Starting July 1, 2013, Illinois taxpayers will gain an important benefit — the right to litigate tax disputes with the Illinois Department of Revenue (Department) on a more level playing field, without upfront payment of the tax. Many tax disputes previously heard by the Office of Administrative Hearings (OAH) of the Department will now be heard by the Illinois Independent Tax Tribunal (Tax Tribunal), an adjudicative body independent of the Department. With this new Tax Tribunal, Illinois joins a growing number of states with independent tax tribunals created to promote fairness and transparency in adjudication of tax disputes. 

Taxpayers may take their cases to the Tax Tribunal if their protests are filed with the Department in June 2013 and may petition the Tax Tribunal directly beginning July 1, 2013. The Tax Tribunal will handle cases in excess of $15,000 concerning non-property taxes administered by the Department. The Tribunal’s administrative law judges (ALJs) in Chicago and Springfield will hear the cases in a formal civil litigation process similar to that in Illinois circuit courts. Appeal will lie with the appellate court of Illinois. 

With only a few months left before the Tax Tribunal begins, there remain questions: Who will be appointed as ALJs? How will the Tax Tribunal operate as a practical matter? What will the rules of practice before the Tax Tribunal look like? These open questions will be decided in the coming months. In any event, tax practitioners need to be aware of the impending change in Illinois tax litigation and craft their strategies accordingly. 

Background.  

Under the current regime, an Illinois taxpayer needing to contest the results of a Department audit is faced with two choices: (1) administrative review before a Department ALJ at OAH; or (2) a circuit court proceeding under the State Officers and Employees Money Disposition Act, 30 ILCS 230/1, et seq. (commonly referred to as the Protest Monies Act). Both options have advantages and disadvantages.  

One advantage of administrative review before an ALJ is that the Department’s OAH does not require prepayment of tax and its ALJs are tax specialists. There are fairness concerns, however, because the Director of the Department is the final arbiter of OAH proceedings. When the Department has taken a policy position adverse to a taxpayer, a taxpayer has little likelihood of prevailing before the OAH. Coupled with the extremely deferential standard established by the Illinois courts for review of administrative agency decisions (see, e.g., City of Belvedere v. Illinois State Labor Relations Board, 181 Ill.2d 191, 692 N.E.2d 295, 302, 229 Ill.Dec. 522 (1998)), for many taxpayers the option of proceeding in OAH is unappealing. 

In order to proceed in circuit court, a taxpayer must pay its tax assessment up front. For taxpayers seeking a credit or those unable to afford a lump-sum payment of their assessment, litigation under the State Officers and Employees Money Disposition Act is beyond their reach. Moreover, in some circuits, judges assigned to State Officers and Employees Money Disposition Act litigation are legal generalists rather than tax specialists, which raises challenges for both the Department and taxpayers in litigating these disputes. 

The creation of an independent tax tribunal with a prepayment remedy thus had been a longstanding goal of Illinois and American Bar Association taxpayer advocate groups. When the Committee on State Taxation assigned Illinois a grade of “D“ for fair and efficient tax administration, based in part on its conclusion that Illinois’ system lacked independence, the Illinois General Assembly was persuaded to take action to remedy the situation.  

The passage of P.A. 97-636 (eff. June 1, 2012) served as the vehicle for the Tax Tribunal. Included in P.A. 97-636 was a law divesting the Department’s power to hear protests of liability or deficiency as of July 1, 2013, and calling for the creation of an Independent Tax Tribunal Board. See35 ILCS 1005/5-5, repealed byP.A. 97-1129 (eff. Aug. 28, 2012). No further details were specified, but the provision served its purpose of forcing stakeholders to come together and agree on the specifics of the new Tax Tribunal.  

This process culminated in the Illinois Independent Tax Tribunal Act of 2012, P.A. 97-1129, which is codified as 35 ILCS 1010/1-1, et seq. Section 1-5(a) of the Act explains the legislature’s purpose in creating the Tax Tribunal: 

To increase public confidence in the fairness of the State tax system, the State shall provide an independent administrative tribunal with tax expertise to resolve tax disputes between the Department of Revenue and taxpayers prior to requiring the taxpayer to pay the amounts in issue. By establishing an independent tax tribunal, this Act provides taxpayers with a means of resolving controversies that ensures both the appearance and the reality of due process and fundamental fairness. 35 ILCS 1010/1-5. 

This Act will govern how the Tax Tribunal will work. It is based on the American Bar Association’s Model State Administrative Tax Tribunal Act. The Tax Tribunal Will Be an Administrative Agency Headed by a Chief ALJ. The Tax Tribunal will be a new agency in the executive branch of the state, with offices in Cook and Sangamon Counties. See 35 ILCS 1010/1-15(a), 1010/1-35(a). A Chief ALJ, to be appointed by the Governor to a five-year term with the advice and consent of the Senate, will oversee the Tax Tribunal. 35 ILCS 1010/1-25(a). This Chief ALJ will have “sole charge” of the administration of the Tax Tribunal and will control case assignments. 35 ILCS 1010/1-25(f). Up to three additional ALJs may be appointed by the Governor to four-year terms. 35 ILCS 1010/1-25(a). The Act creating the Tax Tribunal specifically requires the ALJs to be tax controversy specialists, with substantial knowledge of state tax laws and the making of a record suitable for judicial review. 

While there is legislative authorization to begin setting up the Tax Tribunal, 35 ILCS 1010/1-15(d), no ALJs have yet been appointed. The selection of the initial ALJs, and particularly the Chief ALJ, will have a tremendous role in shaping the effectiveness of the Tax Tribunal as a force for fairness in the Illinois tax system. The ALJs will be some of the most highly compensated members of the executive branch.

ALJ salaries are equal to that of the Director of Revenue, 35 ILCS 1010/1-25(e), which is currently $138,521.44 according to the State Journal-Register database entitled “Salaries — State of Illinois” (available at http://databases.sj-r.com/salaries/stateof-il/department/state-officers/). 

The Chief ALJ receivesan additional $15,000 annual stipend. 35 ILCS 1010/1-25(e). This potentially makes the Chief ALJ the second highest-paid officer in the state after the Governor and just ahead of the Secretary of State. 

The Tax Tribunal Will Hear Most Tax Cases in Excess of $15,000.

The Tax Tribunal will be the body with original jurisdiction over significant claims in income, sales, and other Department-administered taxes, except property taxes. See35 ILCS 1010/1-45(a), 1010/1-45(e)(1). Department determinations of tax exemptions are also excluded, as are tax disputes before other state agencies, such as the Department of Insurance. 35 ILCS 1010/1-45(e)(2).  

To establish the Tax Tribunal’s jurisdiction, two additional conditions must be satisfied. First, the Department must issue a formal notice of tax liability, notice of deficiency, notice of claim denial, or notice of penalty liability. See 35 ILCS 1010/1-45(a). Second, the total amount at issue in a tax year or audit period must exceed $15,000 of tax, not counting any penalties or interest, or, in a case in which the protested notice solely concerns interest or penalties, the combined total of all penalties and interest in the notice must exceed $15,000. Id. There is a $500 filing fee. 35 ILCS 1010/1-55(a). The jurisdiction of the Tax Tribunal begins on July 1, 2013. 35 ILCS 1010/1-15(d).

To bring a case, a taxpayer must petition the Tax Tribunal within the time allotted by law to protest. 35 ILCS 1010/1-50(a). A taxpayer who files an administrative protest with the Department between June 1 and 30, 2013, has a choice: the taxpayer may elect, but is not required, to have its proceedings conducted before the Tax Tribunal if the election is made on or after July 1 and within 30 days of when the protest was originally filed. 35 ILCS 1010/1-15(d). For example, a taxpayer who filed a protest with the Department on June 3, 2013, would have until July 3 to file its election to proceed before the Tax Tribunal. Taxpayers should be careful to avoid filing a protest unnecessarily early, e.g., filing the protest in May instead of June, and thereby missing the opportunity to proceed with the case before the Tax Tribunal instead of the OAH.  

The Tax Tribunal can hear constitutional issues but may decide in favor of the taxpayer only on an as-applied basis. 35 ILCS 1010/1-45(f). A taxpayer may however establish a record to support the appeal of a facial challenge to the appellate court. Id. Not raising constitutional claims before the Tax Tribunal does not preclude a taxpayer from raising the claims before the appellate court (id.), but it would forgo an opportunity to create a supporting evidentiary record. 

If a taxpayer does not want to proceed before the Tax Tribunal, its alternative is a State Officers and Employees Money Disposition Act case. Beginning July 1, 2013, the Department’s protest and OAH route a petition can be filed with the Tribunal. See, e.g., 35 ILCS 5/908(a), 5/909(e), 5/910(a), 105/20, 120/4. The right to pay under protest and proceed in circuit court under the State Officers and Employees Money Disposition Act, however, is expressly preserved. See 35 ILCS 1010/1-45(b); 30 ILCS 230/1, et seq. It is anticipated that the advent of the Tax Tribunal will decrease the volume of State Officers and Employees Money Disposition Act cases as taxpayers avoid the requirement of paying the disputed amount under protest, but much will depend on how the Tax Tribunal is implemented. 

The Tax Tribunal Will Act as Trial Court Consistent with the Illinois Discovery and Evidence Rules. 

While many of the details of the Tax Tribunal remain to be determined in forthcoming administrative rules authorized under 35 ILCS 1010/1-65(d) and 1010/1-95, the statutory requirements make it clear that the Tax Tribunal’s proceedings will be fairly formal and quite similar to a case in the circuit court, with the added benefit of time deadlines to ensure a prompt and efficient resolution of the dispute.  

The taxpayer may represent itself pro se or be represented by an attorney admitted to practice in Illinois. 35 ILCS 1010/1-80(a). The Tax Tribunal may allow attorneys authorized to practice in other states to appear pro hac vice. Id. Unlike the OAH, at the Tax Tribunal the Department will be represented by the Attorney General rather than its own litigators. 35 ILCS 1010/1-80(b). A case begins with the taxpayer’s petition, 35 ILCS 1010/1-50(a), which is analogous to a complaint. Unlike proceedings in OAH, the Department is required to answer the taxpayer’s petition. Its answer must be filed within 30 days of the filing of the petition. 35 ILCS 1010/1-50(b). The case can proceed to discovery, in which the same Supreme Court Rules applicable to discovery in civil cases also apply equally to cases before the Tax Tribunal. 35 

ILCS 1010/1-60(a). The Tax Tribunal has the right to issue subpoenas. 35 ILCS 1010/1-60(b). The Tax Tribunal can enforce its discovery rulings by deciding substantive issues against the offending party. 35 ILCS 1010/1-60(d). The hearing will be de novo, and the burden of persuasion is on the taxpayer by a preponderance of the evidence. 35 ILCS 1010/1-65(a), 1010/1-65(j). Thus, the Tax Tribunal owes no deference to the Department’s findings, determinations, or interpretations. It remains to be seen how the Tax Tribunal will treat the statement in various tax statutes that the Department’s assessments and claim denials are prima facie correct.See, e.g., 35 ILCS 5/904(a) – 5/904(b), 120/4, 120/6b.  

The rules of evidence and privilege apply in a Tax Tribunal hearing just as they would in proceedings before a circuit court, as do the right to cross-examination and the Tax Tribunal’s ability to take judicial notice. 35 ILCS 1010/1-65(e) through 1010/1-65(g). The parties have the right to jointly petition the Tax Tribunal to resolve their dispute through mediation. 35 ILCS 1010/1-63. Taxpayers choosing the Tax Tribunal must be mindful of confidentiality concerns. 

Although the Act creating the Tax Tribunal automatically protects the privacy of taxpayer tax returns, hearings are open to the public unless closed for good cause by order of the Tax Tribunal. 35 ILCS 1010/1-65(c). Likewise, pleadings and evidence in the record before the Tax Tribunal are public unless filed or admitted under seal. Id. This is a major departure from the confidential administrative proceedings at the OAH. The Tax Tribunal is required to issue a written decision setting forth the findings of fact and conclusions of law. 35 ILCS 1010/1-70(a). Importantly, decisions must be rendered within 90 days of the last brief or hearing, although one 30-day extension is allowed. 35 ILCS 1010/1-70(b). If deadlines are missed, either party has the right to file a lawsuit to compel the issuance of a ruling. 35 ILCS 1010/1-70(c). Tax Tribunal decisions become final 35 days after issuance of a notice of decision. 35 ILCS 1010/1-70(e). The Tax Tribunal will publish its decisions within 180 days of issuance. 35 ILCS 1010/1-85(a). These decisions are likely to become a significant body of law and guidance for taxpayers. 

Appeal of a decision of the Tax Tribunal is to the appellate court under the provisions of the Administrative Review Law, 735 ILCS 5/3-101, et seq. 35 ILCS 1010/1-75(a). See also 735 ILCS 5/3-113. On review, the “findings and conclusions” of the Tax Tribunal on questions of fact will be “held to be prima facie true and correct.” 735 ILCS 5/3-110.  

Conclusion. 

The advent of the Tax Tribunal marks a new chapter in Illinois tax law. While uncertainty remains, the prospect of a prepayment remedy before an independent tribunal is likely to be popular with Illinois taxpayers. As the July 1, 2013, start date nears, practitioners should be aware of the transition rules and craft their strategies accordingly.