Illinois Tax Amnesty Signed Into Law . . . Again

Yes, quite surprisingly. Amnesty is available for a taxpayer owing "any tax imposed by" Illinois law and "collected by the Department," and the TDAA does not distinguish between tax debt unknown to the Department and a tax debt the Department assessed and finalized but that remains unpaid. Pay the tax amount during the October 1 through November 8 amnesty period, and you may forget the penalties and interest. The Department's 2003 Emergency Regulations for the TDAA did not foreclose this reading of the TDAA for the 2003 amnesty program, but had they done so, it appears that position is directly contrary to the broad language of the TDAA that remained unchanged in SB 377.

It depends.

No, if the liability is being contested through criminal or civil litigation in the court system.

Yes, if the liability is being contested through an administrative protest or hearing before the Department.

The New Amnesty Law renders ineligible for amnesty any taxpayer who is a party to criminal or civil litigation involving a tax year otherwise eligible for amnesty. Fortunately, because such taxpayers are not eligible for amnesty, they also will not be exposed to any doubling of interest and penalties for not taking advantage of amnesty if the litigation concludes unsuccessfully for them.

However, "civil litigation" does not encompass taxpayers who have an administrative protest and hearing request pending before the Department on a Notice of Tax Liability (sales/use and excise taxes) or a Notice of Deficiency (income taxes). Such taxpayers are eligible for amnesty and so they will see their penalties and interest doubled by operation of law if they don't participate in the amnesty program before it ends November 8.

Yes. From October 1, 2010 through November 8, 2010, a taxpayer may file amended returns reporting additional liability for any open period, even if the period is under audit, and pay only the tax estimated to be due, and avoid paying penalties or interest on that amount.

If the estimate is higher than the eventual audit determination, a taxpayer forfeits the overpayment, but a taxpayer may still seek a refund of overpayments related to issues other than those that generated the liability paid under amnesty.

If the estimate is lower than the eventual audit determination, a taxpayer will be subject to interest and penalties on that deficiency at 200 percent of the otherwise applicable rates.

Yes. As was the case with the TDAA amnesty program last administered in October and November 2003, the Department will accept anticipatory reports of a "federal change"
(an increase in Illinois liability resulting from a final adjustment of federal tax liability). However, unlike the case with the 2003 TDAA amnesty program, taxpayers who would rather not participate in the amnesty program and who will follow the usual reporting and payment deadlines of the Illinois Income Tax Act (the "IITA")—even though these may fall after the 2010 amnesty period—will not be subjected to penalties and interest at 200 percent of the otherwise applicable rate (versions of the bill before it was sent to the governor did not offer this protection). A taxpayer choosing to make an anticipatory payment during amnesty will avoid interest on that amount. If the taxpayer later reports the federal change, any additional amount it may owe at the time the change is reported will bear interest and applicable penalties at the standard statutory rates. If such a taxpayer overpays tax relating to a federal change during the 2010 amnesty program, it may seek a refund of the amount overpaid during the amnesty period.

Yes.

However, there is an interesting twist for remote vendors who have not filed returns and remitted use taxes for purchases made by Illinois customers.

Gov. Quinn also signed SB 459, a separate amnesty for individuals who owe use taxes on purchases from unregistered remote vendors that will run from January 1, 2011 through October 15, 2011. For tax periods starting after June 30, 2004 through December 31, 2010, such taxpayers may report use tax liability on such purchases from unregistered remote vendors on their Illinois personal income tax returns, so long as the liability does not exceed $600. Query whether such remote vendors have an incentive to participate when they may be unjustly enriching the state if their Illinois customers also participate in the special amnesty under SB 459.

Yes. Taxpayers who have a protest to an assessment pending in administrative hearings can participate in the amnesty program if they surrender their due process right to contest the assessed liability and instead pay the assessed tax and interest during the October 1 through November 8 amnesty program. However, taxpayers with cases in the administrative hearings process that are not prepared to surrender their due process rights will increase their exposure for penalties and interest, as these will be imposed at 200 percent the otherwise applicable rate if the tax liability remains unpaid after November 8, 2010, and they are unsuccessful in their protest. Some of these taxpayers may seek to fall within the exclusion by attempting to have those cases removed to Circuit Court (by paying the amounts under protest using the State Officers and Employees Money Disposition Act) and, thus, avoid doubling of penalties and interest. We expect the Department to vigorously oppose such attempts, as the Department views the administrative protest and protest payment suits as an election of remedies question, such that the initial choice of one remedy renders the other unavailable.

We also expect the Department to oppose efforts by taxpayers under audit, who have not yet received a notice of deficiency or notice of tax liability, to short-circuit the audit process by paying the estimated liability for their audit under protest and starting a civil action seeking a refund of the protested payment. One appellate decision involving the 2003 amnesty program allowed a taxpayer, who had received an audit report but who had not been issued a notice of tax liability, to pay the anticipated assessment under protest and file an action in circuit court before the Department issued a notice of tax liability, thus avoiding the administrative hearings process. However, the decision is very narrowly tailored to the facts of that case and may not offer support for similar efforts by differently situated taxpayers.

Some taxpayers who are not eligible for amnesty because the amnesty-eligible tax year is pending in civil litigation may be able to make themselves eligible. Taxpayers that paid disputed assessments under protest pursuant to the State Officers and Employees Money Disposition Act have nothing to pay under amnesty, but they also do not face exposure to doubling of penalties and interest. However, taxpayers who are appealing an unfavorable administrative hearing decision by the Department (such appeals are made to the first judicial level, the circuit court), and for whom abatement of penalties and interest is an acceptable resolution of their case, may be able to voluntarily dismiss their actions and pay the tax amounts under amnesty from October 1 through November 8. Discussions with the attorney general's office and the Department may be necessary to obtain the necessary comfort level before dismissal of the action, since administrative review cases involving taxes cannot be reinstated after dismissal, as is allowed for a limited time for other cases.

Taxpayers under audit (including in Informal Conference) or in the administrative hearings process need to promptly consult with knowledgeable Illinois tax counsel and take steps to avoid doubling of penalties and interest by operation of law when the amnesty period closes November 8, 2010. Reed Smith is advising clients with procedural options specific to their situation.