Illinois gets reasonable on penalties

A client sold his business as an asset sale in October 2015. The sale agreement provided for the sale price to be adjusted based on working capital as of the closing date. But the parties disputed the working capital amount; therefore, no allocation of purchase price could be made to the asset classes and the client could not accurately compute his income for the taxable year. The client’s accountant estimated the tax which the client paid and then the tax return was put on extension.

Finally in August 2016 following the sale, the parties agreed to the working capital amount and allocated the purchase price to the asset classes. When the client computed his taxable income, it was determined that he was significantly underpaid. The client paid the tax and filed his return and the Illinois Department of Revenue then assessed late-paying penalties.

The client’s accountant filed for an abatement of penalties based upon reasonable cause because the client relied on the accountant to estimate the tax, which the client paid. The Illinois Department of Revenue rejected the accountant’s reasonable cause request as well as a follow-up abatement request.

At this time legal counsel was retained and the client was immediately counseled to pay the penalties under protest and a claim was filed in Cook County Court for a refund. After written discovery, Illinois conceded that reasonable cause existed and we the parties entered into an Agreed Order for the client to receive a full refund of the penalties, plus interest.

Abatement of penalties requests are usually handled by an understaffed amount of agents at the Illinois Department of Revenue. Not enough time is dedicated to reviewing the facts of a case, which causes the request for abatement to be rejected out of hand. Oftentimes, it takes a lawyer to file a lawsuit to move the Illinois Department of Revenue to fully review the facts and reasonably conclude that penalties should be abated.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: David B. Shiner, Principal

This alert originally appeared in the March 2018 Shiner's Dollars with Sense newsletter.