A recent protest filed with the Illinois Independent Tax Tribunal highlighted the personal liability penalty outlined in Section 3-7 of the Uniform Penalty and Interest Act (UPIA). The penalty makes individuals personally liable for certain Illinois taxes owed by businesses. Here’s a look at how unpaid Illinois business taxes can become a personal liability.
Personal liability penalties are imposed on officers and employees of a taxpayer subject to a tax act administered by the Illinois Department of Revenue (IDOR) who:
What’s often overlooked, however, is that the personal liability penalty isn’t limited to business owners. It can also be imposed on officers or employees of any taxpayer, including a partner of a partnership, manager or member of a limited liability company, and member of a registered limited liability partnership (UPIA Section 3-7(e)).
Additionally, the identification of owners and officers depends on the organization type: proprietorship (owner(s)); partnership (general partners); non-publicly traded corporation (president, secretary, and treasurer); publicly traded corporation (chief operating officer and chief financial officer); trust or estate (trustee(s) or executor(s)); governmental unit (one contact person); not-for-profit organization (president, secretary, or treasurer); or limited liability company (managers and members).
Form REG-1 is the official business registration application used by IDOR to open state tax accounts. IDOR looks to this form and other public data sources, including filings with the Illinois Secretary of State, to identify individuals potentially subject to the personal liability penalty.
The last step in REG-1 requires that someone attests they’ll be responsible for filing returns and paying all taxes due, unless a Schedule REG-1-R, Responsible Party Information, is attached to name additional responsible parties. A Schedule REG-1-R can also be used to remove a responsible party.
To be held personally liable, officers and employees must have control, supervision, or responsibility of filing returns and making tax payments. In my experience, IDOR will generally assess the penalty on everyone it has identified as an officer or employee listed on Form REG-1. Then, the burden is placed on the person assessed the personal liability penalty to prove that they didn’t have control, supervision, or responsibility for filing returns and making tax payments.
Importantly, it’s crucial for individuals named on Form REG-1 to get themselves removed from IDOR’s REG-1 database when they leave employment or ownership in a company. Unfortunately, I’ve seen many instances where someone leaves a company and the registration is never updated, and years later, the individual is hit with a personal liability penalty for a period after they left the company. In such cases, it’s time consuming and expensive to provide IDOR with evidence proving they weren’t with the company for the tax periods subject to the personal liability penalty.
For the penalty to apply, the underlying tax must be a trust tax. Trust taxes are income tax withholding taxes, retailers’ occupation taxes, or similar transaction taxes collected from customers, as well as any excise or utility tax administered by IDOR that’s billed and collected from a customer. Notably, the law provides that a trust tax includes any tax for which an amount is required to be collected or withheld by a taxpayer from another person regardless of whether it’s actually collected.
Additionally, failure to pay the tax must be “willful,” as defined in Section 700.300(b):
The term willful ‘has generally been defined as involving intentional, knowing and voluntary acts or, alternatively, reckless disregard for obvious or known risks. [Relevant] cases specifically find that according other corporate creditors preferential treatment over governmental tax obligation constitutes willful behavior. Further, they find that, in a civil action, willful conduct does not require bad purpose or intent to defraud the government.’ (Department of Revenue v. Heartland Investments Inc., 106 Ill. 2d 19 (1985))
Suffice it to say, the personal liability penalty shows how quickly a business tax issue can become a personal one.
The bottom line for business owners: Pay attention to taxes even if you’re not involved in the day-to-day operations of the business. If the business falls behind and tax returns aren’t filed and taxes go unpaid, IDOR is likely going to be aggressive in assessing a personal liability penalty against all owners.
For employees, the bottom line is equally clear: Avoid signing Form REG-1 as the responsible person if possible—and if your name appears on the form, be sure to get your name off the registration records as soon as possible when you leave the company.
