(35 ILCS 5/1005) (from Ch. 120, par. 10-1005)
Sec. 1005. Penalty for Underpayment of Tax.
(a) In general. If any amount of tax required to be shown on a return prescribed by this Act is not paid on or before the date required for filing such return (determined without regard to any extension of time to file), a penalty shall be imposed in the manner and at the rate prescribed by the Uniform Penalty and Interest Act.
(b) Reportable transaction penalty. If a taxpayer has a reportable transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20% of the amount of that understatement. This penalty shall be deemed assessed upon the assessment of the tax to which such penalty relates and shall be collected and paid on notice and demand in the same manner as the tax.
(1) Reportable transaction understatement.
For purposes of this Section, the term "reportable transaction understatement" means the sum of subparagraphs (A) and (B):
(A) The product of (i) the amount of the increase
(if any) in Illinois net income, as determined by reference to the amount of post-apportioned income that results from a difference between the proper tax treatment of an item to which this subsection applies and the taxpayer's treatment of that item (as shown on the taxpayer's return of tax), including an amended return filed prior to the date the taxpayer is first contacted by the Department regarding the examination of the return, and (ii) the applicable tax rates under Section 201 of this Act.
(B) Special rules in the case of carrybacks and
carryovers. The penalty for an understatement of income attributable to a reportable transaction applies to any portion of an understatement for a year to which a loss, deduction, or credit is carried that is attributable to a reportable transaction for that year in which the carryback or carryover of the loss, deduction, or credit arises (the "loss or credit year").
(2) Items to which subsection applies.
This subsection shall apply to any item which is attributable to either of the following: (i) any listed transaction as defined in Treasury Regulations Section 1.6011-4, and (ii) any reportable transaction as defined in Treasury Regulations Section 1.6011-4 (other than a listed transaction) if a significant purpose of the transaction is the avoidance or evasion of federal income tax.
(3) Subsection (b) shall be applied by
substituting "30%" for "20%" with respect to the portion of any reportable transaction understatement with respect to which the requirements of (4)(B)(i) of this subsection are not met.
(4) Reasonable cause exception.
(A) In general. No penalty shall be
imposed under this subsection with respect to any portion of a reportable transaction understatement if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.
(B) Special rules. Subparagraph (A) does
not apply to any reportable transaction (including listed transaction) unless all of the following requirements are met:
(i) The relevant facts affecting the tax
treatment of the item are adequately disclosed in accordance with Section 501(b) of this Act. A taxpayer failing to adequately disclose in accordance with Section 501(b) shall be treated as meeting the requirements of this subparagraph (i) if the penalty for that failure was rescinded under Section 1001(b)(3) of this Act;
(ii) There is or was substantial authority
for such treatment; and
(iii) The taxpayer reasonably believed that
such treatment was more likely than not the proper treatment.
(C) Rules relating to reasonable belief. For
purposes of subparagraph (B), a taxpayer shall be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief meets the requirements of this subparagraph (C):
(i) Such belief must be based on the facts
and law that exist at the time the return of tax that includes that tax treatment is filed;
(ii) Such belief must relate solely to the
taxpayer's chances of success on the merits of that treatment and does not take into account the possibility that the return will not be audited, that the treatment will not be raised on audit, or that the treatment will be resolved through settlement if it is raised; and
(iii) Such belief is not solely based on the
opinion of a disqualified tax advisor or on a disqualified opinion.
(A) Disqualified tax advisor. The term
"disqualified tax advisor" is a tax advisor that meets any of the following conditions:
(I) Is a material advisor who participates in
the organization, management, promotion, or sale of the transaction or who is related (within the meaning of Sections 267(b) or 707(b)(1) of the Internal Revenue Code) to any person who so participates;
(II) Is compensated directly or indirectly by
a material advisor with respect to the transaction;
(III) Has a fee arrangement with respect to
the transaction that is contingent on all or part of the intended tax benefits from the transaction being sustained; or
(IV) As determined under regulations
prescribed by either the Secretary of the Treasury for federal income tax purposes or the Department, has a continuing financial interest with respect to the transaction.
(B) Disqualified opinion. The term
"disqualified opinion" means an opinion that meets any of the following conditions:
(I) Is based on unreasonable factual or legal
assumptions (including assumptions as to future events);
(II) Unreasonably relies on representations,
statements, findings, or agreements of the taxpayer or any other person;
(III) Does not identify and consider all
relevant facts; or
(IV) Fails to meet any other requirement as
either the Secretary of the Treasury for federal income tax purposes or the Department may prescribe.
(C) Material Advisor. The term "material
advisor" shall have substantially the same meaning as the same term is defined under Treasury Regulations Section 301.6112-1, (26 CFR 301.6112-1) and shall include any person that is a material advisor for federal income tax purposes under such regulation.
(6) Effective date. This subsection shall
apply to taxable years ending on and after December 31, 2004, except that a reportable transaction understatement shall include an understatement (as determined under paragraph (1)) with respect to any taxable year for which the limitations period on assessment has not expired as of January 1, 2005 that is attributable to a transaction which the taxpayer has entered into after February 28, 2000 and before December 31, 2004 that becomes a listed transaction (as defined in Treasury Regulations Section 1.6011-4(b)(2) at any time.
(c) 100% interest penalty. If a taxpayer has been contacted by the Internal Revenue Service or the Department regarding the use of a potential tax avoidance transaction with respect to a taxable year and has a deficiency with respect to such taxable year or years, there shall be added to the tax attributable to the potential tax avoidance transaction (determined as described in subsection (b)(1) of Section 1005) an amount equal to 100% of the interest assessed under the Uniform Penalty and Interest Act (determined without regard to subsection (f) of Section 3-2 of such Act) for the period beginning on the last date prescribed by law for the payment of such tax and ending on the date of the notice of deficiency. Such penalty shall be deemed assessed upon the assessment of the interest to which such penalty relates and shall be collected and paid in the same manner as such interest. The penalty imposed by this subsection is in addition to any penalty imposed by this Act or the Uniform Penalty and Interest Act. For purposes of this subsection and subsection (d) of this Section, the term "potential tax avoidance transaction" means any tax shelter as defined in Section 6111 of the Internal Revenue Code. This subsection shall apply to taxable years ending on and after December 31, 2004, except that the penalty may also be imposed with respect to any taxable year for which the limitations period on assessment has not expired as of January 1, 2005 that is attributable to a transaction in which the taxpayer has entered into after February 28, 2000 and before December 31, 2004, which transaction becomes a listed transaction (as defined in Treasury Regulations Section 1.6011-4(b)(2)) at any time.
(d) 150% interest rate. For taxable years ending on and after July 1, 2002, for any notice of deficiency issued before the taxpayer is contacted by the Internal Revenue Service or the Department regarding a potential tax avoidance transaction, the taxpayer is subject to interest as provided under Section 3-2 of the Uniform Penalty and Interest Act, but with respect to any deficiency attributable to a potential tax avoidance transaction, the taxpayer is subject to interest at a rate of 150% of the otherwise applicable rate.
(e) Coordination with other penalties. Except as provided in regulations, the penalties imposed by this Section are in addition to any other penalty imposed by this Act or the Uniform Penalty and Interest Act. The doubling of penalties and interest authorized by the Illinois Tax Delinquency Amnesty Act (P.A. 93-26), are not applicable to the reportable transaction penalties and interest under subsections (b), (c), and (d).
(Source: P.A. 93-840, eff. 7-30-04.)
Last modified: February 18, 2015