We have seen a large increase in the number of sales tax audits occurring not just in Chicago, but the entire State of Illinois. It seems that whenever the State runs out of money, they simply increase the number of audits. This in turn, increases their revenues. The term Sales Tax Audit is actually a misnomer. All of the taxes collected by The Illinois Department of Revenue will generally be examined. They are not just looking to enforce existing Sales Tax Law, but also Income, Use, and Payroll Tax Laws.
Given the fact that they are enforcing four different types of tax law, no matter what type of business you are in, a sales tax audit is not a laughing matter. Manufacturers, general contractors, or other businesses that have never collected a dime in sales tax can have major difficulties.
The income of a business is always examined. One of the reasons that they ask for so many items, from bank statements to sales journals, is so that they can audit your sales. If you haven’t reported all of your income, you could be guilty of income tax evasion.
Payroll tax laws have changed dramatically in the past decade. Under existing law, if you are paying an individual rather than an established entity, Illinois will normally consider them to be an employee rather than an independent contractor. The auditor will look at the nature of the relationship rather than any written agreements that exist. If you haven’t made your payroll tax deposits or have independent contractors that are ultimately reclassified as employees, you will be assessed additional tax, interest, and penalties.
Use Tax is when you purchase something that is used for the production of income inside Illinois from an out-of-state vendor, where Illinois sales tax was not collected. You are supposed to report these purchases to the state and pay a 6.2% Use Tax. Any purchases from Amazon, or the like, can cause substantial problems. If you cannot prove based upon an original receipt that Illinois Sales Tax was collected, you will probably be charged Use Tax along with penalties and interest.
Sales Tax collection and remittance is also examined. Remembering that you are guilty until proven innocent, you will need original documentation. If the transaction was non-taxable, such as a sale to a charitable organization or the sale of a service, you will need the charitable exemption certificate or the original invoice to prove that you were not required to collect and remit sales tax. The sales tax laws of our state can be very tricky and unreasonable. Any physical product sold to an end user, with a delivery address inside Illinois is most likely a taxable transaction.
Illinois Department of Revenue audits are some of the most miserable experiences that any business can endure. Everything is examined. It is very difficult to go through one, without owing the State something. Original documentation, proper bookkeeping, and adherence to tax laws in your accounting system are the keys to survival. But, let’s not forget that knowledgeable and professional representation can make a big difference as well.