What to Expect If You Don't Pay Illinois Sales Tax

Falling behind on sales tax payments is easy, and it happens to a lot of businesses. Technically, businesses don't pay sales tax. Instead, they collect it from their customers and hold it "in trust" until they send it to the state. But it's easy for the sales tax to get mixed into the general fund and used for other purposes – especially if you have tight profit margins or you're in an area with a high sales tax rate. 

For example, consider a business in Chicago where the sales tax rate is 10.25%. If you have $10,000 in sales, you collect $1025 in sales tax. So, after the sales, $11,025 goes into your bank account. You're supposed to send the $1025 to the Department of Revenue, but unfortunately, if you don't track things closely, it can easily get absorbed and used for other expenses. 

That can lead to significant problems – not paying sales tax can lead to penalties, collection actions, and potentially personal liability for the unpaid tax. To protect yourself, you need a tax professional who understands Illinois's sales tax problems and how to get back into compliance. To find help now, use TaxCure to search for a tax professional experienced with the IL DOR.

Key takeaways

• Failure to pay sales tax leads to penalties ranging from 2% to 20% of the unpaid tax.
• The IDOR can use involuntary measures (tax liens, garnishments, seizures) to recoup unpaid sales tax. 
• You may face personal liability for unpaid sales tax.
• There are payment plans and other relief options for taxpayers who get behind. 
• An Illinois tax pro can help you get back into compliance.

Why is unpaid sales tax so serious in Illinois

The state takes unpaid sales tax extremely seriously for several reasons:

• State budget – sales tax covers about 20% of the state's budget.
• Trust fund tax – you don't pay sales tax. You collect it from customers and remit it to the state. If you don't play your role as the "middleman" correctly, the state sees it as if you stole those funds from your customers and/or the state.
• Continued issues – if you don't pay sales tax but continue to operate, you're likely collecting more tax that you're not going to pay. The state wants to get in front of that and prevent the situation from escalating. 

If you've ever fallen behind on personal income tax payments, you may have noticed that the state took a while to reach out to you. The IRS takes even longer to reach out about unpaid income taxes. However, sales tax and other trust fund taxes are a lot different. Even if you're a small business with a relatively small balance due, you may get a visit from a revenue officer and intense scrutiny from the department. 

Common reasons for falling behind on sales tax payments

Often, businesses fall behind because the collected sales tax gets mixed into the general fund and used for operational expenses or spent by the owner for personal use. However, businesses may also fall behind due to:

• Not applying the correct sales tax rate – they collect too little during the sale and find out they owe more when they file their returns.
• Not knowing they have nexus, so not collecting anything – remote sellers who don't realize they have nexus in Illinois may fail to collect any sales tax, but if the DOR discovers the issue, they'll be on the hook for the uncollected tax. 
• Missed filings – not filing your returns on time can lead to penalties and interest that can quickly make the balance overwhelming and difficult to pay.
• Unexpected liabilities due to sales tax audits – if you're selected for an audit and the auditor determines that you didn't report your sales tax correctly, you may face a tax liability as well as interest and penalties. 

Regardless of why you've fallen behind, be aware that the Department takes the situation very seriously, and reach out to talk with them about solutions or contact an Illinois tax professional for help as soon as possible. 

What happens if you owe sales tax in Illinois?

If you owe sales tax in Illinois, the Department will send you several notices demanding payment. They will also add penalties to your account, and eventually, they will attempt to collect the balance due without your involvement, which includes tax liens, garnishments, and asset seizure. The state can also take away your business license and hold you personally liable for the unpaid tax.

Penalties for unpaid sales tax

The IDOR assesses penalties for both filing and paying late.

• Late filing penalty – If you file late, the initial penalty is the lesser of 2% of the unpaid tax or $250. For example, if you owe $10,000, the penalty is $200. If you owe $20,000, the penalty is $250. 
• Penalty after non-filing notice – Once the state sends you a non-filing notice, you have 30 days to file, or you incur an additional penalty of the greater of 2% or $250. So, if you owe $10,000, the penalty is $250, but if you owe $20,000, the penalty is $400.

There are also late filing and underpayment penalties ranging from 2 to 20% as follows:

• Any late payment – 2%
• 31 or more days late – 10%
• Payments made after the start of an audit – 15%
• Amounts not paid within 30 days after an auditor changes your return – 20%

For instance, let's say you owe $10,000 in sales tax and you file a day late. Your penalty is $200. Now, imagine that you don't pay for two months, your penalty increases to $1000. However, if you haven't paid by the time the DOR contacts you about an audit, the penalty increases $1500. If the auditor changes your return and you still haven't paid, there's a penalty of $2000. Obviously, the more you owe, the higher these penalties can get. Interest also accrues on the unpaid balance. 

Penalties make it extremely hard to get caught up, which is why it's critical to stay in compliance whenever possible. However, penalties are just the beginning – if you accrue a larger unpaid balance, you can face much more serious consequences. 

What if I don't file a sales tax return?

If you don't file, Illinois will assess penalties against you. The state will demand that you file a return, and if you don't, they may file one on your behalf to start the assessment and collection process. Failure to file sales tax returns can lead to the loss of your business license, meaning that you may lose the right to do business in Illinois. 

What if I file but forget to collect sales tax?

Then, you'll be forced to pay the same amount in tax, even though you didn't collect it. Illinois's sales tax rules are a bit different from most other states. When you file, you note your gross receipts (total taxable sales) and you calculate tax due based on the sales. Then, you effectively get a credit for the sales tax collected, and you end up paying the sales tax you received from your customers. 

However, in cases where you failed to collect, you don't get the credit, but the return still shows that you owe money based on your gross receipts. That set-up allows the state to protect its financial interests in cases where business owners fail to collect sales tax. 

How the IDOR collects sales tax from uncooperative businesses

If you don't pay, the state can use the following strategies to collect the tax without your cooperation: 

• Tax liens – the state's legal claim to your business's assets. Filed in the county where you do business and attaches to all of your business assets, making it very difficult to sell or transfer assets, and giving the state the right to move forward with seizure.
• Bank account seizures – this is one of the most common types of asset seizures for both the state and the IRS. 
• Asset seizures – the IDOR can take most of what your business owns for unpaid taxes. 

The state can also hold you personally liable for the tax. If that happens, they can file liens and go after your personal assets as well. 

Why can Illinois hold you personally liable for unpaid sales tax?

IL state law dictates that the state can hold individuals personally liable for a business's unpaid sales tax. The law is written like that because these are trust fund taxes, meaning they are collected from one party (the customer) and held in trust until they're paid to another party (the state). In contrast, the state typically cannot hold you personally liable for unpaid corporate income tax – that's almost always exclusively the problem of the business itself.

How to resolve unpaid Illinois sales tax

If you're behind on your sales tax obligations, the first step is to file an unfiled returns. Then, contact the Department or work with a tax attorney to set up the following types of arrangements.

• Installment agreement – the IDOR will typically accept payment plans on up to $5000 in unpaid sales tax. For higher debt levels, you will need to submit additional paperwork.
• Offer in compromise – you may be able to settle for less than owed, but typically, only in severe financial situations or if there's a dispute over the amount owed.
• Penalty abatement – if you pay in full or set up payments, request penalty abatement to help reduce how much you owe.

In all cases, it's critical to be proactive and reach out to the Department or hire a tax professional at the first sign of a problem. 

What to do if you receive a notice about a lien or levy

Notices of liens or levies indicate that the issue has escalated. At this point, you need to reach out, or your assets will be at risk. The state can seize assets, but even worse, they may be able to padlock your business and prevent you from operating. 

That can disrupt your ability to earn money and hurt your reputation. A padlocked business is not a private affair – anyone who drives up to your business will see that's happening. 

Get help with unpaid sales tax now.

If you're dealing with unfiled returns or unpaid sales tax, you need a tax pro who's experienced with Illinois tax problems. Use TaxCure to start your search – look for pros, read reviews, and find the best fit for your unique tax problems. State tax problems require specialists, and we make it easy to find someone with experience. 

FAQs

What happens if I collect sales tax but don't send it to the state?

The Illinois DOR will add penalties to your account based on the amount reported or collected. If you refuse to pay, they will seize your business assets, assess the tax against you personally, and go after your personal assets.

Will the Illinois Department of Revenue shut down my business?

Yes, the IDOR may shut down your business if you fail to meet your sales tax obligations. They can also revoke your sales tax permit, effectively preventing you from operating.

Can I negotiate a lower amount with IDOR?

Yes, if you can show limited income and assets, you may be able to negotiate a lower settlement that you owe. This can be very difficult, and potentially impossible, if your business is still operating. 

What if I can’t afford to pay all the tax I owe?

Then, contact the DOR about setting up payments, asking for penalty relief, or exploring other options.

Can I go to jail for unpaid sales tax in Illinois?

Only if tax fraud or evasion is involved. You will not face jail time for inability to pay your taxes.