes and how they’re used, time spent in each place, employment, family and children’s schools, prior domicile, other real property, banking, community and religious affiliations, the federal return address, voter registration, licenses, vehicle registration, and where sentimental property is kept. No single factor controls, and a license or voter registration “may be given less weight” than the pattern of living. One detail favors the taxpayer: 3.3.1.7 NMAC defines a day as “any consecutive 24-hour period,” so for the 185-day count, New Mexico, unlike the IRS, doesn’t count partial days.

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What do New Mexico’s own residency cases show?

The Administrative Hearings Office decides these protests, and its decisions read like federal ones. In In re Casanova, D&O No. 22-24 (N.M. Admin. Hearings Off. Nov. 30, 2022), the taxpayer worked full-time in Texas and claimed only ten days in New Mexico, but he kept a New Mexico driver’s license, voter registration, vehicle registration, and a home. The hearing officer counted eight factors pointing to New Mexico against two for Texas, held the taxpayer remained domiciled here, and upheld a $7,239.41 assessment on income earned entirely in Texas. In In re Pauly, D&O No. 21-08 (Apr. 13, 2021), a taxpayer working in Virginia whose spouse stayed in New Mexico kept his New Mexico domicile. It’s the IRS’s Act 60 method: the taxpayer’s story of where he lives is tested against where his family, home, and paperwork say he lives, and the paperwork usually wins.

What does a defensible move from New Mexico to Texas look like?

Consider a Hobbs engineer who takes a Midland job in March. If his spouse and children stay in the Hobbs house and he drives back every weekend, New Mexico treats him as a domiciliary all year and taxes his Midland wages, with no offsetting credit because Texas has no income tax. If instead the family sells or leases the Hobbs house, moves to Midland in March, enrolls the children in Texas schools, gets Texas licenses within the 90 days Texas allows, registers vehicles and votes in Texas, moves the bank accounts and church membership, and files a New Mexico part-year return for January and February, the abode-change exception in § 7-2-2(S) applies and New Mexico’s claim ends in February. Texas offers its own proof: a homestead exemption application under Tex. Tax Code § 11.13 is a sworn statement of principal residence, and since Texas constitutionally bars a personal income tax, there’s no competing return to reconcile. The file that wins a New Mexico audit is the file that wins a federal one: a departure date, a contemporaneous calendar, and every listed factor pointing the same way. The cost of getting it wrong runs for years, because under NMSA § 7-1-18 the Department has three years to assess after a return, six years if income was understated by 25 percent or more, and seven years if no New Mexico return was filed at all, which is exactly the posture of someone who assumed he’d become a Texan.

What traps run in the other direction?

The 185-day rule catches Texans, too. A Dallas couple that spends June through mid-December at a Taos second home is a statutory New Mexico resident for that year regardless of domicile, and New Mexico will tax their worldwide income for the period, with a credit only for taxes paid to other states, of which Texas collects none. Remote workers who moved to Santa Fe while keeping a Texas employer face the mirror image: New Mexico domicile and New Mexico tax on wages a Texas company pays. And a spouse who stays behind anchors the other spouse’s domicile in both the federal and state analyses. Across Puerto Rico, Texas, and New Mexico the thread is the same: a move is a fact, not a filing, and the agencies know the difference.

Factor	IRS (Puerto Rico bona fide residency)	New Mexico (domicile / statutory residency)
Day-count threshold	183 days, or alternatives under § 1.937-1(c)	185 days makes anyone a resident regardless of domicile
How a day is counted	Present at any time during the day	Any consecutive 24-hour period (3.3.1.7 NMAC)
Family location	Closer connection factor	Domicile factor; spouse left behind is often decisive
Licenses, voting, registration	Closer connection factors	Listed factors, but may be given less weight than living pattern
Required filing	Form 8898 in year of move ($1,000 penalty)	Part-year PIT-1 for the year of the move
Limitations if no return filed	Unlimited (§ 6501(c)(3))	Seven years (§ 7-1-18(C))

Frequently Asked Questions

Who is a New Mexico resident for income tax purposes?

Anyone domiciled in New Mexico during any part of the year, and anyone physically present in the state for 185 days or more regardless of domicile. A person who truly moves to another state stops being a resident from the date of the move.

Does getting a Texas driver’s license end my New Mexico residency?

Not by itself. The regulation lists licenses and voter registration as factors but says they may be given less weight than where you live, work, keep your family, and spend your time.

How does New Mexico count days toward the 185-day test?

A day is any consecutive 24-hour period under 3.3.1.7 NMAC, so partial days generally don’t count. The federal Puerto Rico test is stricter and counts presence at any time during a day.

If I work in Texas but my family stays in New Mexico, do I owe New Mexico tax on my Texas wages?

Usually yes. The Administrative Hearings Office has held that a spouse and home in New Mexico keep the worker domiciled here, and there’s no credit because Texas has no income tax.

How long can New Mexico go back to assess tax on someone who claimed to have moved?

Three years after a return is filed, six years if income was understated by 25 percent or more, and seven years if no New Mexico return was filed for the year.

What does the Act 60 enforcement have to do with New Mexico?

The IRS builds Puerto Rico residency cases from calendars, travel records, family location, and paperwork, and New Mexico builds domicile cases the same way. The documentation that survives one survives the other.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico taxpayers in residency and domicile audits before the Taxation and Revenue Department and the Administrative Hearings Office, in IRS examinations involving territorial and foreign residency claims, and in planning a move so the record supports it. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and brings a forensic accountant’s approach to reconstructing the calendars and records these cases turn on. The firm’s tax defense practice handles state and federal audits, its IRS audit defense practice covers the federal side, and its international and expatriation tax practice addresses residency changes that cross national borders. Contact North Star Law Firm before the move, or as soon as the audit letter arrives.

Federal fraud enforcement just got a new command structure, a bigger budget, and a published target list. On August 13, 2026, Assistant Attorney General Colin M. McDonald of the Department of Justice’s National Fraud Enforcement Division issued a memorandum laying out five enforcement priorities and describing a build-out to roughly 500 attorneys and staff, supported by data scientists, asset recovery lawyers, and a nationwide coordination model. New Mexico businesses might assume a Washington reorganization is someone else’s problem. It is not. The priorities the memo names, government program fraud, healthcare fraud, criminal tax enforcement, trade fraud, and corporate misconduct, map almost perfectly onto the New Mexico economy: federal contractors and lab suppliers, rural healthcare providers, small businesses that took pandemic-era loans, and importers moving goods through the border corridor.

What are the Fraud Division’s five priorities?

The memorandum organizes the division’s work around five substantive areas. Public trust and financial integrity covers procurement fraud, bid-rigging, billing fraud, and fraud in grant and benefit programs, expressly including disaster relief and small business support initiatives. Healthcare fraud targets telemedicine schemes, Medicare and Medicaid fraud, kickbacks, and home health and hospice abuse, with an expanded strike force model. Criminal tax enforcement folds tax prosecutions into the broader fraud mission, naming false return preparation, concealed income, and promotion of unlawful tax schemes. Global trade and commerce aims at customs evasion, transshipment, country-of-origin fraud, and undervaluation, run through a cross-agency task force. Corporate misconduct rounds out the list, paired with a promise that self-disclosure, cooperation, and remediation will keep earning credit.

Two themes cut across all five: data analytics as the lead investigative tool, and nationwide coordination that moves cases wherever the evidence sits, including into districts like New Mexico that have not historically hosted large fraud sections.

Why should EIDL and PPP borrowers in New Mexico pay attention?

The first priority’s reference to fraud affecting “small-business support initiatives” is a direct line to pandemic-loan enforcement. Data-driven review is how those cases start: loan files, tax returns, and bank records are cross-matched by algorithm before any human ever opens an investigation. A borrower who overstated revenue on an application, used Economic Injury Disaster Loan proceeds for personal spending, or kept drawing on a loan after the business stopped operating can surface in that matching years after the fact, and the ten-year statute of limitations Congress enacted for pandemic loan fraud gives the government until the mid-2030s on many loans. The practical point is not panic; it is sequencing. A borrower with a problem file should have counsel assess criminal exposure before entering any workout, offer in compromise, or bankruptcy, because each of those processes generates sworn financial disclosures that enforcement teams can read too.

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What does integrated criminal tax enforcement mean for taxpayers?

Housing criminal tax work inside a fraud division changes charging psychology. Prosecutors reaching for familiar tools like wire fraud and false statements alongside the tax crimes in 26 U.S.C. § 7201 and § 7206 can build cases faster and stack exposure higher. The memo’s focus on false return preparation also means preparer investigations, and preparer clients, stay squarely in view; a preparer under scrutiny becomes a roadmap to every return in the office. For a taxpayer whose filings have problems, the traditional pressure valves still work, but they are timing-sensitive. A voluntary disclosure made before an investigation opens is a powerful mitigation tool; the same facts volunteered after a data-analytics referral is a confession. An audit that starts feeling like more than an audit, with duplicative document requests, bank summonses, or questions about intent, deserves criminal-defense attention immediately, before another interview happens.

Which New Mexico industries sit closest to the target list?

Match the memo to the state’s economic base and the overlap is striking. Federal procurement and grant dollars flow through contractors and subcontractors supporting the national laboratories and military installations, exactly where procurement fraud and billing fraud theories operate. Rural hospitals, clinics, home health agencies, and behavioral health providers bill Medicare and Medicaid in a state with among the highest Medicaid enrollment shares in the country, and telehealth billing across New Mexico’s distances is precisely the pattern the strike force model studies. Import-heavy businesses moving goods through the Santa Teresa port of entry inherit the trade priorities, where country-of-origin and valuation cases can be charged criminally rather than handled as customs disputes. And the oil and gas activity in the southeast corner generates the royalty, severance, and depletion complexity that criminal tax teams mine for concealed-income cases. None of this requires wrongdoing to matter: proximity to priority sectors raises the odds of subpoenas, audits, and third-party record demands even for clean businesses.

What should a business do now, before any contact from the government?

Three moves cost little and change outcomes. First, self-audit the files the government would pull: federal loan applications and use-of-proceeds records, healthcare billing patterns, procurement certifications, and the last several years of returns, read the way an analyst would read them. Second, fix what is fixable through the front door, amended returns, repayment negotiations, or voluntary disclosure, while those doors remain open; the memo’s cooperation-credit language applies to companies that find and report their own problems. Third, plan the response before the knock: who accepts a subpoena, who calls counsel, what employees say when an agent appears at the counter. The businesses that fare worst in enforcement waves are the ones improvising on day one.

Fraud Division priority	New Mexico exposure point	First defensive step
Public trust and financial integrity	Lab and base contractors; EIDL and PPP borrowers; grant recipients	Self-audit loan files and procurement certifications
Healthcare fraud	Medicaid-heavy providers, telehealth, home health and hospice	Billing pattern review against strike force data models
Criminal tax enforcement	Cash-intensive businesses, preparer clients, oil and gas complexity	Evaluate voluntary disclosure before contact
Global trade and commerce	Border-corridor importers and logistics operators	Verify origin, valuation, and classification files
Corporate misconduct	Any company with federal touchpoints	Document compliance program and response plan

Frequently Asked Questions

What is the DOJ National Fraud Enforcement Division?

A division created in 2026 that consolidates federal fraud enforcement, with a memorandum issued August 13, 2026 setting five priorities: government program fraud, healthcare fraud, criminal tax enforcement, trade fraud, and corporate misconduct, backed by planned growth to about 500 attorneys and staff.

Are EIDL and PPP loans still being investigated in 2026?

Yes. Fraud affecting small business support and disaster relief programs is an express priority, Congress extended the statute of limitations for pandemic loan fraud to ten years, and data analytics keeps generating new referrals from old loan files.

Does the memo change anything for ordinary tax audits?

The audit process itself is unchanged, but criminal tax enforcement is now integrated with fraud prosecutors who charge tax and non-tax offenses together. Audits showing badges of fraud can escalate faster, which makes early counsel involvement more valuable.

What is voluntary disclosure and when does it help?

It is a structured way to correct past noncompliance before an investigation begins, which generally takes criminal prosecution off the table for a truthful, timely, complete disclosure. Its protection depends on getting there before the government identifies you.

Should a New Mexico business with a clean record do anything?

Yes: know your paper. Priority-sector businesses face more subpoenas and third-party demands even without wrongdoing, so organized loan, billing, and tax files plus a response plan turn an alarming letter into an administrative task.

How North Star Law Firm Can Help

North Star Law Firm represents New Mexico businesses and individuals facing federal financial exposure, from EIDL and SBA loan problems to tax controversies that carry criminal risk. Phillip Zagotti, JD/CPA, pairs legal defense strategy with the forensic accounting these data-driven cases are built on, and sequences resolution work so that sworn disclosures help rather than hurt. The firm’s tax defense practice covers audit defense and unfiled return correction, and its bankruptcy practice evaluates whether restructuring belongs in the plan at all once enforcement risk is assessed. Contact North Star Law Firm for a confidential review before the government’s analysts review the file for you.

The IRS does not need a tip to open a tax preparer investigation. It needs a pattern. Every paid-preparer return carries a preparer tax identification number (PTIN), and when returns filed under one PTIN show statistically unusual credits or refund rates, the preparer — not just the clients — becomes the target. For New Mexico’s small-market preparers serving working families in Albuquerque’s South Valley, immigrant communities in Las Cruces, and ranching country to the east, a PTIN-level anomaly triggers trouble on two fronts: compounding per-return civil penalties and a criminal track running in parallel. The preparer’s clients get pulled in too. This post addresses both audiences.

How does the IRS decide to investigate a tax preparer?

Preparer investigations begin with data, not door knocks. The IRS matches third-party information returns — Forms W-2, 1098, and 1099-K — against filed returns, then scores each return under the discriminant index function (DIF), which compares it to statistical norms for similar filers. A high DIF score on one return means little. But aggregated across a PTIN — one preparer’s clients disproportionately claiming the earned income credit, or reporting Schedule C losses that zero out tax — the pattern puts the preparer’s number on a list.

Much of it is invisible to the preparer: revenue agents audit a sample of client returns filed under the PTIN, interview those taxpayers, and may summons bank records before ever contacting the preparer. By the time an examination notice arrives, the Service often holds a statistical case built from dozens of client files — and in New Mexico, where one storefront may serve much of a community’s EITC-eligible filers, those sample audits sweep local families into examination before anyone understands why.

What civil penalties can the IRS assess against a tax return preparer?

The core preparer penalty statute is 26 U.S.C. § 6694. Section 6694(a) imposes the greater of $1,000 or 50 percent of the fee derived from the return for an understatement caused by an unreasonable position — generally, an undisclosed position lacking substantial authority. Section 6694(b) escalates to the greater of $5,000 or 75 percent of the fee for willful conduct or reckless disregard of rules. Both apply per return — the book of business is the multiplier.

The volume penalties live in 26 U.S.C. § 6695. Most — unsigned returns, unfurnished copies, unretained client lists — are modest and capped annually. The dangerous one is § 6695(g), the due-diligence penalty covering the earned income credit, the child tax credit, the American opportunity credit, and head-of-household status: $650 per failure for returns filed in 2026 under Rev. Proc. 2024-40, with no annual cap.

The arithmetic is sobering. A Las Cruces preparer who files 200 EITC returns in one season without completing and documenting Form 8867 due diligence faces 200 failures at $650 — a $130,000 assessment. And each covered benefit on each return is a separate failure: if those 200 returns also claim the child tax credit and head-of-household status, the count triples to 600 and the exposure reaches $390,000 — on returns that may have generated $150 apiece in fees, before any fraud question is even asked.

How do civil and criminal preparer investigations run in parallel?

First, determine who is asking. An IRS revenue agent signals a civil examination; an IRS Criminal Investigation (CI) special agent means the government is considering prosecution. The tracks are practically intertwined: a civil examiner who develops firm indications of fraud must suspend the exam and refer the matter to CI, so a routine-looking audit can be an eggshell exam — every document produced and explanation offered remains available to prosecutors later.

The criminal workhorse is 26 U.S.C. § 7206(2), which makes it a felony to willfully aid or assist in preparing a return that is false as to any material matter — punishable by up to three years and a $100,000 fine, with each false return a potential count. Separately, 26 U.S.C. § 7216 criminalizes knowing or reckless disclosure or misuse of client return information.

On the civil side, the Department of Justice can sue under 26 U.S.C. § 7407 to enjoin specific conduct — or, where a preparer has “continually or repeatedly” violated the statute, to bar the person from preparing returns entirely — while 26 U.S.C. § 7408 reaches promoter conduct and violations of Circular 230, the practice rules at 31 C.F.R. part 10. The Office of Professional Responsibility can separately censure, suspend, or disbar a practitioner, and the Service can suspend the PTIN itself — a de facto shutdown order.

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What should a New Mexico preparer do after an IRS or DOJ contact?

Read every notice for who sent it, what periods it covers, and what it demands, and run a statute-of-limitations analysis before producing anything — the scope of a request telegraphs the government’s theory. Retain counsel before responding: the instinct to clear things up with an examiner is precisely how civil admissions become criminal exhibits.

Counsel should then run a parallel investigation: pull the engagement letters, intake forms, Form 8867 files, and client correspondence for the flagged years; identify the statistical aberrations the Service likely saw; and quantify the potential tax loss, which drives both penalty negotiations and criminal sentencing exposure. Two operational questions need early answers: whether to keep preparing returns — repeating disputed positions can look like willfulness, while a mid-season shutdown harms clients — and how to communicate with clients without violating § 7216 or creating discoverable statements.

Does accountant-client privilege protect you in a preparer investigation?

Far less than most preparers assume. The federally authorized tax practitioner privilege, 26 U.S.C. § 7525, extends attorney-client-style confidentiality to tax advice from CPAs and enrolled agents — but only in noncriminal matters before the IRS and noncriminal federal tax proceedings. Once an investigation turns criminal, the privilege evaporates — and return preparation itself is generally not privileged advice at all.

The solution comes from United States v. Kovel, 296 F.2d 918 (2d Cir. 1961): the defense attorney — not the client — engages an accountant to assist in rendering legal advice, wrapping the accountant’s work inside the attorney’s privilege so the defense can reconstruct returns and quantify tax loss without creating a subpoena target. Critically, the preparer’s longtime accountant is usually the wrong Kovel accountant — that person may already be a fact witness. Counsel who holds both a law license and CPA training can run this analysis inside the privilege from day one.

What should you do if your tax preparer is under IRS investigation?

Your preparer’s misconduct does not excuse your returns. In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court held that reliance on an agent is not reasonable cause for a late filing — the duty to comply is nondelegable. The signature on Form 1040 is yours, and the IRS routinely audits an expanding circle of a targeted preparer’s clients, often through correspondence audits covering two or three open years at once. Even an innocent victim owes the corrected tax plus interest.

Penalties are a different fight. Boyle distinguishes clerical duties from substantive judgment: you cannot delegate the obligation to file, but good-faith reliance on a professional’s substantive advice can be reasonable cause abating accuracy-related penalties — if you gave the preparer complete information and reviewed the return within your competence. A taxpayer who never saw fabricated Schedule C losses has a genuine defense; one who signed a return showing a business they never operated does not. Get your file back, have the flagged years independently reviewed, and if returns went unfiled, address that before the IRS does — the firm’s guide to unfiled tax returns in New Mexico maps that path. And do not let the preparer who caused the audit represent you in it.

Authority	Conduct	Exposure	Who bears it
§ 6694(a)/(b)	Unreasonable position; willful or reckless conduct	Greater of $1,000/50% of fee; $5,000/75% of fee, per return	Preparer
§ 6695(g)	EITC/CTC/AOTC/HOH due-diligence failures	$650 per failure (2026 filings), no annual cap	Preparer
§ 7407 / § 7408	Repeated violations; Circular 230 breaches	Injunction up to a total bar from preparing returns	Preparer
§ 7206(2)	Willfully aiding false returns	Felony: 3 years and $100,000 per count	Preparer
Circular 230 / OPR; PTIN action	Practice misconduct	Censure, suspension, disbarment; PTIN suspension	Preparer
Audit adjustments and accuracy penalties	Incorrect returns filed under targeted PTIN	Tax, 20% penalty, interest across multiple years	Client

Frequently Asked Questions

Will I be audited if my tax preparer is under IRS investigation?

Quite possibly. The IRS builds preparer cases by auditing samples of returns filed under the preparer’s PTIN, expanding the sample when it finds problems. Clients commonly face correspondence audits covering multiple open years and remain liable for corrected tax and interest even when the errors were entirely the preparer’s doing.

Can I avoid penalties by blaming my tax preparer?

Sometimes — but only penalties, not the tax. Under United States v. Boyle, the duty to file and pay is nondelegable. Good-faith reliance on a professional’s substantive advice can abate accuracy-related penalties if you gave the preparer complete information and had no reason to know the return was wrong.

What is a Kovel arrangement and why does it matter?

A Kovel arrangement is an engagement in which a defense attorney hires an accountant to assist in providing legal advice, extending attorney-client privilege to the accountant’s analysis. It matters because the § 7525 practitioner privilege does not apply in criminal matters.

How much is the EITC due-diligence penalty in 2026?

For returns filed in 2026, the § 6695(g) penalty is $650 per failure. Each covered benefit on each return is a separate failure, and there is no annual cap, so one high-volume season can produce six-figure exposure.

Should a preparer keep filing returns while under investigation?

Get counsel’s input immediately. Continuing to file returns with the positions under examination can supply evidence of willfulness, while stopping abruptly harms clients. Many preparers tighten intake and documentation, decline high-risk returns, and continue compliant work while the matter proceeds.

How North Star Law Firm Can Help

North Star Law Firm handles preparer penalty examinations, due-diligence audits, and parallel IRS investigations for clients across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — and represents taxpayers audited because of their preparer’s conduct. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court under Circular 230; his combined legal and accounting background allows privileged reconstruction of the numbers driving these cases. The firm provides IRS audit defense, help with unfiled tax returns, and broader federal tax defense strategy. If the IRS or DOJ has contacted you — as a preparer or as a client — contact North Star Law Firm for a free consultation.