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Illinois Independent Tax Tribunal: A Victory for Illinois Taxpayers

Governor Pat Quinn and the General Assembly broke with tradition last fall by taking a big step towards making Illinois more taxpayer friendly when they approved a law authorizing the creation of an independent Tax Tribunal. As members of the legislature now consider HB 5192 in the final days of this spring session they have an opportunity to finish the job.

 

House Bill 5192 allows taxpayers, for the first time ever, to protest an adverse Department of Revenue assessment before an independent administrative tribunal and removes  the disincentive and financial hardship currently associated with Illinois tax appeals by allowing taxpayers to seek judgment without first having to pay all taxes, penalties and interest.

 

Our government has a chance to show Illinois taxpayers and observers from around the country that our state is serious about improving tax administration and the business climate. When this bill becomes law people will notice something positive has been achieved that will help improve Illinois’ reputation.

 

The Illinois Chamber is proud to have worked with the bill’s lead sponsor, Representative Mike Zalewski (D-Chicago) and House colleagues Barbara Flynn Currie (D-Chicago) and David Harris (R-Arlington Heights), in negotiating and drafting the legislative language to implement the new Tax Tribunal.

 

We are encouraged by the bipartisan support the measure is already receiving as it works its way through the legislative process because legislators know of the many months of detailed work that have gone into crafting this statute. Senators Toi Hutchinson (D-Olympia Fields) and Shane Cultra (R-Onarga) have committed to sponsor the bill when it reaches the Senate.

 

The Illinois Chamber staff appeared this morning in House Revenue & Finance Committee to testify in support of HB 5192, the bill that implements the Tax Tribunal. I am pleased to say that HB 5192 passed out of Committee by unanimous vote and thus begins a legislative journey that we hope will conclude with success in the coming week.

 

Call to Action

 

We encourage you to communicate with your state legislators immediately to ask for their support for House Bill 5192. You may do so easily by accessing the Illinois Chamber Grassroots Action Center.

 

After you send your legislators a quick note, we also encourage you to call their office to reinforce your support for HB 5192.  

 

 

How We Got Here

With all eyes focused on the requested tax relief package for both CME and Sears during last fall’s veto session, little attention was paid to a critically important piece of the final legislative package-the creation of an independent tax tribunal in Illinois (Public Act 97-636). The Illinois Independent Tax Tribunal Act, for which the legislature set an operational goal of July 1, 2013, was a huge victory for both individual and business taxpayers. For the first time ever, Illinois taxpayers will be able to have an independent review of a Department of Revenue tax assessment without having to first pay the full amount of tax, penalty and interest assessed.

 

We applaud Rep. John Bradley and Sen. Toi Hutchinson for sponsoring this pro-taxpayer initiative, along with co-sponsors Senators Donne Trotter and William Brady, and Representatives Kenneth Dunkin and Jehan Gordon.

While Public Act 97-636 called for the creation of the independent tax tribunal and set a deadline for its operation, it intentionally left the details to subsequent legislation. The Illinois Chamber’s Tax Institute has stepped up to the plate to draft the needed legislation using the highly recommended American Bar Association Model Tax Tribunal Act as the starting point for the proposed Illinois law.

 

Under the Model Act, an executive branch Tax Tribunal that is independent of the Department of Revenue and expert in tax law would make the initial decision on the evidence and legal arguments presented by the taxpayer and the Department. Either party can appeal an adverse decision based on the record made before the Tax Tribunal. The model legislation also minimizes litigation by encouraging state revenue departments to settle as many cases as possible due to the hazards of litigation.

 

Illinois Graded “D” as a Pay-to-Play State

Illinois has long been criticized for its tax appeal procedures. A recent scorecard issued by the Council on State Taxation (COST) gave Illinois a grade of “D” and ranked us as one of the 10 worst states when it comes to fair and efficient tax administration. COST is a national tax organization whose mission is to preserve and promote equitable and nondiscriminatory state and local taxation of multistate business entities.

 

The COST scorecard evaluates state tax appeal systems by asking four questions:

  1. Is the appeal system truly independent?
  2. Does a taxpayer have to pay-to-play? (Pay the disputed tax prior to an opportunity for an independent review of the assessment.)
  3. Are the reviewing judges required to have experience in evaluating the complexities of state tax laws?
  4. Will the taxpayer have an opportunity for a hearing of record (i.e. a trial de novo) at an independent tribunal that would form the basis for further appeals?

Illinois currently fails on all counts. Under current law, a taxpayer facing an assessed tax liability must choose between a Department of Revenue administrative hearings to contest the matter, or the taxpayer must pay the full amount of tax, penalty and interest assessed by the Department of Revenue in order to go directly to circuit court to get an independent review of the assessment.

 

The perception that the deck is stacked against the taxpayer is high since the hearing is held at the Department of Revenue, by employees of the Department of Revenue. Illinois law also allows the Director of Revenue to overrule his own administrative law judge if he disagrees with the judge’s opinion. So even if you win at a Department hearing, you can still lose.

 

Taxpayers can only appeal a ruling based on the record established at the Department hearing and cannot request a de novo review in circuit court. The circuit court judge reviewing the record is limited by current law to determining whether he thinks the Department’s opinion was “clearly erroneous” or “against the manifest weight of the evidence.” That means even if the circuit court judge would have ruled otherwise based on the facts presented in the record, unless he can show that the Department made a blatant mistake of some nature, he must uphold its ruling. Under this standard, according to its own statistics, the Department is upheld by the circuit court 75 percent of the time.

 

Conversely, taxpayers who are able to pay the full amount of tax, penalty and interest upfront and go directly to circuit court to get an independent judicial hearing win their case 75 percent of the time.

 

Benefits of an Independent Tax Tribunal

A state’s ability to recognize the potential for error or bias in its own tax department and to provide an independent review process is key to increasing public confidence in state tax administration and in promoting voluntary compliance with tax laws. An independent Tax Tribunal is less likely to be perceived as driven by concerns over revenue collection, upholding departmental policies, or offending departmental decision-makers.

 

HB 5192, as amended, will create an executive branch tax tribunal that is independent of the Department of Revenue and staffed with knowledgeable administrative law judges who will apply well-established rules of evidence.   Either party to the tax dispute will be able to appeal an adverse decision. The proposed language also improves the Department of Revenue’s existing informal conference bureau to encourage the settlement of cases. Once the Tax Tribunal is established, business and individual taxpayers who dispute their taxes will not have to pay the assessed tax, penalty or interest, until and unless the Administrative Law Judge of the Tax Tribunal agrees with the Department’s assessment and all appeals by the taxpayer have been exhausted.

 

The resolution of a tax dispute is also streamlined by allowing taxpayers to appeal an adverse decision of the Tax Tribunal directly to the appellate court, eliminating circuit court review and accordingly reducing litigation costs for taxpayers.

 

The Tax Tribunal will provide more consistency and transparency along with more taxpayer guidance and predictability, since the decisions will be written by administrative law judges knowledgeable in state tax matters and the Tribunal’s decisions will regularly be made available to the public.

 

More than half of all states now provide an independent tax appeal process like the proposed Illinois Tax Tribunal, including our neighboring states of Indiana, Michigan, Missouri, and Wisconsin. Two-thirds of all states currently allow taxpayers to protest an assessment without first prepaying tax, penalty and interest.

 

Improving access to an impartial decision-making process will only increase public confidence in Illinois tax administration and improve the Illinois business climate. In tough budgetary times, it speaks well for our legislative leaders that they are willing to take the time and make the effort to ensure that Illinois taxpayers are treated fairly.

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