If you don't pay state taxes, the Illinois Department of Revenue (DOR) can garnish your wages, seize your assets, or shut down your business. But before taking these actions, the state will start by assessing tax penalties. In this article, we will discuss two common tax penalties associated with delinquent taxpayers. There are two tax penalties taxpayers should know about along with how interest accrues on any unpaid balance.
The DOR will assess a penalty to individual taxpayers who do not file on time or fail to file. The IL DOR refers to this penalty as the Late-filing (or Nonfiling) Penalty. If a taxpayer timely files a tax return but DOR cannot process it and the taxpayer does not correct it within 30 days (for tax returns due after December 31st, 1995) from the date the state notifies them, taxpayers can also face a late-filing penalty.
The DOR assesses the tax penalty when the taxpayer fails to file by the due date, including extensions. Specifically, the tax penalty is the smaller of $250 or 2% of the tax required to be shown due on the return and lowered by timely payments or credits. The former applies to tax returns due January 1st, 2005 to current. If the taxpayer does not file a return “within 30 days after receiving a notice of nonfiling” the DOR will assess an “additional penalty equal to the greater of $250 or 2% of the tax shown due on the return without regard to timely payments.” The additional penalty will not exceed $5,000. The DOR will assess the tax penalty even if the taxpayer has no balance.
If a taxpayer fails to pay taxes owed on time, the IL DOR will assess a Late-Payment Penalty. The DOR will assess this penalty if the taxpayer does not pay their taxes by the due date of the tax payment or the original due date of the return without regard to extensions. The DOR bases the penalty on the number of days the tax required to be shown due on the return is late. If the payment is 30 days late or less, the penalty is 2%. If the payment is greater than 30 days late, then the tax penalty is 10%.
The penalty is 15% on any amount the taxpayer doesn’t pay after the “initiation of an audit or investigation” of the taxpayer’s liability. It is 20% of any amount the taxpayer does not pay within “30 days after the issuance of an audit-prepared amended return or Form IL-870, Waiver of Restrictions at the conclusion of the audit or investigation.”
If the taxpayer incurs a penalty for underpayment of estimated taxes or accelerated tax, the “tax amount that this penalty is assessed on is subtracted from the total tax.”
Taxpayers who fail to pay state taxes owed to the State of Illinois will incur interest charges. The DOR assesses interest the day after the taxpayer’s payment due date until the date the taxpayer pays the tax. Interest is simple interest using a daily rate that the state updates twice a year (1/1 and 7/1). The state beginning January 1st, 2014, uses the federal underpayment rate. Before the previous date, the IL DOR assessed interest differently. Moreover, after January 1st, 2001, the DOR no longer charges interest on penalties. The current interest rate or “underpayment rate” for the period for which delinquent tax goes unpaid accrues at a rate of 8% for individuals (4/15/2024).
As one can see, the tax penalties and interest can add up. Therefore, even if a taxpayer cannot pay the taxes owed, they should still file. Filing a tax return and make a partial payment will lessen the impact of penalties.
Illinois allows taxpayers to appeal penalty assessments by filing a petition to the Board of Appeals (BOA). Taxpayers can find the petition form for filing a penalty appeal request with the Board here. Taxpayers can petition the BOA once their liability has become final. In other words, “all administrative hearings, Tax Tribunal decisions, and court proceedings to review the assessment have ended or the time for taking such action has expired.”
The BOA will only consider penalty abatement for reasonable cause. IL makes determinations of reasonable cause on a case-by-case basis.
The DOR provides examples of reasonable cause for purposes of abating tax penalties:
The DOR provides that the BOA should consider the following pertinent factors of determining the existence of reasonable cause:
The procedures and filing information for submitting a petition with the BOA seeking penalty abatement relief, work in the same manner as those for an Offer-in-Compromise.
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Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. Therefore, for specific help regarding your tax situation, contact a licensed tax professional or tax attorney.
