Illinois: Consequences of Back Taxes and Tax Relief Options
The Illinois Department of Revenue (the “DOR”) has the job of collecting all the state’s taxes. It includes the income tax as well. Once taxes become due either because of an audit assessment or due to the taxpayer filing a tax return without paying any tax due, the DOR will send a collection notice to the taxpayer. If the taxpayer does not respond to the letter by the due date, the DOR will begin enforced collection activities. These actions may include a tax lien placed on assets, a bank account levy, or wage garnishment. It can also include the seizure of personal property and revocation or suspension of business licenses, and the utilization of collection agencies. Therefore, it is essential for taxpayers with taxes owed to proactively resolve their outstanding tax liabilities.
Tax Relief Options for Illinois Back Taxes
Taxpayers who owe delinquent income taxes to the State of Illinois have four standard options available to reach a reasonable resolution. These are:
- Installment Payment Plan – An Installment Payment Plan is a monthly tax payment plan. In other words, an arrangement where the taxpayer reaches an agreement with the DOR to make a series of monthly payments until the taxpayer pays their taxes in full (including penalties and interest).
- Offer-in-Compromise (OIC) – An OIC is an agreement where the taxpayer agrees to settle their taxes owed by paying a lump sum in settlement of the entire tax owed. In other words, the taxpayer pays less than they owe.
- Penalty Abatement – It is a request by the taxpayer asking the DOR to reduce or eliminate tax penalties assessed.
- Innocent Spouse Relief -A request by a taxpayer who filed jointly with their former spouse or current spouse and believes their spouse has the sole responsibility for paying the tax liability.
You can find more information about each option discussed by following their respective links above. However, taxpayers can find innocent spouse relief details and other options below.
Innocent Spouse Relief
Illinois offers Relief from Joint Liability for taxpayers who filed joint returns but should not be held liable for their spouse’s delinquent taxes. Generally, spouses who file a joint return for a tax year are each responsible for paying the entire joint tax liability no matter who generated the income. One exception to this rule is achieved through one spouse requesting Innocent Spouse Relief (ISR). With ISR, one spouse may avoid paying the joint liability when the other spouse is responsible for failing to pay the tax shown due on a joint income tax return or for failing to report all taxes due.
Taxpayers can apply for Innocent Spouse Relief if:
- the taxpayer filed a joint return with their spouse for a tax year,
- at the time the taxpayer signed the joint tax return, they did not know their spouse “omitted income, claimed false deductions or credits, or otherwise prepared a fraudulent return; and”
- the taxpayer believes “the sole responsibility for paying the tax liability belongs to their spouse”
Documents Need for Innocent Spouse Relief Request
To request Innocent Spouse Relief taxpayers must complete Form IL-8857, Request for Innocent Spouse Relief. Taxpayers must complete it for each year in which the taxpayer requests relief. The taxpayers must attach the following to their request:
- A copy of original U.S. and Illinois income tax returns
- A copy of any amended U.S. and Illinois income tax returns
- Any final determination of the taxpayer’s federal or Illinois tax liability that was received. This includes any grant or denial of innocent spouse relief, and
- Any other supporting documentation that would assist in determining eligibility
- A copy of U.S. Form 8857, Request for Innocent Spouse Relief, if the taxpayer also requested relief from the IRS
The taxpayer seeking ISR has the burden of proof in establishing that they are not liable for the taxes owed. Once the DOR has received the Innocent Spouse Relief request, they will send a notice to the other spouse listed on the joint return for the tax years at issue. The notice will state that a taxpayer filed a request for innocent spouse relief. At this point, the other spouse has 60 days from the date of the notification to submit documentation or additional information that may assist the DOR in coming to a determination. It is important to note that while the other spouse has the opportunity to submit documentation, they will not be allowed to otherwise participate in the proceedings.
Once the DOR Decides
Once the DOR has made a determination, they will send a notice to both spouses stating the effects of the proceedings on each spouse’s joint return liability. An innocent spouse may have a claim for refund for any overpayment that resulted from the granting of innocent spouse relief. There is no limitation period for making an “innocent spouse” election. However, the DOR will not issue a refund of taxes paid by a spouse making the election unless the taxpayer files the election within the applicable period for filing a claim for refund of income taxes.
If the taxpayer has already received Innocent Spouse Relief from the IRS, the validity of the innocent spouse request is conclusively presumed to be correct.
Taxpayers should mail the completed form IL-8857, along with supporting documentation to:
Illinois Department of Revenue
Problems Resolution Division
PO Box 19014, Springfield, IL 62794.
Statute of Limitations
Taxpayers should understand their legal rights concerning Illinois law regarding the statute of limitation rules for the collection of unpaid taxes. In Illinois, the general collection statute of limitation is 20 years from the date of assessment. However, the 20 years may be reduced if one of the following applies:
- The DOR filed a tax lien
- The Attorney General entered a judgment
- Certain other enforcement actions were used
Other Options That May Be Available
Challenge the Assessment
Taxpayers can appeal a proposed assessment to the Independent Tax Tribunal if they have a proposed assessment for additional income taxes owed from the result of a State audit and the amount of tax is $15,000 or higher. The taxpayer can file the petition online here. If the taxpayer does not come to a resolution with the Independent Tax Tribunal, the taxpayer can appeal to the Illinois Circuit Court.
Taxpayers may want to consider bankruptcy if they have notable personal liability in addition to taxes owed. Bankruptcy is usually expensive. Furthermore, it can lead to taxpayers still owing taxes after the bankruptcy comes to a close. In other words, the taxpayer may not eliminate some taxes through bankruptcy proceedings. Therefore, taxpayers who owe want to consider it should reach out to an experienced bankruptcy attorney.
The Illinois Tax Amnesty Program
Illinois has a history of offering tax amnesties. The last tax amnesty program offered by the State took place in 2019. A Tax Amnesty Program offers taxpayers a way to reduce or eliminate some or all penalties and interest in exchange for getting into filing and payment compliance. Currently, Illinois does not have one of these programs open. However, delinquent taxpayers should be aware that these types of programs exist and check to see if the state currently has one active.
However, Illinois does offer a Voluntary Disclosure Program. To participate, you must reach out to the DOR before they contact you about an audit, tax assessment, or investigation. Then, you submit a voluntary disclosure application. If the state accepts your application, you only have a four-year lookback period, meaning that you only have to file four years of missing returns. You also don't incur any penalties.
As discussed herein, the DOR has a Board of Appeals that was established as a unit within the DOR to be responsible for the review of Penalty Abatement requests and Offer-in-Compromise requests. The decisions of BOA cannot be appealed. Therefore, they are final, leaving requesting taxpayers with denials very few options.
Alternatively, as a practical tip, the taxpayer should not hesitate to raise controversial issues to a DOR supervisor. Often, a new representative and the authority and experience of a supervisor can help resolve tax issues.
The DOR will only release a tax lien after:
- they have received confirmation that the past due liability has been paid in full or
- satisfied via an approved Offer-in-Compromise payment.
Consequences of Not Paying Taxes in Illinois
If you don't pay your taxes when you file your tax return, the Illinois Department of Revenue will send you a bill. The agency will also send you a bill if you made a mistake on your tax return and you owe additional tax. The first bill explains how much you owe, and it outlines your rights. If you don't pay your tax by the due date, the department will send additional notices, but it will also start collection actions against you. Here's what can happen if you don't pay taxes in Illinois.
Illinois State Tax Liens
A tax lien secures the state's interest in your unpaid tax debt. The lien is for the amount of your past due taxes plus interest and penalties, and it attaches to all of your real and personal property. A lien can make it very difficult to sell or take loans against your assets. Once issued, it stays in place for 20 years. Typically, the lien does not show up on your credit report, but it is a public record so lenders will find it when they search for you. Additionally, if you try to sell your assets, buyers will see that there is a lien against your assets.
Asset Seizure for Unpaid Illinois Taxes
The Illinois Department of Revenue can also seize your personal and business assets. The department must give you a 10-day notice before a seizure. If you don't pay in the 10-day time frame, the state can take your assets. Then, it must hold them for 20 days before auctioning them off. However, if you have perishable assets such as food inventory from a restaurant, the state can auction those assets off within 24 hours of the seizure.
Asset and Wage Levies in Illinois
When you have unpaid taxes in Illinois, the IL DOR can also levy your assets and wages. Levy is another word for seizure. The state may garnish your wages, or it may seize the funds in your bank account. Bank account seizures may take the funds in your checking or savings accounts as well as CDs, interest from insurance policies, contractual payments, interest on bonds, or rent that your tenants owe you. Once a levy has occurred, it can be difficult if not impossible to remove. For best results, you should reach out to an Illinois tax pro before a levy takes place.
Personal Liability for Business Taxes
In Illinois, the state can hold you personally responsible for business taxes. The liability may apply to business owners partners, officers, and anyone responsible for filing and paying sales and withholding taxes.
Loss of Sales Tax Certificate
If you have unfiled sales tax returns or delinquent sales taxes, the state can revoke your sales tax license. This makes it impossible to make taxable sales. If you continue to make sales, you may be charged with a Class A misdemeanor. The Department of Revenue can also post a notice on your business premises that you have unpaid sales tax and that it is illegal for your to operate.
Liquor License Revocation
Similarly, the state can also revoke your liquor license. This can happen if you don't pay sales tax or other business taxes such as Illinois state withholding taxes. Once you have lost your license, you will not be able to buy inventory -- it's illegal for wholesalers, brewers, and manufacturers to deliver products to businesses that don't have a valid liquor license.
Loss of Other Illinois Business Licenses
Failure to pay business taxes in Illinois can also lead to other penalties. In particular, you may lose your lottery license, your corporate charter may not be renewed, and the Secretary of State may not renew your dealer's license. In other words, not paying your taxes can make it impossible to operate your business.
Offset for Back Taxes in Illinois
The IL DOR also uses offsets to collect back taxes. That means if you file a state tax return with a refund, the state can keep your refund and apply it to your tax bill. If you owe taxes in Illinois but not to the IRS, the IRS will send your federal refund to the IL DOR.
The IL DOR can also refer your delinquent tax bill to a collection agency. In this case, you will owe the tax, interest, and penalties, but you will also incur all of the collection agency fees. Additionally, the state can put your name on a delinquent taxpayer list, and in some cases, the state may even send a collector to your home or business.
Get Help With Illinois Back Taxes
Taxpayers have many different options to resolve unpaid taxes with the State of Illinois. With that said, Illinois has up to 20 years to collect past-due liabilities. It has much longer than most other states and the federal government to collect. Additionally, taxes owed can become quite large quickly because of associated penalties, interest, and collection fees. Therefore, taxpayers should contact a licensed tax professional or tax resolution firm to determine which option(s) to pursue. To connect to a tax professional with Illinois DOR experience, visit this link today, or start your search below.
Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.