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Come Clean with Illinois Use Tax!

The Illinois Department of Revenue (IDOR) has initiated an aggressive approach to collect unreported use tax. Taxpayers who IDOR believes have unreported use tax are being contacted and allowed to "voluntarily report" their past due use tax liability within 60 days. Participating in this program and paying all Illinois use tax and interest owed for the past four years will prevent IDOR from assessing penalties for these years. In addition, any use tax, interest and penalties for the fifth and sixth prior years will be forgiven.

What is use tax?

Use tax is imposed on use, storage or other consumption of tangible personal property purchased at retail in Illinois. Generally, sales tax (Retailer's Occupation Tax) is paid to suppliers when goods are purchased. However, if the supplier does not charge sales tax, the taxpayer is responsible for self-assessing use tax on taxable purchases. The Illinois use tax rate is 6.25%, even though Illinois vendors might be required to charge you a higher tax rate, which could include local rates.

Why would taxpayers owe use tax?

There are many reasons why taxpayers might incur use tax. The most common examples include the following:

• Internet purchases
• Purchases of inventory (items purchased for resale) that are subsequently removed from inventory and used as samples
• Purchases of promotional items such as pens or T-shirts
• Items purchased outside Illinois where the purchase is taxed at less than 6.25% (the Illinois use tax rate). For example, if computers are purchased and picked up outside Illinois and the vendor charges a 5% sales tax, an additional 1.25% would be due to Illinois.

How will Illinois find unreported transactions?

IDOR is matching its income and withholding tax databases to its sales and use tax databases. By doing this, businesses that are paying income tax or withholding Illinois income tax from employees, but are not filing use tax returns, will be identified and contacted by IDOR. IDOR is currently sending letters to these taxpayers offering voluntary disclosure because it believes it is highly unlikely that a business would never incur use tax.

Moreover, IDOR has unofficially stated that it intends to contact individuals with incomes over $1 million and encourage them to voluntarily file use tax returns.

These measures are in addition to programs such as searching customs records and obtaining information on Illinois-destined shipments from Internet retailers.

What is voluntary disclosure?

If a taxpayer files Illinois use tax returns and pays the applicable tax and interest under voluntary disclosure, IDOR will limit the look-back period to the last four years and forgive penalties. Typically, IDOR requires nonfilers to make payments of tax, penalties and interest for the past six years.

What if the "nice" letter is ignored?

If IDOR identifies a taxpayer as a nonfiler, it may conduct an audit and assess tax, penalties and interest for unreported use tax for six years. The difference? Penalties and two extra years of tax and interest. And don't forget sales tax audits are extremely intrusive.

What about local use tax?

If a taxpayer is located in Chicago, the taxpayer might owe Chicago use tax (1%) in addition to Illinois use tax. The Chicago Department of Revenue also offers a voluntary disclosure program with which we are very familiar.

What now?

We highly recommend taking advantage of the Illinois voluntary disclosure program, and we can assist you with every step of the process. We generally find that taxpayers need the most assistance in estimating their liabilities.

For further assistance, please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.