It arrives as a letter or email from the Illinois Department of Revenue—A Notice of Audit Initiation for Illinois ST-1 sales tax returns. You’re thinking, “wait a minute, my business isn’t even located in Illinois, why is the Illinois Department of Revenue auditing me??!?” Or maybe you just registered your out-of-state business to start collecting & remitting Illinois sales tax because of increased sales to Illinois, and then you get an audit notice just a few months later. You think, “why are they auditing me already?!?”
Even if your business is not located in IL, even if you have no employees, contractors, inventory, or any other connection to Illinois, if you make $100,000 in sales or more in a calendar year to IL customers, you owe IL sales tax.
This may seem cruel, but I primarily see these audits initiated within a few months of out-of-state businesses registering for IL sales tax for the first time. When an out of state retailer registers for IL sales tax, IL Dept of Revenue now has all of your contact information and knows that you have Illinois sales, and they do not trust that you registered at the exact moment you met the threshold. So they audit you to determine the exact start date that your IL sales became subject to IL sales tax, and they make sure they collect back to the exact day you met the threshold.
What happens during an Illinois sales tax audit for an out-of-state retailer? First, you will receive a Notice of Audit Initiation, then you receive contact from an IL Auditor. They will ask you to an initial interview and ask you to fill out a questionnaire with general information about your business like what your hours of operation are, what records you keep, etc.
Eventually the IL Dept of Revenue is going to ask for your federal tax return to determine your total sales, and your sales data divided into IL sales and non-IL sales likely back several years. If the total income on your federal return and your total sales data match, IL Dept of Revenue generally accepts your Illinois sales numbers provided and assesses IL tax based on those numbers. If they don’t match, the IL Dept of Revenue will assume the difference is taxable IL sales unless you can prove they are not.
Then the IL Dept of Revenue will assess a penalty on any underreported tax, and you will want to fight that penalty. In general, reasonable cause is the standard for abating penalties. In my experience, the goal is write out all of the ways you attempted to comply with Illinois sales tax laws even if you ultimately fell short of full compliance.
If you don’t agree with the results of the IL sales tax audits, you have several opportunities to appeal.
And if you need an experienced Illinois attorney to help your business navigate the Illinois remote retailer sales tax audit process, set up a consultation with Urban Tax Law to review your case.