Voluntarily Disclose for unreported and Under reported Illinois sales tax
By: Mansoor Ansari, Chicago Tax Attorney
Title 86 Part 210 Section 210.126 Voluntary Disclosure
Most business owners are honest, hardworking people that fully intend to make the money back in a few weeks or possibly catch up with next month’s sales tax return. Before long, a taxpayer can find itself several months or even years behind in making tax payments. Other business owners in certain industries intentionally skim sales taxes by using money collected to allow for lower, more competitive prices. Eventually, business picks back up and the business does not feel the need to truthfully file sales tax returns or remit the correct amount of Illinois sales tax to the Illinois Department of Revenue (“IDOR”). In other circumstances, the business would like to faithfully remit the appropriate amount of sales tax to the state, but it does not want to significantly increase its sales reported on the sales tax return for fear of raising the dreaded audit flag. Stuck between the preverbal rock and a hard place, the business usually chooses the route of not doing anything and continues its practice of not reporting sales tax accurately. Eventually, the business is audited which turns into a large civil assessment with penalties and interest or in the extreme case criminal liability, which can equate to jail time.
If this sounds like your business, what can you do? One obvious alternative is to fix the problem going forward. Of course, there is the risk of raising an audit flag, however, correctly reporting and remitting sales tax starting today eliminates the problem going forward and mitigates the ticking time bomb of a large or even criminal tax exposure. While there is a running 3 year statute of limitations and the problem is solved prospectively, it does not eliminate past issues. Another alternative that can be used in isolation or along with the planning technique or reporting correctly going forward is Illinois’s Voluntary Disclosure Program. The program gives the taxpayer the chance to voluntarily step forward and admit to past misbehavior usually without being penalized by the state. If you have not been previously contacted by the state IDOR, then there is a way to disclose unpaid tax liabilities and even remit sales tax previously collected but not remitted. The program covers any tax administered by the IDOR, which includes communication services tax, corporate income tax, documentary stamp tax, estate tax, fuel tax, gross receipts tax, tourist development tax, sales and use tax, and unemployment tax. Further, as long as sales tax collected and not remitted is not the issue, the IDOR only looks back three years which cuts off any potential infinite liability for an unregistered taxpayer. For taxes collected but not remitted, it has been our experience that the IDOR will usually only look back three years in these situations as well.
The Voluntary Disclosure process is completed by providing the IDOR with a detailed explanation that your company made a mistake with specifics about each month’s sales and collections, if any, over the previous three years. Even if the business is unsure as to the exact amount of tax owed, we can file a Voluntary Disclosure and ask for additional time to calculate the exact amount. It is worth noting that unregistered companies are also required to register as a condition to the voluntary disclosure of tax liability.
Many of our clients file Voluntary Disclosures because they realize a manager or prior partner as not handling the sales tax collection and remittance process correctly. Other clients learn that their competitors are being audited by the IDOR and they want to come clean now rather than suffer through the sleepless nights waiting for their audit notice. Whatever the reason, the Voluntary Disclosure Program is an excellent avenue to put a looming tax liability to bed. Further, it gives taxpayers who collected and did not remit an avenue to step forward admit wrongdoing and take jail time off the table. In our experience, many taxpayers find the experience helpful in relieving the stress of an imminent tax assessment hanging over its head.
It is also noteworthy that in exchange for voluntary disclosing and paying past tax liabilities and interest, the IDOR agrees to waive all penalties, unless the taxpayer collected and did not remit tax. If there were taxes collected but not remitted, the IDOR generally imposes a 5% penalty, which is often a much more attractive alternative than having the fear of 50% penalties or jail time weighing on the shoulders of the business owner.Amidst the current state tax climate in Illinois, the Voluntary Disclosure program is an exceptional way for a taxpayer who learns of wrongdoing to come forward to pay the tax, avoid the penalties, and put unneeded stress to bed once and for all. While it doesn’t happen for every client, we have more often than not seen the IDOR was 100% of the penalties even for collected but not remitted cases. Now more than ever, the Department has detailed third-party information that makes it more difficult for a business to avoid its responsibility of accurately calculating, collecting, and remitting state tax. For example, the IDOR now has detailed third party reports for any business that purchases alcohol or tobacco related products. This has made convenience stores, liquor stores, bars, and restaurants prime targets for audit. As they have had for a while, the IDOR also has detailed reports from the DMV which can bury a car dealer or the like who fails to properly charge, collect, and remit tax on its sales. As technology progresses and the information flow becomes closer to limitless with each passing year, the odds of a business escaping its state tax obligations become less and less. The question as to whether a company will be audited and caught from wrongdoing has become more of a question of when rather than if. Therefore, we highly recommend if you have an outstanding tax obligation to put behind you, the Voluntary Disclosure Program may be an extremely viable alternative.