Illinois recently enacted a tax amnesty program that provides a carrot—but carries a big stick. Taxpayers who participate in the program are able to eliminate interest and double penalties for any eligible tax liabilities. However, taxpayers that do not participate in the program will be subject to double interest and penalties on any eligible liability. Ouch! Taxpayers must analyze the pros and cons of the amnesty program and decide quickly because it will run for only a very brief time—from October 1 through November 8, 2010.

Illinois law defines eligibility for the amnesty program on the basis of a tax liability, not on the basis of the taxable year or the status of the taxpayer. The legislation defines an “eligible tax liability” as any tax owed for the period from June 30, 2002, through July 1, 2009, that is collected by the Department of Revenue (which excludes the Illinois franchise tax collected by the secretary of state). A tax liability is ineligible for the amnesty program if the liability is pending in any civil or criminal litigation in an Illinois court. However, liabilities pending in any administrative forum—such as the Informal Conference Board or Office of Administrative Hearings—are eligible for the program, and will be subject to double interest and double penalties if the taxpayer does not participate.

Participation in the amnesty program will also significantly limit refunds. Taxpayers participating in the program will be eligible to claim refunds of overpayments unrelated to the amnesty tax issues and overpayments associated with federal changes. This refund policy means taxpayers’ estimated payments are generally final, even if a taxpayer’s position is subsequently upheld. In contrast, the 2003 Illinois program allowed refunds only for computational errors, but it credited the taxpayer for all other overpayments.

Due to potentially exorbitant interest and penalties, taxpayers with eligible tax liabilities should quickly and carefully consider their options:

  1. Taxpayers can estimate their tax liability and pay that amount under the amnesty program to avoid the double interest and penalties on such tax liability. However, this imperfect option could subject a taxpayer to double interest and penalties (for a low estimate) and foregoing refunds (for a high estimate).
  2. Alternatively, taxpayers with uncertain liabilities pending in an administrative forum may want to consider changing forum to an Illinois court to escape the amnesty penalty provisions.