The Alphabet Soup of Illinois Sales Tax

In Illinois, as in many states, three things are the chief subjects of taxation: property, income and consumption.  That last one is where sales and use tax come from.  A consumption tax is a tax assessed on what a taxpayer uses, as opposed to income tax, a tax on wages, and property tax, a tax on what a taxpayer owns.  In Illinois, consumption tax takes the form of four related taxes which are commonly referred to by the abbreviations ROT, SOT, RUT and SUT.

ROT is the Retail Occupation Tax and SOT is the Service Occupation Tax.  The difference between is just the nature of what’s being purchased, goods for retail and service for service.  Otherwise the taxes are largely the same thing.  These are what most people would call sales tax.  You got to a store or a service provider and tax is added to your bill.  That’s ROT or SOT.  The business collects the tax at the time the purchase is made and later remits those taxes to the state on its regularly filed sales tax returns.  The tax is technically assessed on the consumer but it’s the business’s job to collect.  Failure to do so or filing false sales tax returns can carry harsh penalties for business.

RUT and SUT are the Retail Use Tax and the Service Use Tax.  Use tax isn’t as well known as sales tax, probably because you’ll never see a line item for it on a receipt.  The point of use tax is to catch what sales tax misses.  It’s assessed on goods and services used in the State of Illinois for which the consumer paid less than Illinois’s sales tax rate–currently that’s 6.75%.  That means if you buy something online or by catalog and pay no sales tax on that purchase, you now owe use tax on it (if you use the good or service within Illinois) equal to 6.75% for most products and services (certain purchases are eligible for a reduced rate, e.g. food and some prescription drugs, while other purchases like automobiles incur higher rates).  Similarly, if you purchase something in another state and pay less than Illinois’s sales tax rate and you use the item in Illinois, you owe use tax equal to the sales tax difference.  That is, if you pay 4% sales tax for something and use it in Illinois, you owe use tax equal to 2.75%, the Illinois rate of 6.75% less the 4% you paid.

Unlike sales tax, it is the job of the consumer, not the merchant or service provider, to collect use tax and remit it to the state.  It is thus the consumer who might face penalties for failure to pay the tax owed.  For the last several years, Illinois income tax returns (Forms IL-1040) have included line items regarding use tax.

In the case of all four taxes–ROT, SOT, RUT, SUT–the penalties for failure to file or for filing incorrect returns, can be severe.  For years the Attorney General has been aggressive in investigating and prosecuting sales and use tax evaders.  Gas station owners have gotten into the news repeatedly but other business have been targeted, including restaurants, liquor stores, doctor offices, and especially business that deal in frequent cash transactions.

Horowitz Law Offices has represented numerous taxpayers before the Illinois Department of Revenue regarding sales and use tax audits, motions before the Board of Appeals, and all other Illinois tax matters.  You are welcome to contact us at 312-787-5533 or info@hwchicagolaw.com

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Offshore Disclosure 101

In 2009 the IRS ran a short program for offshore voluntary disclosure.  In 2011 they ran a similar program.  In 2012 they began a third offshore disclosure program, this one without an expiration attached.  Intead of expiration, the IRS is free to change the particulars of the program when it choose, for example increasing the penalties.  That program, the Offshore Voluntary Disclosure Program or OVDP continues today.

All three variations off the OVDP shared a common purpose.  In exchange for submitting information to the IRS regarding previously undisclosed offshore/foreign accounts and assets, taxpayers receive reduced penalties and avoid criminal prosecution.  The IRS has long had a similar program in place for domestic disclosure as well.

Without the protection of the OVDP, the penalties are severe for failing to disclose offshore assets to the Department of the Treasury or failing to disclose offshore income.  They include high penalties and can also include jail time.  Participation in the OVDP does not spare the taxpayer all penalties, like some other tax amnesty programs have in the past, but the program does spare the taxpayer criminal prosecution and the penalties to be paid as part of participation are much lower than what one would otherwise face.

There’s one important caveat.  Once the IRS or the Treasury Department begins investigation into a taxpayer’s offshore assets–and such  investigation typically begins before the taxpayer is notified about it–they are no longer eligible for the OVDP.  With the 2010 Foreign Account Tax Complicate Act (FATCA), a law that will allow for the automatic exchange of information between the IRS on foreign financial institutions regarding US depositors, coming into full force this July, the IRS’s ability to investigate offshore assets is stronger than ever before.  Twenty-two countries have already signed FATCA agreements with the US and many more have agreements in various stages of completion.

Each tax situation is of course unique and you should always consult a tax professional to determine the best course of action for you.  Horowitz Law Offices has represented numerous clients in their participation with the OVDP, with offshore reporting requirements, and other Federal, Illinois and Chicago tax matters.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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The Prosecutor Who Wiped Out Arthur Andersen May Be Coming For Your Bank

At first glance the name Leslie Caldwell might not mean much.  Ms. Caldwell is President Obama’s appointment to head the Criminal Division of the Department of Justice.  She was confirmed last month.  This new position follows a stretch of relatively quiet private practice.  But more than a decade ago, Ms. Caldwell made waves as the chief prosecutor in the case that destroyed accounting juggernaut Arthur Andersen.  Ms. Caldwell’s appointment certainly doesn’t seem an accident in light of the Justice Department’s increase focus on foreign banks like Credit Suisse and BNP Paribas.

In the wake of the Enron collapse, Ms. Caldwell headed up an investigation of Arthur Andersen LLP, one of the largest accounting firms in the world at the time, for their possible culpability in the Enron scandal.  An investigation characterized by aggressive conduct on the part of Ms. Caldwell, the resulting conviction was later overturned nine to zero by the Supreme Court.  The damage had already been done, however, and Arthur Andersen had lost its client base.

Not long after Ms. Caldwell’s current appointment, Credit Suisse plead guilty to the tune of $2.6 billion in fines and the French bank BNP Paribas will face a fine of between $8 and $9 billion in addition to a temporary on the bank’s ability to conduct transactions in U.S. dollars.  With FATCA expanding the U.S.’s ability to collect information on foreign accounts and assets and providing increased leverage on foreign financial institutions, it’s reasonable to expect more investigations, more fines, and more agreements so hare information on U.S. depositors.

The silver lining for taxpayers with as yet undisclosed offshore assets is to be found in the IRS’s Offshore Voluntary Disclosure Program (OVDP).  By coming clean to the IRS about their offshore accounts and foreign assets, taxpayers receive reduced penalties and avoid criminal prosecution.  If the IRS has already begun investigating the taxpayer, however, they are no longer eligible for the OVDP.  Recently instituted rules also remove the penalty reduction if the IRS or the Department of Justice has begun an investigation into the bank holding the taxpayer’s accounts.

Horowitz Law Offices has  represented clients through the OVDP since its inception.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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The Rising Stakes of Sales Tax Evasion in Illinois

For the last several years, the Illinois Attorney General has repeatedly issued press releases to announce the results of yet another sales tax indictment.  While at the federal level, the focus on tax enforcement seems to be primarily on offshore assets and accounts, at the state level the focus has landed mostly on sales and use tax.  Gas stations have gotten most of the coverage, bringing tens of millions of dollars of lost tax revenue to the state, but in our practice representing taxpayers in connection with sales and use tax cases, we’ve seen plenty of other types of businesses be the subject of Department of Revenue investigations.

Liquor stores have been the target of investigations by the Attorney General and the Department of Revenue.  Medical businesses also seem frequently to come up.  This is often because while many medications are taxed in Illinois at a reduced rate (the same rate at which most food is taxed) some medications or medical products are still taxed at the higher rate imposed on ordinary purchases.  Businesses operating with frequent cash transactions, restaurants for example, are also often on the radar.

In 2012 the Illinois General Assembly created a new crime in Illinois, Sales Tax Evasion.  The penalties depend on the amount of taxes invaded, but any amount the offense is considered a felony and entails possible jail time.  For amounts less than $500, Sales Tax Evasion is a Class 4 felony (1-3 years in prison), less than $10,000 is a Class 3 felony (2-5 years in prison), less than $100,000 is a Class 2 felony (3-7 years in prison) and more than $100,000 is a Class 1 felony (6-30 years in prison).  This in addition to repaying the taxes evaded, plus interest and penalties.

Horowitz Law Offices represents taxpayers before the IRS, the Illinois Department of Revenue and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Obama 2015 Budget Proposes Tax Revenue Increase

The White House has released its proposed budget for the 2015 fiscal year.  The Congressional Budget Office (CBO), reports that the proposed budget would increase tax revenue by $1.4 trillion over the next decade.  It would also cut deficits by $1.o5 trillion and fund new proposed spending, the CBO has said.

The White House’s own numbers are more optimistic than the non-partisan CBO’s, projection cumulative deficits of $4.9 trillion compared to the CBO’s projection of $6.6 trillion over the next ten years.  The two estimates differ primarily because the CBO forecasts slower economic growth, which would result in lower tax revenue.

The proposed budget increases revenue by limiting tax breaks for the wealthy and for businesses, increasing taxes on tobacco products, creating a new millionaire tax, and restoring estate and gift taxes to the higher rates they had in 2009.  The budget also proposes to increase spending by canceling the automatic spending cuts to military and domestic programs, which were part of the ‘sequester,’ and increasing funds to job training programs and expanding tax credits for low-income taxpayers.

The proposed budget is of course just that, a proposal.  Congress has the final word of the purse strings.  The chances of the Obama budget being passed as-is are nonexistent.  The GOP has advanced a budget put together my Representative Paul Ryan that proposes deep spending cuts and no tax increases.  In both cases, the budgets may be designed more to support stump speeches for November’s election.  Unless one party gains control of both houses of Congress in that election, we are likely to face another budget standoff like those of recent years.

Horowitz Law Offices represents individual and business taxpayers for a variety of tax concerns before the Internal Revenue Service, the Illinois Department of Revenue and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 and info@hwchicagolaw.com

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IRS Weighs in on Virtual Currency

Online cryptocurrencies like bitcoin have been around a few years now and every few months they end up in the news, often when the value of one virtual currency spikes or drops.

Two days ago, the IRS issued Noticed 2014-21 which addresses how the IRS will treat virtual currency for tax purposes.  The long and short of it is that the Department of Treasury and the IRS do not treat virtual currencies like bitcoin as currency.  Instead for purposes of tax they are treated as property.  This means virtual currency is not applicable for the various sorts of tax situations that could arise, for example, from the changing relative values of Euros and US Dollars.  As property, however, the changing value of virtual currency counts as gains or losses.  Virtual currency received as compensation for employment is considered wages.  For both purposes, the fair market value in US dollars has to be calculated.  The IRS further explained that payments  made in virtual currency incur the same reporting requirements as payments made through other means. Failure to treat virtual currency transactions in accordance with the notice may leave taxpayers subject to penalties, the same failing to comply with any other tax laws.

Horowitz Law Offices represents individual and corporate taxpayers before the Internal Revenue Service, Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Supreme Court Rules: Severence Pay Taxable

Yesterday, the Supreme Court ruled on the case of United States v. Quality Stores.  Reversing the decision of the lower courts, the Supreme Court found that severance pay are taxable wages for FICA purposes.  The justices ruled 8-0, with Justice Kagan recusing herself from the case.

The case arose during the bankruptcy proceedings of Quality Stores, Inc. and its affiliates.  As part of the Chapter 11 proceedings, Quality Stores made severance payments to employees who were involuntarily terminated.  Quality Stores withheld taxes as required under the Federal Insurance Contributions Act (FICA).  These taxes are collected to fund Medicare and Social Security.  Later, Quality Stores sought a refund of those taxes, believing FICA did not actually apply to severance payments.  The IRS did not allow or deny the refund, so Quality Stores brought action in the Bankruptcy Court, which ruled in Quality Stores’s favor.  The District Court and the Sixth Circuit Court of Appeals upheld that decision.  The Supreme Court reversed it.

The decision is uncomplicated.  FICA defines wages as “all remuneration for employment” and the Supreme Court holds that severance payments plainly fit that standard.  They are paid in consideration for employment, thus they are subject to the tax.  The opinion further points out that within the Act’s lengthy list of exceptions, severance payments made because of retirement for disability are specifically exempted.  There would be no need for such a provision unless severance payments were generally subject to tax.

Horowitz Law Offices represents individuals and businesses before the IRS, the Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Madigan Proposes “Millionaire Tax” In Illinois

Yesterday, Speaker of the Illinois House of Representatives Michael Madigan proposed an amendment to the Illinois Constitution that would create a new 3% tax on incomes over $1,000,000, the revenue from which would be applied to education.  The amendment would add Section 11 to Article IX of the Constitution, the article dealing with revenue.

There was discussion last year about the possibility of trying to move Illinois to a progressive or graduated income tax structure.  Doing so would require an amendment as Section 3(a) of Article IX currently requires a flat tax for both individuals and corporations in Illinois.  The amendment currently proposed does not try to alter the existing tax rates, nor to permit a graduated tax structure, simply to add an additional tax on incomes over the $1 million threshold.  The amendment provides that “all revenue collected pursuant to this Section shall be distributed to school districts solely on a per pupil basis.”  If passed, the amendment would affect tax years beginning on or after January 1, 2014.  Proponents of the amendment say it will raise as much as $1 billion for education funding.

The unmentioned elephant in the room in all of this are the scheduled rate decreases to Illinois’s individual and corporate income tax rates.  If no further legislative action is taken, those rates will decline January 1, 2015, from 5% to 3.75% for individuals.

Horowitz Law Offices represents taxpayers before the Illinois Department of Revenue, Internal Revenue Service and the Chicago Board of Finance for a variety of tax matters.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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The Tax Tribunal Is Here – But We’re Still Not Sure Exactly What It Looks Like

In 2012, the Illinois General Assembly passed the Illinois Independent Tax Tribunal Act of 2012 (35 ILCA 1010), the effect of which was to create a body separate from the Illinois Department of Revenue to arbitrate tax disputes between taxpayers and the Department.  Prior to the creation of the Tribunal, IDOR itself handled all such matters.

Although the act was passed in 2012, the Tribunal wasn’t slated to begin taking cases until the Summer of 2013.  From that point till the first of this year, the Tribunal was in something of a no man’s land.  Taxpayers had the choice of taking their cases out of IDOR’s Department of Administrative Hearings and transferring to the Tribunal, or remaining with IDOR.

As of January 1, 2014, the Tribunal’s rules are in full effect.  It has jurisdiction over all cases involving more than $15,000 in tax (not including interest and/or penalties).  The Tribunal also has jurisdiction in cases where there is no tax deficiency but total interest and penalties is above $15,000.

Thus far, however, the Tribunal has not heard very many cases.  It has published its rules and procedures on its website, but still it isn’t yet exactly clear how the Tribunal is going to work and, more to the point, how a case resolved with a Tribunal will differ from working through Administrative Hearings.

The chief difference is of course structural.  The old model was administration, dealing with collections and appeals agents of IDOR, while the Tribunal will function much like any other court.  This might provide opportunities to taxpayers they wouldn’t have under the old system, though nothing’s certain until we’ve got a clearer picture of just how the Tribunal is going to do business.

Horowitz Law Offices represents individual and corporate taxpayers in connection with sales and use tax audits, collection matters, and other tax concerns at the federal, state and local levels.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

Disclaimer.

It’s Not That Easy To Avoid Sales Tax

Here in Illinois, we often hear or see advertisements from neighboring states highlighting their lower taxes.  Many of these ads talk about moving to another state for lower income tax, but there’s also ads focusing on sales tax.  The idea is pretty simple.  Take a trip across state lines and enjoy lower sales tax on your shopping.

Using a similar line of thought, you can shop online or buy from a catalog.  Many such retailers don’t have to charge sales tax because they don’t have a physical, brick and mortar presence in the state.

None of these methods, however, actually remove an Illinois taxpayer from any tax exposure.  This is because in addition to sale tax — more technically, the Retailer Occupation Tax (ROT) and the Service Occupation Tax (SOT) — Illinois also has laws for use tax.

It works like this.  If you purchase something and you use it in Illinois (and you’re an Illinois resident), as long as you paid sales tax equal to or greater than Illinois’s rate (6.25% for general merchandise, 1% on qualifying food and drugs) you don’t owe anything else to the Illinois Department of Revenue.  Importantly, it doesn’t matter if you paid that sales tax to Illinois or not.  If, however, you paid less than the Illinois rate, and you use the product in Illinois, then you owe use tax equal to the difference between the tax you paid and Illinois’s rate.

An example.  Let’s say you were on vacation in a state with a sales tax rate of 3%.  You buy something and pay the sales tax on that transaction and you bring that product back to Illinois.  By using that item in Illinois, you now owe 3.25% use tax to IDOR (6.25%, the Illinois rate, less the 3% you already paid).

For several years now the Illinois annual income tax return has included a line item regarding use tax and that line cannot be left blank, which might open a taxpayer to a charge of filing a false return.

Horowitz Law Offices represents taxpayers before the IRS and the Illinois Department of Revenue on a variety of tax matters including sales and use tax audits, criminal tax cases and motor vehicle tax audits.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com.

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