Overview of IL Tax-Related Penalties and Penalty Abatement
The Illinois Department of Revenue (DOR) assesses tax penalties to taxpayers who fail to file or pay tax liabilities. In this article, we will discuss two common tax penalties associated with delinquent taxpayers. There are two tax penalties taxpayers should know about along with how interest accrues on any unpaid balance.
Late-Filing (or Nonfiling) Penalty
The DOR will assess a penalty to individual taxpayers who do not file on time or fail to file. The IL DOR refers to this penalty as the Late-filing (or Nonfiling) Penalty. If a taxpayer timely files a tax return but DOR cannot process it and the taxpayer does not correct it within 30 days (for tax returns due after December 31st, 1995) from the date the state notifies them, taxpayers can also face a late-filing penalty.
The DOR assesses the tax penalty when the taxpayer fails to file by the due date, including extensions. Specifically, the tax penalty is the smaller of $250 or 2% of the tax required to be shown due on the return and lowered by timely payments or credits. The former applies to tax returns due January 1st, 2005 to current. If the taxpayer does not file a return “within 30 days after receiving a notice of nonfiling” the DOR will assess an “additional penalty equal to the greater of $250 or 2% of the tax shown due on the return without regard to timely payments.” The additional penalty will not exceed $5,000. The DOR will assess the tax penalty even if the taxpayer has no balance.
If a taxpayer fails to pay taxes owed on time, the IL DOR will assess a Late-Payment Penalty. The DOR will assess this penalty if the taxpayer does not pay their taxes by the due date of the tax payment or the original due date of the return without regard to extensions. The DOR bases the penalty on the number of days the tax required to be shown due on the return is late. If the payment is 30 days late or less, the penalty is 2%. If the payment is greater than 30 days late, then the tax penalty is 10%.
The penalty is 15% on any amount the taxpayer doesn’t pay after the “initiation of an audit or investigation” of the taxpayer’s liability. It is 20% of any amount the taxpayer does not pay within “30 days after the issuance of an audit-prepared amended return or Form IL-870, Waiver of Restrictions at the conclusion of the audit or investigation.”
If the taxpayer incurs a penalty for underpayment of estimated taxes or accelerated tax, the “tax amount that this penalty is assessed on is subtracted from the total tax.”
Taxpayers who fail to pay state taxes owed to the State of Illinois will incur interest charges. The DOR assesses interest the day after the taxpayer’s payment due date until the date the taxpayer pays the tax. Interest is simple interest using a daily rate that the state updates twice a year (1/1 and 7/1). The state beginning January 1st, 2014, uses the federal underpayment rate. Before the previous date, the IL DOR assessed interest differently. Moreover, after January 1st, 2001, the DOR no longer charges interest on penalties. The current interest rate or “underpayment rate” for the period for which delinquent tax goes unpaid accrues at a rate of 6% (6/30/2019).
As one can see, the tax penalties and interest can add up. Therefore, even if a taxpayer cannot pay the taxes owed, they should still file. Filing a tax return and make a partial payment will lessen the impact of penalties.
Illinois allows taxpayers to appeal penalty assessments by filing a petition to the Board of Appeals (BOA). Taxpayers can find the petition form for filing a penalty appeal request with the Board here. Taxpayers can petition the BOA once their liability has become final. In other words, “all administrative hearings, Tax Tribunal decisions, and court proceedings to review the assessment have ended or the time for taking such action has expired.”
The BOA will only consider penalty abatement for reasonable cause. IL makes determinations of reasonable cause on a case-by-case basis.
Examples Provided of Reasonable Cause
The DOR provides examples of reasonable cause for purposes of abating tax penalties:
- “If a liability results from amendments made by the DOR to regulations or formal administrative policies or positions after which the liability was computed was filed.”
- Reasonable cause may exist based on severe illness of the taxpayer (or the tax preparer), incapacity, or death. It may also exist if a death or serious illness to an immediate family member caused a late filing or payment. “In the case of an estate, trust, or corporation, the death, incapacity, or serious illness happened to the individual with sole authority to file the return (not the individual preparing the return) or make the deposit/payment, or a member of such individual’s immediate family.”
- “An unavoidable absence of a taxpayer (or tax preparer) due to circumstances unforeseeable by a reasonable person may also constitute reasonable cause for
purposes of abatement of the penalty.” With an estate, corporation, or trust, etc., “the absence is due to the individual having sole authority to file the return (not individual preparing it) or make the deposit/payment.”
More Examples of Reasonable Cause
- The taxpayer was unable to obtain records necessary in a timely fashion for reasons beyond the control of the taxpayer.
- Factors beyond the taxpayer’s control. For example, “destruction by fire, other casualty or civil disturbance, of the taxpayer residence or place of business records.”
- “Taxpayer mailed the return or payment to the Department in time to reach the Department on or before the due date, given the normal handling of the mail. However, through no fault of the taxpayer, the return or payment was not delivered within the prescribed time period. This fact situation would constitute reasonable cause for abatement of the penalty.”
- If the taxpayer makes honest mistakes. For example, such as mailing a check to the wrong tax agency.
- An Illinois appellate court decision, a U.S. appellate court decision, or an appellate court decision from another state (provided that the appellate court case in the other state is based upon substantially similar statutory or regulatory law) which supports the taxpayer’s position will ordinarily provide a basis for a reasonable cause determination.
- The IL DOR provided erroneous information or it delayed a process under its control.
- “Taxes withheld by an employer for the wrong state.”
- “Embezzlement or employee fraud not reasonably within the knowledge of the taxpayer.”
Relevant Factors the BOA Considers With Penalty Abatement
The DOR provides that the BOA should consider the following pertinent factors of determining the existence of reasonable cause:
- “Could the taxpayer’s federal filing status have caused confusion about his or her Illinois filing requirements?” Under Illinois law, many taxpayers without an IRS filing requirement may need to file with the DOR.
- “Does the taxpayer’s reason address the penalty assessed?” For example, say DOR assessed the taxpayer a late payment and late filing penalty for the same return. “The taxpayer’s explanation of the failure to file and pay may apply to one penalty, but not the other.”
- “Does the length of time between the reason cited and the actual violation support abatement? If the taxpayer cites a specific event or set of events (e.g., illness, unexpected absence, or natural disaster) or set of events that led to the imposition of the penalty, the Department will determine whether those events are directly related to the return or payment under review.”
- Could the taxpayer have reasonably anticipated the event cited? Was the event one the taxpayer should have anticipated? For example, a vacation or scheduled absence. “[O]r was it unexpected, unavoidable, or otherwise unplanned (e.g., an emergency or disaster).”
- Did the taxpayer exercise prudence and ordinary business care? “In the absence of new or unusual circumstances, most filing and payment requirements are common knowledge or are readily available to most taxpayers. If the taxpayer did all that could be reasonably expected of him or her and was still unable to file or pay on time, reasonable cause may be present.”
The procedures and filing information for submitting a petition with the BOA seeking penalty abatement relief, work in the same manner as those for an Offer-in-Compromise.
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Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. Therefore, for specific help regarding your tax situation, contact a licensed tax professional or tax attorney.