By far the most common type of audit I see from the Illinois Department of Revenue (“IDOR”) are sales tax audits. There are two primary types of sales tax audits: auditing the sales of Illinois businesses that sell tangible personal property, and auditing out-of-state businesses that sell tangible property to Illinois customers and meet criteria to be charged Illinois sales tax (sometimes called “sales tax nexus”).
What is the process for Illinois sales tax audits?
All Illinois sales tax audits follow the same general process. First, an Auditor from IDOR is assigned and sends a Notice of Audit Initiation that identifies what type of tax is being audited, the length of time (or “period”) that is under audit, the Auditor’s contact information, and a Preaudit Questionnaire. These letters are typically followed up with an “Audit Information Document Request” outlining the documents and information the Auditor needs to complete their review.
The most common documents the Auditor asks for are bank statements, 1099-K Forms, federal tax returns, POS reports or sales invoices, and any documentation used to prepare your ST-1 sales tax returns. Depending on the responses, the Auditor may issue additional Audit Information Document Request letters asking for other documents.
The Auditor will use these documents to calculate the amount of additional sales tax due for each period. If documentation is missing or incomplete, the Auditor will use estimates to determine your taxable sales. These estimates are important to review carefully because their estimates are usually not taxpayer favorable and are one of easiest areas to dispute on appeal (discussed in more detail later).
If you expect the Auditor will find underpaid sales tax, and you believe you can demonstrate “reasonable cause” to explain the underpayment, you can submit a written statement outlining why you should not be charged the negligence penalty (20%) or fraud penalty (50%).
When the Auditor finishes their calculations, you will receive additional letters from the Auditor including a Notice of Proposed Audit Results, Audit Summary Analysis Report, and Penalty Computation Summary. If you agree with the results, the Auditor will send you an Auditor’s Report that you can sign to close the audit. If you do not agree with the results, you have several rounds of appeal rights that you can exercise.
Can I appeal the results of an Illinois sales tax (ST-1) audit?
Yes, there are several opportunities to appeal the Auditor’s determinations including Fast Track Resolution, Informal Conference Board, and the Illinois Independent Tax Tribunal. The first appeal option is Fast Track Resolution. Along with the first set of documents with proposed tax due received from the Auditor, you will also likely receive a document titled “Notice of Eligibility Tax Liability for Illinois’s Audit Fast Track Resolution Program.” Fast Track Resolution is a very useful tool for appealing any part of the Auditor’s findings that you do not agree with or that you believe are overstated.
What is Illinois’s Audit Fast Track Resolution Program (“FTR”)?
FTR is IDOR’s expedited appeal process that allows you to challenge any part of the Auditor’s determination and negotiate a settlement with IDOR. You can challenge the method the Auditor used to calculate underpaid sales tax, assumptions made by the auditor, penalties, or anything else. FTR will review your case and could concede certain issues or offer you a settlement for any issues raised. FTR is an excellent option for resolving issues both quickly and favorably, but FTR only gives you 20 days from the date of your Notice of Eligible Tax Liability for Illinois Audit Fast Track Resolution Program to apply for consideration from FTR. And if you miss the deadline this option is forever closed.
If you do not apply for FTR or your FTR appeal rights expire, the Auditor will eventually send a Notice of Proposed Liability. You have 60 days from the date on this letter to exercise your next set of appeal rights by filing an ICB-1 with Illinois Informal Conference Board (“ICB”).
What is the Illinois Informal Conference Board (“ICB”)?
Appealing to the Illinois Informal Conference Board (ICB) is a more formal appeal process for disputing Illinois tax assessments. You have 60 days from the date listed on any of the following documents to file for ICB consideration: Notice of Proposed Liability, Notice of Proposed Deficiency, Notice of Claim Denial, or Notice of Proposed Liability and Claim Denial. To file for ICB consideration you must prepare and timely submit form ICB-1.
The ICB is a board of three high ranking members from IDOR that reviews the audit file and the ICB-1 submission and makes a determination. They do not hold a trial or hearing before making their decision, they decide purely based on the documents in the file and the arguments presented by the taxpayer in the ICB-1 form. If they decide that any adjustments are warranted, the case is sent back to IDOR audit bureau and new Notice of Tax Liability is issued.
Can a decision from the ICB be appealed?
Yes. There is one more venue to appeal—the Illinois Independent Tax Tribunal (“Tax Tribunal”). To receive consideration from the Tax Tribunal, a petition must be filed within 60 days of receipt of the Notice of Tax Liability, there must be more than $15,000 at issue, the disputed tax must be unpaid, and there is a $500 filing fee. If the Notice of Tax Liability is older than 60 days, the Illinois Independent Tax Tribunal also has a process to apply for a Late Discretionary Hearing—but such hearings are not guaranteed. For cases before the Tax Tribunal, there is an opportunity to negotiate with IDOR attorneys assigned to the case, or a chance to present your case to a judge and receive consideration for your arguments and, ultimately, a final decision on the audit.
IDOR provides multiple opportunities to appeal proposed tax assessments from an audit. It’s important to be well apprised of each of the various options to give yourself the best chance at a favorable resolution to your Illinois sales tax audit.