Is Your Time Really Up?
What options do taxpayers have when the protest period for an unfair tax assessment has expired?
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
Mr. Smith comes to you one day with a notice of tax liability or of deficiency issued by the Illinois Department of Revenue. Although the 60-day protest period is up, Mr. Smith has a good reason to counter it. can it still be challenged?
Under Section 200.175(a) of the Illinois Department of Revenue’s rules for the Administrative Hearings Division, a taxpayer can seek a “late discretionary hearing” for a Notice of Tax Liability under Sections 4 or 5 of the Retailers' Occupation Tax (the "ROT"), and any tax in which these ROT Sections are incorporated by reference. (Generally these provisions are incorporated into the various excise taxes.)
What’s more, Section 908(d) of the Illinois Income Tax Act provides that “the Department, at any time before such assessment is reduced to judgment, may (subject to rules of the Department) grant a rehearing (or grant departmental review and hold an original hearing if no previous hearing in the matter has been held) upon the application of the person aggrieved.”
In other words, Mr. Smith may have a fighting chance.
Procedurally, a taxpayer is required to make a request to the Department's Chief Administrative Law Judge for a late discretionary hearing in the case of sales and excise taxes, and a rehearing in the case of the Illinois Income Tax Act. A copy of the Notice of Tax Liability or Notice of Deficiency should be attached to the request, along with the reason(s) the taxpayer failed to protest the Notice within the statutory time period.
While the Department hasn’t broadcast standards for evaluating rehearing requests, taxpayers may wish to follow the same standards used by the Department in evaluating penalty abatement requests based on reasonable cause. For example, Section 700.400(e)(2) of the Department’s Uniform Penalty and Interest Act rules provides that reasonable cause could result from “the death, incapacity or serious illness of the taxpayer (or his tax preparer) or a death or serious illness in his or her immediate family which causes a late filing and payment of tax due. In the case of a corporation, estate, trust, etc., the death, incapacity, or serious illness must have been of an individual having sole authority to file the return (not the individual preparing the return) or make the deposit/payment, or a member of such individual's immediate family.”
Section 700.400(e)(3) also provides that “an unavoidable absence of a taxpayer (or tax preparer) due to circumstances unforeseeable by a reasonable person may also constitute reasonable cause.” And, states Section 700.400(e)(5), reasonable cause can be found in situations involving “factors beyond a taxpayer's control such as destruction by fire, other casualty or civil disturbance, of the taxpayer residence or place of business records.”
All that said, it really never hurts to make the request even if none of the situations I’ve just listed apply. If the request is granted, the assessment protest is allowed.
Now, if the request is granted and less than $15,000 is at issue, Section 200.110 of the Department’s rules governs taxpayer representation. If more than $15,000 is at issue, the case will fall under the jurisdiction of the Independent Tax Tribunal, and the taxpayer will need to be represented by an attorney.
If the request for a rehearing is denied, the taxpayer does have the option to pay the assessment and then file a claim for a refund. If the refund claim is denied, the taxpayer can then protest the refund claim denial. Under Section 911(a) of the Illinois Income Tax Act, a claim for refund can be filed within three years of the tax return’s due date for the year at issue or within one year of the date of the tax payment.
Taxes governed by the refund claim provisions of Section 6 of the Retailers’ Occupation Tax Act generally provide similar terms, but in all situations you need to carefully evaluate the facts and consult with expert counsel to determine whether a refund claim is possible.
This discussion is specific to Illinois law and regulations, and other states will have their own requirements. Even the City of Chicago and Cook County have their own separate requirements for the taxes they administer. Regardless, the bottom line is that even if the normal time for challenging an assessment has expired, your client still may have some form of recourse.