Illinois Inconsistently Applies Amnesty Double Interest Penalty

The Illinois Appellate Court recently found that a taxpayer who failed to pay a tax liability under the state's 2003 amnesty was subject to a 200% interest penalty, even though the taxpayer did not know it owed the tax until after a federal audit. [Marriott Int'l, Inc. v. Hamer, 2012 Ill. App. LEXIS 684 (Ill. App. Ct. 1st Dist. 2012).]

A different division of the same appellate court reached the opposite conclusion in a case earlier this year, involving Metropolitan Life Insurance Company, deciding that the penalty did not apply when the taxpayer's tax obligation was determined as a result of a federal audit that concluded after the amnesty period. [Metro. Life Ins. Co. v. Hamer, 2012 Ill. App. LEXIS 144 (Ill. App. Ct. 1st Dist. 2012). See also on this web site: "Illinois Amnesty Period Double Interest Penalty Restricted".] The conflict will likely force the Illinois Supreme Court to review this issue and provide guidance.

In the present case, Marriott International (''Marriott") paid its federal and Illinois corporate taxes for the 2000 and 2001 tax years. In 2007, following an IRS audit that started after the amnesty period had lapsed, Marriott's 2000 and 2001 federal taxable income increased. Marriott subsequently filed amended Illinois income tax returns for the 2000 and 2001 tax years reflecting the increased taxable income resulting from the federal audit. The Illinois Department of Revenue ("Department") assessed the 200% amnesty penalty on Marriott for the 2000 and 2001 tax years because the increased tax liability for those years were eligible for payment during the amnesty period but were not paid.

Taxes are "due" under the 2003 amnesty at the time of their filing deadline regardless of whether such tax liability is known to the taxpayer at that time. Marriott argued before the appellate court that the obligation to pay "all taxes due" under the amnesty was to pay all tax liabilities known by the taxpayer during the time of the amnesty period. Marriott asserted that the "additional" tax liability was not subject to the amnesty penalty because it did not ''become due" until the liability became final, which was well after the close of the amnesty period. Marriott asserted that it did not know about the additional tax liability during the amnesty period; that it paid all of its Illinois taxes reported on its return; and therefore that it had paid "all taxes due" for 2000 and 2001 when Marriott filed its Illinois returns.

The Department relied on its own amnesty emergency regulation stating that a taxpayer must pay "all taxes due" under the amnesty "irrespective of whether that liability is known to the Department or to the taxpayer, or whether the Department has assessed it." The court agreed with the Department, favoring an interpretation that required taxpayers to pay all "properly reportable" taxes during the amnesty period, as opposed to all taxes that were actually reported.

The court held that "all taxes due" meant "those taxes that are due on the date the tax return for that year is to be filed, irrespective of whether the Department has issued a formal assessment. The court concluded that "when Marriott filed its federal and state income tax returns for the years 2000 and 2001, which were not assessed until 2007, and when it did not accurately report its taxable income that was properly reportable, it underpaid its taxes and has a tax liability that became due on the dates that the 2000 and 2001 tax returns were due to be filed, which was during the amnesty period."

With the clear conflict between the decision in Marriott and the earlier Metropolitan Life decision, taxpayers are left in a state of confusion and left to hope that the Illinois Supreme Court resolves the conflict soon.

RELATED LINKS: For further insight on amnesty period issues, see:

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