Illinois Department of Revenue

1. Illinois Department of Revenue Withholding Income Tax Audits Robert Lovell, CPA, CIA Revenue Audit Supervisor

2. INCOME TAX DISCOVERY Two Revenue Audit Supervisors Twenty five Revenue Auditors Types of audits completed Corporate Income tax- IL-1120 returns Sub-Chapter S corporations- IL- 1120ST returns Partnerships- IL- 1065 returns Withholding- IL- 941 returns Individual Income Tax- IL- 1040 returns

3. Resources to Discover Potential Withholding Income Tax Audits Internal Revenue Service (IRS) Employer/Provider Submitted Forms W-2 Employee submitted Forms W-2 Illinois Department of Labor

4. Internal Revenue Service (IRS) Information sharing with IRS under IRC 6103(d) – General comparison of federal filing records against Illinois filing records Taxpayers federally audited for failure to file US-941’s with Illinois addresses Taxpayers federally audited for under-reporting federal withholding Taxpayers federally audited for misclassification of fringe benefits (personal use of company owned assets, reimbursement of personal expenses not considered necessary for operation of business) Taxpayers federally audited for misclassification of officer/shareholder distributions/compensation Taxpayers federally audited for misclassification of independent contractors

5. Employer/Provider Submitted Forms W-2 Beginning 1/1/2009, Payroll Providers were required to electronically submit 2008 Forms W-2 & W-2C. Beginning 1/1/2010, Payroll Providers & Employers with more than 250 employees were required to electronically submit 2009 Forms W-2 & W-2C. ALL businesses, regardless of size, are encouraged to electronically submit Forms W-2 & W-2C.

6. Employee SubmittedForms W-2 Forms W-2 received with employees’ IL-1040s, filed both traditionally (on paper) and electronically are periodically reviewed

7. Illinois Department of Labor 2008 Worker Classification Act – IDOL audits of construction companies in which it is determined that independent contractors were misclassified are referred to IDOR for comparable Illinois Withholding Income Tax Audits Illinois Wage Payment & Collection Act definition of employee is used by IDOL to determine whether independent contractors should be classified as employees

8. Possible WithholdingIncome Tax Audits Federal Employment Tax Audits Non-Filer Under-reporter Worker Classification Timely Payment Compliance

9. Federal Employment Tax Audits IRC 6651 – taxpayer failed to file US-941’s Triggers a review of the Illinois withholding account to determine filing status If IL-941’s filed, review for under-reporting IRC 3402 – fringe benefits reclassified to wages subject to federal withholding, FICA & Medicare Triggers review for under-reporting Possible apportioning of wage adjustment based on Illinois versus National wages if a national employer

10. Federal Employment Tax Audits (Cont’d) IRC 3509 – reclassification of independent contractors to employees Triggers a review of the Illinois withholding account to determine filing status If IL-941s filed, review for under-reporting Per IITA Section 706, if proof provided that income tax paid on reclassified income, only penalty & interest due by employer on amount that was required to be withheld

11. Federal Employment Tax Audits (Cont’d) IRC 3101/3111 – reclassification of officer/shareholder distributions/compensation Triggers a review of the Illinois withholding account to determine filing status If IL-941s filed, review for under-reporting Per IITA Section 706, if proof provided that income tax paid on reclassified income, only penalty & interest due by employer on amount that was required to be withheld

12. Illinois Non-Filer &Under-reporter Audits discovered comparing federal information against state information Audits discovered from other than federal information Primary goal to bring taxpayer into compliance regarding Illinois withholding Complete compliance of all applicable Illinois taxes with be performed

13. Illinois Worker Reclassification Referrals from IDOL Employee complaints made directly to IDOR Determination of Worker Classification (Fed Rules) Three categories: Behavioral Control, Financial Control and Relationship of the Parties Behavioral Control – Instruction & Training Financial control – Significant Investment, Expenses, & Opportunity for Profit or Loss Relationship of the Parties – Employee Benefits & Written Contract IITA Section 706 could apply here as well, if proof provided

14. Timely Payment Compliance Filing Frequencies: Quarterly – If annual withholding is more than $1,000 Annual – If annual withholding is $1,000 or less Payment Frequencies: Annual – Annual withholding is $1,000 or less Monthly – Annual withholding is more than $1,000 but less than $12,000 Semi-Weekly – Annual withholding is $12,000 or more If anytime during a filing period you exceed the next payment frequency’s payment level, you must advance to the next and continue to pay on the new level for the remainder of that year and the following year.

15. Timely Payment Compliance (Cont’d) Periodic Letter Projects are done to confirm taxpayer compliance Information requested is usually Illinois Withholding by Payroll Date Penalties & Interest will be assessed on those whose payments are not timely Taxpayer’s are informed of change in filing/payment frequency WHEN they change

16. Withholding Income Tax Audit Process The Withholding Income Tax Audit The Notice of Deficiency Final Billing Compliance Checks

17. The Withholding Income Tax Audit Notice of Audit Initiation – letter notifying taxpayer audit has started and request for returns/information Notice of Proposed Deficiency – based upon best information available unless more accurate information provided by taxpayer; ability to request Informal Conference Board (ICB) Review Waiver of Restrictions – document that upon signature reflects the taxpayer’s agreement to the change in income tax assessed; upon agreement penalties & interest are deemed assessed The auditor can be contacted, or provided, any and all applicable information during this process, unless under review by ICB, then all communication is done through them until an Action Decision is issued.

18. The Notice of Deficiency This is issued upon completion of the unagreed audit This notice allows for a formal protest through Administrative Hearings or payment under protest and file in Circuit Court (60 days to file) The initial auditor should not be contacted after the Protest has been filed If the 60 period expires and no Protest is filed, the assessment will be final

19. Final Billing This is issued upon completion of the agreed audit, unagreed audit, or settlement (if payment not already satisfied) This statement allows for request for payment plan or a Petition to the Board of Appeals, if ICB and/or Administrative Hearings has not made a determination. The initial auditor should not be contacted at this time Note: if an outstanding balance still exists after the entire process, collection activity will ensue

20. COMPLIANCE CHECKS IL- 1120 returns Officers IL- 1120ST returns Shareholders IL- 1065 returns Partners Sole proprietorships Individuals