State & Local Tax Blog

Why You Recently Received an Illinois Sales Tax Audit Notice

Received an audit notice from Illinois? You’re not alone. We’re seeing a large increase in new Illinois sales tax audits. In this blog, we’re going to discuss why it might be happening, what it means for your business and what you should do about it.

We’re starting to notice a pattern here…

At this point, many of our clients registered in Illinois have received an audit notice from the state. There doesn’t seem to be a certain type of business being targeted by these audits. It’s several businesses that are registered in Illinois.

It seems that Illinois is looking at registered companies to see if they established nexus earlier than they registered. And that makes sense. The state has that information and auditing those businesses can help them recover some revenue in those uncollected taxes.

On its face, it seems like this only affects businesses registered with Illinois. But there are still implications here for businesses that aren’t registered.

Illinois Economic Nexus Legislation

To start to understand what’s happening here, we first need to look at Illinois’ economic nexus legislation, which went into effect on October 1, 2018, a little over three years ago (that date will be important later on).

Their legislation is a bit strange compared to the other states. Most other states are dropping the transactions threshold in favor for a revenue only threshold. But Illinois still maintains a threshold of $100,000 in revenue OR 200 transactions for remote sellers establishing economic nexus in the state.

The threshold isn’t the only thing a bit wonky about Illinois. Their threshold lookback period is also a bit confusing in that it’s a rolling 12-month total. When determining if you have nexus in Illinois, you look back at the previous completed month and then the 11 months before that to see if you meet either the $100,000 in revenue or the 200 transactions in the state thresholds.

Why is Illinois Auditing Aggressively Now?

We can only speculate as to why this is happening now since we aren’t privy to internal state discussions and decision-making. But there are a couple of things that line up here that may explain why Illinois is being so aggressive with their audits all of a sudden.

#1) Statute of Limitations

It’s been three years since the economic nexus legislation went into effect, and the statute of limitations in Illinois is also three years. So, the state has naturally found a look-back period cycle, and it could be earmarked in the budget to start pursuing this revenue more aggressively.

Which leads us to the second contributing factor…

#2) Illinois is Usually on a Tight Budget

The state of Illinois has a reputation for being a bit strapped for cash. For years now, they have not issued refunds for tax over-payment. Instead, they’ll issue a credit memo that you can use against future returns.

And it’s interesting how the use of those credit memos has played out. For manufacturers and people selling wholesale who may have overpaid on their taxes, that memo is useless to them since they don’t file returns. As a result, they can sell that refund to another company for maybe 90 cents on the dollar, and that credit memo can be transferred to the buyer’s company for them to use towards their returns.

But back to the audits – being strapped for cash can really be a motivator for any state to start cracking down on audits. Going back to find all those companies that should have registered earlier can churn up a new stream of revenue for the state.

Overall, Illinois is a bit of an oddball from a sales tax perspective. A lot of the ways they impose and change tax legislation is slightly different than most other states. Staying compliant in Illinois can be challenging, and whether you’re trying to do it yourself or not doing anything about it, you’re liable to make a costly mistake.

So, What Can You Do About It?

If you’ve received that audit notice (or even if you haven’t) you have options on how to proceed.

A lot of it comes down to your own unique situation – amount of business done in Illinois, your company’s possible exposure and your risk tolerance.

Prepare for your Audit

First, if you’ve received one of these audit notices, now is the time to start preparing for that audit. Make sure that your files are in order and be prepared to ask questions about the scope and procedure. We’ve outlined a lot of what you need to do here.

Enter into a Voluntary Disclosure Agreement

If you aren’t registered in Illinois, and you haven’t received a notice yet, you may want to consider a Voluntary Disclosure Agreement (VDA) depending on the material amount of your possible exposure.

These anonymous agreements are great for avoiding possible penalties and interest on owed taxes, provided you are accurate about how long you’ve been out of compliance. If you enter a VDA and withhold information, you could be in for even more penalties.

Register Prospectively

If you’re not registered in Illinois, this development may make you a bit antsy. You might be wondering now if you should be registered in Illinois. Now, you can go back and look at your sales and make the determination to register before you establish nexus and cover your bases. This can be a good decision for a lot of businesses.

But it’s also a double-edged sword.

What if you register and the state then finds out you needed to register earlier? Remember that Illinois is auditing registered companies to see if they should have registered earlier. If you register prospectively now, you’re liable to have information uncovered by the state that could show you should have been registered earlier.

We want to stress – talking to a sales tax professional is so important with all these actions.

And we don’t mean talking to a “sales tax rep.” We want you to talk to a sales tax practitioner, someone who knows the nuances of state sales tax and nexus from state to state, and someone who can talk you through the pros and cons of each action you take.

Conclusion

What’s going on with Illinois right now is a perfect example of why talking to a state sales tax expert is paramount. You never know when states will start cracking down on audits or change their legislation. This sort of thing can happen in any state at any time.

But if you’re compliant where you need to be and talking with a sales tax professional, you can be ready for any change or challenge that comes along.

Got a letter from Illinois? We can help. Let’s chat on a “What’s Next?” call to find out how to proceed.

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