Recurrent Taxpayer Non-Compliance Issues

Per 20 ILCS 2520/4, the Illinois Department of Revenue (IDOR) is required to identify areas of recurrent taxpayer non-compliance with rules or guidelines and to report its findings and recommendations concerning such non-compliance annually. The information provided on this webpage will be included in the Illinois Department of Revenue’s Annual Report each year. Updates may be made prior to the annual reporting of this information if additional non-compliance issues arise that IDOR determines should be addressed.

The following taxpayer recurrent non-compliance issues have been identified by the Illinois Department of Revenue (IDOR) for 2025.

Audits of cash businesses such as bars, restaurants, liquor stores, tobacco stores, grocery stores, convenience stores, and fuel stations continue to show compliance problems.

• Audited taxpayers are failing to keep or produce records. The records produced are often insufficient to verify taxable sales. Failure to maintain proper records and/or production of insufficient records cause delays in the audit process which results in taxpayers postponing their payments for established liabilities. (See 86 Ill. Adm. Code 130.801.)
• Some taxpayers are incorrectly reporting sales subject to the high rate of tax as sales subject to the low rate of tax on their returns to reduce their tax liability. (See 86 Ill. Adm. Code 130.310 and 86 Ill. Adm. Code 130.311.)
• Some fuel stations are incorrectly reporting taxable fuel as tax exempt fuel. (See 86 Ill. Adm. Code 130.320 and FY 2024-13, Form ST-1 and Form PST-1 Changes for New Motor Fuel Classifications, Effective January 1, 2024.)

Retailers are increasingly adding additional charges to their sales invoices such as credit card transaction fees, banquet room fees, etc. They often fail to collect taxes on these fees even though these fees are considered as costs of doing business and are subject to tax. (See 86 Ill. Adm. Code 130.410, 86 Ill. Adm. Code 130.2145, and CA-2012-11.)

Depending on their nature, state and local taxes can either be deducted from gross receipts or included in them as costs of doing business. Generally, costs of doing business are not deductible and should be included in gross receipts. (See 86 Ill. Adm. Code 130.410.)

Retailers find it difficult to determine if local food and beverage taxes should be included in their gross sales or deducted from it when calculating the ROT. Whether a tax should be included in a business’s gross receipts depends on who is legally responsible for paying the tax. If the consumer is legally responsible for paying the tax, it does not count as part of the business’s gross receipts. If the retailer or manufacturer is responsible for the tax, then the tax must be included in the gross receipts as part of the business’s operating costs. (See 86 Ill. Adm. Code 130.435.)

For example, the Chicago Restaurant Tax should be included in gross receipts on Line 1 of Form ST-1, Sales and Use Tax and E911 Surcharge Return, and is subject to ROT, but some Chicago restaurants are failing to include the Chicago Restaurant Tax in gross receipts. For the taxes that are deductible, some retailers fail to keep records showing they remitted the taxes to the local government. (See 86 Ill. Adm. Code 130.410, 86 Ill. Adm. Code 130.435, and Form ST-1, Sales and Use Tax and E911 Surcharge Return, Instructions.)

The Audit Bureau has noticed some retailers are failing to obtain or keep the documentation required to show that a sale qualifies for an exemption. Examples of frequently missing exemption documentation include resale certificates, farm machinery and equipment exemption certificates, building materials exemption certificates, marketplace facilitator certificates, and exemption documentation for sales to governmental, charitable, religious, or educational organizations. This failure to obtain or keep documentation leads to delays in completing audits as the taxpayers must then gather the documentation after the audit starts. (See PIO-101, Illinois Sales & Use Tax Matrix, for guidance on different types of exemption documentation required to be obtained by retailers and 86 Ill. Adm. Code 130.810.)

For example, when a sale is made to an exempt organization, some retailers may obtain exemption certificates (i.e.,  Form ST-591, Certificate of Exemption Eligibility for Qualified Purchases of Home-Delivered Meals, a copy of the organization’s Section 501(c)(3) exemption from the IRS, a copy of their “E” number from IDOR, etc.) but fail to retain the documentation required to tie those certificates to specific sales nor do they maintain proof that payment was made by the exempt organization. A retailer must identify the sales made to the specific exempt organization in their books and records and provide proof payment was made by the exempt organization. If they fail to do so, IDOR must disallow the exemption. (See 86 Ill. Adm. Code 130.2081.)

Additionally, some construction contractors claiming a building materials exemption for work performed in an Enterprise Zones, River Edge Redevelopment Zones, etc., are failing to keep and provide the documentation necessary to verify their building material purchases qualify for the project exemptions.  In addition, some retailers selling to these construction contractors are failing to obtain the required exemption certifications. It is the retailer’s responsibility to verify that the certificate holder’s building materials exemption certificate number is valid and active. The retailer can confirm the validity of the Form EZ-1, Building Materials Exemption Certification, from the construction contractor through IDOR’s website. (See 86 Ill. Adm. Code 130.1949 – 1954 and FY 2013-16, New Application Process to Obtain Sales Tax Exemption Certificates for Building Materials.)

The Audit Bureau has noticed some retailers and servicepeople are not remitting Retailers’ Occupation Tax or Service Occupation Tax for durable medical equipment and other tangible personal property transferred to Medicare beneficiaries under Medicare Parts A and B and paid for by Medicare Administrative Contractors. (See CA-2024-01, Sales Made to Medicare Administrative Contactors, and 86 Ill. Adm. Code 130.810.)

The Audit Bureau has noticed some cannabis cultivators are incorrectly calculating the privilege taxes they owe due to the different ways in which the adult-use and medical cannabis privilege taxes are calculated. 

The medical cannabis privilege tax is calculated using the sales price per ounce while the adult-use cannabis privilege tax is based on gross receipts.

Cannabis cultivators must file Form CC-1, Adult Use Cannabis Cultivation Privilege Tax Return, if they are licensed as a cannabis cultivation center or a craft grower making sales of adult use cannabis. Cannabis cultivation centers selling medical cannabis must file Form MC-1, Medical Cannabis Cultivation Privilege Tax Return, to report sales of medical cannabis. (See 86 Ill. Adm. Code section 422.105, 86 Ill. Adm. Code section 423.105, 86 Ill. Adm. Code section 424.105, 86 Ill. Adm. Code section 425.105, and 86 Ill. Adm. Code section 429.105.)   

Current Law for Medical Cannabis Cultivators:

Beginning January 1, 2014, a tax is imposed upon the privilege of cultivating medical cannabis at a rate of 7% of the sales price per ounce.  The tax is paid by a cultivation center and is not the responsibility of a dispensing organization, qualifying patient or designated caregiver. [410 ILCS 130/200(a)]

Current Law for Adult-Use Cannabis Cultivators:

Beginning September 1, 2019, the Cannabis Cultivation Privilege Tax Law imposes a tax on the privilege of cultivating cannabis in this State* at the rate of 7% of gross receipts received from the first sale of cannabis by the cultivator.  [410 ILCS 705/60-10(a)]

The Audit Bureau has identified a variety of compliance issues related to the International Fuel Tax Agreement:

• Many licensees covered by the International Fuel Tax Agreement are failing to keep or produce the documentation required to verify the amounts claimed on their returns. These licensees are not properly maintaining logs or other support to document their miles driven, are not keeping fuel purchase receipts, and are not adequately keeping track of the fuel withdrawn from bulk fuel storage tanks.
• Many IFTA licensees are not keeping copies of their system generated Electronic Logging Device (ELD) daily log details which are needed for verification on completeness of the trips taken. These licensees are only keeping copies of the mileage state* summaries. ELD systems’ reports are normally only accessible for the previous six months, which is problematic when auditing periods prior to that timeframe. (See the MFUT-53, Illinois IFTA Carrier Compliance Manual and 86 Ill. Adm. Code 500.345.)

Licensees covered by the International Fuel Tax Agreement are failing to record the actual addresses of their origin and destination points and are instead simply listing the city which is insufficient. They are also failing to record their actual trip origin and destination points and are instead only reporting the locations where they pick up and drop off loads.

• Some IFTA licensees are purchasing more decals than their reported active trucks listed and are unable to show the copies of any unused decals after the year ends. This makes it difficult to determine whether the licensee is using those decals with vehicles not reported in their records.  

The Audit Bureau has identified a variety of compliance issues related to the purchases of aircraft, watercraft, and vehicles. Major issues include the following:

• Taxpayers continue to claim the rolling stock exemption on non-qualifying vehicles such as trucks that do not exceed the 16,000 pounds gross vehicle weight rating (GVWR) and vehicles improperly claimed to be used as limousines. (Note: Effective July 1, 2025, Public Act 104-0006 eliminated the exemption for limousines used to provide transportation network company services which should simplify future compliance.)  (See 86 Ill. Adm. Code 130.340 and FY 2025-30, Changes Related to Motor Vehicle Transactions for Automobile Dealers.)
• Illinois residents are purchasing vehicles from Illinois dealers claiming the exemption available for out-of-state residents from reciprocal states. There is a similar issue with Illinois residents establishing out-of-state LLCs to improperly claim a nonresident exemption on vehicles intended to be used in Illinois. (Note: Public Act 104-0006 provided clarification on this issue by creating a rebuttable presumption that an LLC with an Illinois resident as a member is not eligible to claim the nonresident exemption.) (See 86 Ill. Adm. Code 130.605 and FY 2025-30.)
• Taxpayers are claiming the farm machinery and equipment exemption on purchases which frequently do not qualify for the exemption, such as ATVs, UTVs, and mowers. If these purchases do qualify for the exemption, taxpayers frequently fail to keep usage logs which makes verifying that the items are used in an exempt manner difficult during an audit. (See 86 Ill. Adm. Code 130.305.)
• Purchasers of watercraft from private parties are listing a price below the actual purchase price to reduce the tax due. (See 86 Ill. Adm Code 153.110.)
• Out-of-state residents who hangar or primarily use aircraft in Illinois are failing to file returns and pay the applicable use taxes due. (See 86 Ill. Adm. Code 150.310.)

Leasing companies, in and outside of Illinois, are failing to make the proper determination on sales of certain off-lease, Illinois-registered items such as motor vehicles, watercraft, aircraft, and trailers, which are subject to state and local retailers’ occupation tax in Illinois.

In Illinois, if a company primarily leases or rents first division motor vehicles, aircraft, or watercraft, and then sells any of these used items to someone who intends to use it and not resell it, that company is considered a retailer engaged in the business of selling that specific item at retail. Similarly, leasing companies selling off-lease, second division motor vehicles or trailers are also considered to be selling these items at retail if they typically sell this type of property. (See 86 Ill. Adm. Code 130.111 and FY 2025-17, Reporting Requirements for Certain Titled or Registered Property Subject to Tax on Lease or Rental Receipts.)

These leasing companies must register with IDOR and are obligated to collect Illinois Sales Tax and report these sales on Form ST-556, Sales Tax Transaction Return. (See 86 Ill. Adm. Code 130.2013(e).)

In general, apportionment calculations seem to give taxpayers difficulty. Certain businesses that derive their income from inside and outside Illinois require an apportionment formula. On a recurring basis, auditors have identified compliance problems with taxpayers failing to correctly report both the numerator and denominator of the apportionment factor. Improper calculations by taxpayers can result in a smaller apportionment of income to Illinois and as a result, they underpay their tax.

For more information on what should be included in the numerator or denominator of your sales factor, see 86 Ill. Adm. Code Sections 100.3370 and 100.3380.

• Numerator / Reversionary Sales - Auditors often find instances where the numerator does not include items of income apportionable to Illinois. This includes sales of services received in Illinois and sales of tangible personal property shipped into Illinois. Auditors have also noted instances where taxpayers are not including receipts from the sale of tangible personal property shipped from Illinois to states where they are not taxable. Per 35 ILCS 5/304(a)(3)(B)(ii), such sales should be included in the sales factor numerator.

Apportionment Denominator - Auditors have discovered instances where taxpayers have added items into the calculation of the apportionment denominator that should not be included, as well as excluded figures from the denominator when they should be included. For example, auditors have discovered instances where the apportionment denominator includes items of income such as foreign dividends, tax exempt interest, etc., that are being subtracted during the computation of base income. Per Continental Illinois Nat’l Bank & Trust Co. of Chicago v. Lenckos, 102 Ill. 2d 210 (1984), any gross receipt excluded from base income or subtracted in the computation of base income must be excluded from the apportionment numerator and denominator. Auditors are also noticing that taxpayers struggle to properly classify (or mistakenly include) royalties, non-business income, and eligible throw-out sales when calculating the denominator. Taxpayers are mistakenly using gross sales instead of net sales. Eliminations are also being calculated incorrectly. (See 35 ILCS 5/304(a)(3).) 

Partnerships are improperly reporting the subtraction modification allowed under the Illinois Income Tax Act Section 203(d)(2)(H) for personal service income (PSI) or reasonable allowance for compensation paid to their partners. Taxpayers are using this subtraction to zero out their taxable income and eliminate their replacement tax liability. In many cases, they have not maintained proper documentation to substantiate the subtraction amount as reported. When supporting documentation is requested, they either do not have the documentation, or they attempt to find a calculation that justifies their subtraction amount. 

Due to Illinois' complex and decoupled rules regarding bonus depreciation, many taxpayers incorrectly calculate their tax modifications on Form IL-4562, Special Depreciation. This non-compliance is a timing issue but results in the state* not receiving the tax revenue it should.

Taxpayers are trying to use subtraction modifications to catch up on the deduction even after the asset has been disposed of. Additionally, they are keeping separate depreciation records between federal and state* for different calculations. (See 35 ILCS 5/203 and Form IL-4562, Instructions.) 

Individual taxpayers are improperly reporting income and expenses on their federal Schedule C or Schedule E. The following are common issues IDOR continues to find: 

• Under-reporting of income – Taxpayers may not be reporting all income related to their business activities.
• Over-reporting of expenses - Auditors have noticed that taxpayers may be claiming a small amount of income but a disproportionately large amount of expenses. Taxpayers are also claiming wage expenses even though they are not paying Illinois withholding income tax on these wages. 
• Improper business deductions – Auditors have noticed that taxpayers are claiming excessive business deduction amounts and are using incorrect information when doing so. For example, some taxpayers are claiming home office expenses instead of pro-rating the amounts and completing the proper forms per the federal guidelines. 
• Claiming gambling losses in the improper place - There are instances where taxpayers are attempting to take gambling losses on the federal Schedule C, claiming they are professional gamblers, instead of properly claiming the losses on the federal Schedule A.  

In each case, taxpayers are attempting to create a loss to offset other, unrelated income and reduce their tax liability. In some cases, the reported loss is significant enough that it allows them to claim federal and state Earned Income Tax Credit (EITC). 

Auditors have noted several recurring issues with taxpayers incorrectly completing Form IL-477, Replacement Tax Investment Credits, that results in taxpayers claiming more credit than they are entitled to receive.

For example, taxpayers are:

• Failing to meet the conditions required to claim the Replacement Tax Investment Credit.
• Claiming the credit on non-qualified property.
• Failing to report recapture credits from disqualified property.
• Claiming the credits on property put into service after 2018, which is not permissible according to IITA §201(e)(8).  

One of the most prevalent compliance issues faced by IDOR is non-filed returns. This is a major issue, especially with individual income taxpayers. In accordance with information exchange agreements, IDOR receives information from both the Illinois Comptroller’s Office and the IRS regarding taxpayers that have Illinois sourced income but are found to have not filed the required Illinois returns. The Audit Bureau contacts these taxpayers and encourages them to file their state return or to provide supporting information that confirms they are not required to file with the State of Illinois. There have been over 131,000 non-filer taxpayers for individual income tax with $302.7 million in liability established in the past fiscal year alone.  

Non-filed business income tax returns are also problematic. In a recent non-filer project, the Audit Bureau encountered transportation companies that have revenue miles within Illinois, but did not file Illinois business income tax returns to apportion their income based upon Illinois revenue miles.  

Audits have revealed taxpayers who habitually fail to file returns despite multiple compliance enforcement cycles. These repeated audits are costly and inefficient for the state. Certain taxpayers knowingly avoid filing returns to evade paying taxes they know are due, including individuals with wages lacking Illinois withholding, recipients of flow-through income, and those transacting primarily in cash.  

When taxpayers are audited by the IRS, the federal audit results often include changes that result in increased Illinois tax liability. Taxpayers are required to report these changes from the federal Revenue Auditor’s Report (RAR) to Illinois within 120 days of the federal finalization date. Taxpayers often fail to report federal changes that affect their Illinois returns, so the Audit Bureau must contact them to make the required changes. This applies to several taxes including individual income tax, business income tax, and withholding tax. (See 35 ILCS 5/506(b).) 

The Audit Bureau has noted several recurring issues with unitary business groups (See Public Act 93-0840 and 86 Ill. Adm. Code 100.2430(b)(1)).)

• Unitary business groups have been incorrectly utilizing non-unitary partnership losses instead of having the non-unitary partner claim them.   
• Taxpayers seem to misunderstand the 80/20 rules and misclassify foreign partners. 
• Some taxpayers struggle with the repeal of the non-combination rule. They are incorrectly excluding entities from the group that were previously disallowed due to non-combination and are failing to include all appropriate entity types in the unitary group. 
• Taxpayers do not understand that the rules for federal combined returns are different than the Illinois unitary rules and regulations, causing them to include or exclude members from the unitary group incorrectly.  

Some taxpayers are trying to avoid Illinois taxation by filing as residents of states with no income tax, such as Florida, while still maintaining residences in Illinois. The Audit Bureau is receiving referrals from the Individual Processing Division, the Federal State Exchange Unit, and the Criminal Investigation Division for situations that appear questionable. Rules for residency can be found in 86 Ill. Adm. Code 100.3020. 

The Audit Bureau has found that partnerships are intentionally creating multi-tiered partnership structures and are incorrectly using Form IL-1000-E, Certificate of Exemption for Pass-through Withholding, in an effort to hide income. Tiered partnership structures make it harder to track the income flowing through the various tiers.  Often, the income-originating partnership taxpayers are not paying the pass-through’s withholding because they are claiming the IL-1000-E exemption for the flow-through partnerships, and then the flow-through partners do not file the required return to pay tax on the K-1 flow through income. This circumvents the intent of the pass-through withholding.  

Taxpayers continue to claim they do not have nexus with Illinois or try to claim protection under P.L. 86-272 even though the business activities exceed mere solicitation. (See 86 Ill. Adm. Code 100.9720.) 

Taxpayers are incorrectly claiming the Research and Development tax credit to claim credit for research activities that are conducted outside of Illinois. (See 35 ILCS 5/201(k) and 86 Ill. Adm. Code 100.2160.)

(IDOR-RPT1-T – Updated 10/25)