United States: Illinois’ Amnesty Program: Pay Now And Save Later

Illinois has responded to the state’s enormous budget deficit with a generous amnesty program designed to generate a rapid cash flow for fiscal year 2003. The program’s approach features an enormous incentive—the elimination of all accrued penalties and interest for eligible tax liabilities—coupled with the threat of doubled interest and penalties for persons who fail to take advantage of amnesty. The program will run for only six weeks, from October 1, 2003 to November 17, 2003.

The amnesty program will apply to any tax administered by the Illinois Department of Revenue, other than the Motor Fuel Tax. Taxpayers can obtain amnesty for any tax deficiency that arose from January 1, 1983, until July 1, 2002. Payment of back taxes during the amnesty period eliminates all accrued penalties and interest and affords immunity from any criminal prosecution. Any person with a tax liability is eligible unless that person is already the subject of a criminal investigation or is involved in litigation with the state for the nonpayment of taxes. However, those litigants can become eligible for the elimination of penalty and interest by agreeing to resolve the tax issue in the state’s favor and pay the tax. The consequences for persons who are eligible to participate in amnesty, but fail to do so, are a doubling of the penalty and interest that would otherwise be owed on the unpaid tax liability.

Amnesty applies to every tax administered by the Illinois Department of Revenue except the Motor Fuel Tax. Amnesty also applies to taxes that are imposed by local governmental units so long as those taxes are administered by the state. Examples of these taxes are the Chicago Soft Drink Tax and the Home Rule Retailer’s Occupation Tax.

The amnesty program applies to eligible taxes due between January 1, 1983 and July 1, 2002. Any liability that arose before or after that period is not eligible for the amnesty program. For example, the Retailer’s Occupation Tax (commonly referred to as the "sales tax") is normally due for taxpayers on a monthly basis. Thus, liabilities based on receipts received after June 30, 1983, are eligible. The eligibility period runs for every month through June 2002. Liability arising from receipts received on or after July 1, 2002 are not eligible. For income taxes, the taxable period is the taxable year. Calendar year taxpayers can participate in the amnesty program for taxes arising from income earned or received on or before December 31, 2001. Liabilities based on income received after January 1, 2002, are not eligible. Fiscal year taxpayers can participate in the program for all years ending after June 30, 1983, but not for any taxable year ending on or after July 1, 2002.

A person who is eligible for amnesty, but does not pay the tax under the program will face doubled interest and penalties after the program’s November 17, 2003, conclusion. The doubling of the interest and penalties will apply without regard to the taxpayer’s knowledge of the liability. For example, a liability for taxable year 2000 income tax that is established during an audit conducted in 2004 will be increased by double the amount of penalty and interest that would otherwise have been applied.

Amnesty only applies to "tax liabilities." Thus, if the only amount owed to Illinois is an unpaid penalty, for example for a late filed income tax, that amount could not be paid under amnesty. Also, the state’s claim against a corporate officer resulting from an unpaid corporate tax liability is technically a penalty equal to the amount of the unpaid corporate tax. Since the officer’s liability is a penalty, it cannot be paid under amnesty. However, as a practical matter, the corporation could pay the tax under the amnesty program and, thereby eliminate its liability along with the basis for imposing the liability against the corporate officer.

Taxpayers can participate on a selective basis. A taxpayer with multiple potential liabilities can select one or more but less than all of those liabilities for payment under amnesty. Although the statute that created the program states amnesty will be available to a taxpayer who pays all taxes due, the Department of Revenue has interpreted that language as applying to tax types owed for specific tax periods. For example, assume a taxpayer has been audited and issued an assessment for income tax for taxable year 2000. The taxpayer believes that it has a use tax liability for a purchase made in October 2001. If a taxpayer believes that the income tax assessment is incorrect, it may contest that assessment without jeopardizing its ability to pay the October 2001 use tax liability under the amnesty program. Additionally, a taxpayer can elect to pay a liability under a specific tax type for one year, but reserve the right to contest its liability for the same tax for other years. However, taxpayers cannot contest liability on an issue by issue basis.

Not every taxpayer is eligible for the amnesty program. Those who are now the subject of a criminal investigation cannot participate. Additionally, persons who are involved in a lawsuit in any circuit or appellate court for the nonpayment of any tax imposed by Illinois law are not eligible for amnesty.

A person involved in pending litigation can become eligible for the program by stipulating to judgment in favor of the state during the October 1 through November 17, 2003 period and paying the amount of tax in controversy. If the litigation involved is a protest monies action, in which the taxpayer has paid the tax, penalty and interest involved at the beginning of the suit and sued for its return, the taxpayer can recover the interest and penalty paid by agreeing to a dismissal of the lawsuit and the payment of the tax amount to the state. Because a litigant is not eligible for amnesty, the statute’s provision for imposition of double interest and penalty on those who failed to participate in amnesty does not apply. Since the litigant was never "eligible" for amnesty as to the amount involved in the law suit, it could not have failed to participate in amnesty and, thus is not subject to the increase in penalty and interest applied to those who could have, but failed to, participate in the program.

The litigation ban does not apply to persons who have protested an assessment and are involved in a case before the Department of Revenue’s Administrative Hearings Division. Persons in administrative hearings who ultimately lose their case will be subject to the double penalty and interest provision. The department’s emergency regulation states that a person involved with an administrative hearing may participate in a program by stipulating to judgment in favor of the department and paying the amount of tax in dispute between October 1 and November 17.

The litigation ban applies only with respect to the specific tax type and tax period that is involved in the litigation. Thus, a taxpayer who has a court case challenging an assessment of income tax for 1995 may participate in amnesty for income taxes owed for any year other than the year involved in the court case or for any other tax the Department of Revenue administers.

Persons who have already entered into settlement agreements with the state are not eligible for amnesty with respect to the settlement. For example, a taxpayer who had executed a settlement agreement in July 2003 that compromised a disputed income tax assessment for the years 1999 through 2001 for 50 percent of the tax, together with interest, cannot delay payment until October 1, 2003, and then simply pay the compromised amount of tax alone, without interest, under the amnesty program.

The Illinois Department of Revenue will send out notices to persons that it believes may be eligible for amnesty. This group would include anyone with an outstanding liability, or who is currently under audit or who has an audit scheduled to begin within the next few months. Additionally, the department will contact persons whose accounts with the department show outstanding liabilities. However, if the department fails to contact a taxpayer, the taxpayer cannot later use that failure as an excuse for avoiding the increased penalties and interest that apply to those who fail to participate in amnesty. The taxpayer must send a payment to the department, together with the correct return for the type of tax plus, if possible, a schedule showing the tax and the period for which amnesty is being sought. Any payment during the amnesty period will be considered to have been made under amnesty. Payments must be physically received during the amnesty period or be postmarked by the U.S. Postal Service during the period.

Payments can be made by cash, check, guaranteed remittance or electronic payment. The department will allow, on a case-by-case basis, the use of overpayments to offset underpayments. It will also allow, upon application, the use of refunds that have been finally approved to pay the deficiencies for which amnesty is being sought.

The amnesty payment must include all tax owed for the tax type in question for the period for which amnesty is sought. The department will not accept partial payments nor will it agree to a periodic payment plan. Any payment under amnesty requires that the taxpayer forego its right to contest the liability that is being paid. Thus, a taxpayer who pays an amount under amnesty cannot later seek a refund or protest the department’s denial of any refund that is filed. The election to make the amnesty payment is final. Once the payment is made, the taxpayer cannot decide to withdraw from the program. The only exception to the prohibition on claiming refunds is with respect to liabilities arising from changes in the taxpayer’s federal income tax liability. A taxpayer is eligible for amnesty on amounts that arise because of federal changes. If the taxpayer is under federal audit, it can and—to avoid the double interest provision—it must, estimate the amount of the liability that will arise from the federal change. If the finalized federal audit results in a decrease in the Illinois liability paid under the amnesty program, the taxpayer may file a refund claim for the overpayment. If the taxpayer is uncertain as to the amount it may owe for a given tax type, it can make a good faith estimate and pay that amount. The department will eventually review the taxpayer’s liability for the period for which the payment was made. If the department determines that it was an underpayment and if the statute of limitations is still open, it will send the taxpayer a bill for the amount of the underpayment and provide an opportunity to pay the underpayment, together with double penalty and interest on the amount of the underpayment, without jeopardizing the amnesty available for the amount that was paid as part of the good faith estimate. However, if the taxpayer fails to pay the additional amount billed within the period specified, then the payment of the estimated amount is ignored and double interest and penalties will be demanded for the entire claimed liability. If the taxpayer’s good faith estimate is determined to be an overpayment, the department will credit the amount of the overpayment. The determination of an overpayment is at the department’s discretion.

The amnesty program affords a solution to taxpayers who have been concerned about the liabilities built up by mistaken reporting positions over the years. These taxpayers have not been eligible for Illinois’ voluntary disclosure program that is limited to non-filers. These liabilities for the 20-year amnesty period can be resolved for the tax amounts alone. The Department of Revenue has apparently taken the position that an applicant for voluntary disclosure cannot participate in the amnesty program. The rationale is that amnesty requires payment of all taxes due for the 20-year amnesty period while the voluntary disclosure program limits the liability to four years.

The amnesty program offers a unique opportunity to dispose of old liabilities and to escape accumulated interest on admitted deficits. While Illinois is thus paying dearly for the anticipated flow of cash during the fall of 2003, taxpayers who fail to take advantage of amnesty will also pay a steep price if they must ultimately pay the doubled penalties and interest that will be assessed for taxes that could have been paid under amnesty.