Application and Abatement of Penalties in Chicago and Cook County

This post is featured in the Illinois Practitioner Series.

For taxpayers surprised to find their business caught in the crosshairs of a Chicago or Cook County audit, substantial penalties can also be an alarming challenge. In a prior post, I outlined penalties assessed by the Illinois Department of Revenue (“Department”), the basis for relief, and the process for seeking penalty abatement. Although the basis for relief is similar for Chicago and Cook County penalties, there are key differences in the procedure and requirements for seeking penalty abatement.

CHICAGO PENALTIES

The Chicago Department of Finance (“Chicago Department”) imposes several potential penalties upon taxpayers, including, but not limited to, late payment and late filing penalties, failure to file penalties, negligence or willfulness penalties, and failure to remit collected taxes penalty.[1] Generally, taxpayers should look to the ordinance for the specific tax at issue, such as the Chicago Lease Transaction Tax Ordinance or the Chicago Amusement Tax Ordinance, in determining the applicable penalties.

However, additional penalties may be imposed under the Uniform Revenue Procedures Ordinance (“URPO”).[2] For example, if a specific Chicago tax ordinance does not impose a negligence or willfulness penalty, the URPO imposes a penalty equal to 25 percent of the tax due and unpaid upon taxpayers who negligently or willfully fail to pay or remit a city tax.[3] Similarly, if a specific Chicago tax ordinance does not impose a failure to remit collected taxes penalty, the URPO imposes a penalty equal to 50 percent of the total tax collected and not remitted upon taxpayers who knowingly collect and fail to remit to the department a tax imposed by any ordinance.[4]

COOK COUNTY PENALTIES

Similarly, the Cook County Department of Revenue (“Cook County Department”) imposes numerous potential penalties upon taxpayers, including, but not limited to, late payment, late filing penalties, failure to file penalties, negligence or willfulness penalties, incomplete return penalties, and failure to remit collected taxes penalty.[5] As in Chicago, generally, taxpayers should look to the ordinance for the specific tax at issue, such as the Cook County Amusement Tax Ordinance or the Cook County Gasoline and Diesel Fuel Ordinance, in determining the applicable penalties.

Further, for most Cook County taxes (when not inconsistent with the specific taxing ordinance), the Uniform Penalties, Interest and Procedures Ordinance (“UPIPO”) also applies and can impose additional penalties and restrictions.[6] For example, if a specific taxing ordinance does not impose a penalty for late filing or late payment penalties, the UPIPO imposes either a late filing or a late payment penalty at a rate of 10 percent of the total tax due.[7] Additionally, if a specific Cook County taxing ordinance does not impose a negligence or willfulness penalty, the UPIPO imposes a penalty equal to 25 percent of the total tax due and unpaid.[8]

REQUESTING ABATEMENT OF LOCAL PENALTIES: AUDIT LEVEL AND ON APPEAL

To seek relief from penalties, taxpayers can either pursue abatement at the audit level or appeal a Notice of Tax Determination and Assessment to the respective Department of Administrative Hearings. The procedure for protesting a Notice of Tax Determination and Assessment to the City of Chicago Department of Administrative Hearings and Cook County Department of Administrative Hearings is addressed in detail in separate prior posts.

1.  GROUNDS FOR RELIEF: REASONABLE CAUSE

In Chicago and Cook County, several penalties, including late payment and late filing penalties, failure to file penalties, and failure to remit collected taxes penalties, may be waived or abated if the taxpayer demonstrates it had reasonable cause.[9] Under both Chicago and Cook County’s Ordinances, the director may promulgate standards for determining reasonable cause.[10]  If the director does not promulgate such standards, then the reasonable cause determination shall be made by applying the reasonable cause criteria of the United States Internal Revenue Service, as these standards may be amended.”[11] The Director has also promulgated standards in a Uniform Revenue Procedures Ruling, but the ruling provides limited examples of what constitutes reasonable cause and is not meant to be comprehensive.[12]

The Internal Revenue Code does not define “reasonable cause”. However, the Internal Revenue Manual defines reasonable cause as those reasons deemed administratively acceptable to the Service for justifying non-assertion or abatement of applicable penalties against taxpayers.”[13]  Most significantly, reasonable cause will be found where the taxpayer exercised ordinary business care and prudence but due to circumstances beyond his control, was unable to pay the taxes in a timely manner.[14] Generally, ignorance is no excuse for unremitted tax or unfiled returns. However, similar to the Illinois Department’s standard, ignorance of the law, when combined with other circumstances such as limited education or lack of a previous tax and penalty experience, can support a finding of reasonable cause.[15]

Furthermore, in the context of accuracy related and underpayment penalties, the code of federal regulations identifies reasonable cause and good faith standards. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, considering all pertinent facts and circumstances.[16] Generally, the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.[17] In making its determination, the Chicago Department and Cook County Department will consider an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge and education of the taxpayer.[18] As a result, although Chicago and Cook County follow the reasonable cause standard of the Internal Revenue Service, rather than the Illinois standard[19], the factors applied are ultimately substantially similar to those considered by the Illinois Department.

2.  REQUESTING RELIEF AT AUDIT LEVEL AND ON APPEAL

As with an audit at the Illinois Department, taxpayers should be aggressive in seeking penalty relief at the audit level. Unlike the old adage, it is often easier to achieve relief by requesting penalties not be assessed, rather than requesting forgiveness after receiving a formal assessment. Relatedly, another advantage to resolving a matter at the audit level is that a taxpayer will generally not be assessed an audit “willfulness” penalty, which is an additional 25 percent penalty included in a Notice of Tax Determination and Assessment that can often be an unwelcome surprise to taxpayers on appeal. Further, because requests for penalty abatement at the audit level do not bar subsequent review of the same penalty issue, aside from the time and expense of the request, there is little disadvantage to requesting penalty relief at the audit level. To assure the request for penalty relief is ultimately reviewed by the appropriate party, taxpayers should seek the request in writing rather than only providing an oral request.

Unlike penalties assessed by the Illinois Department, the Illinois Board of Appeals does not have authority to review assessments of penalties by the Chicago Department or the Cook County Department. Rather, on appeal, a taxpayer can only protest a Notice of Tax Determination and Assessment that includes penalties to the Chicago or Cook County Department of Administrative Hearings. For additional information explaining the procedure for protesting a Notice of Tax Determination and Assessment to the City of Chicago Department of Administrative Hearings and Cook County Department of Administrative Hearings see the prior posts in the Illinois Tax Talk series.

CONCLUSION

Although penalty relief was historically considered as nearly automatic by practitioners and taxpayers, the Chicago Department and Cook County Department have become more scrupulous in their review and restrictive in their granting of abatement. Consequently, taxpayers should not treat the process as a formality and expect their request to be rubber stamped. Rather, taxpayers should invest in the exercise and provide a thorough written request at the audit level and potentially on appeal.