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Tax Analysts Receives Illinois Audit Manual in Settlement

Posted on Dec. 8, 2020

Over three years after Tax Analysts initially requested the materials, the Illinois Department of Revenue has provided its audit manual and updates, which includes a reference to a goddess associated with primordial chaos.

As a result of a December 3 settlement agreement in Tax Analysts v. Illinois Department of Revenue, Tax Analysts received the redacted copy of the audit manual, which will be available through Tax NotesAudit Insight research tool. As part of the settlement, the company reviewed and approved the basis of all redactions made by the DOR. 

The DOR provided Tax Analysts with 42 chapters of its audit manual and numerous updates issued between September 2018 and April 2020. Two of the provided chapters concern general audit information and procedures, 13 chapters concern the sales tax, and 27 concern the income tax.

Chapter 20 of the audit manual sets out the procedures for conducting an income tax audit, including the notation that the continuing audit file for audits for tax years between 2011 and before November 1, 2017, are stored electronically in a network storage area called “Tiamat.” Tiamat is a Mesopotamian goddess referenced in a creation myth who is associated with primordial chaos and the salt sea. She is also a five-headed dragon goddess in the role-playing game Dungeons & Dragons.

Audits initiated after October 31, 2017, are electronic and stored in GenTax — the DOR’s enterprisewide tax processing system, with paper files as the only available resource for audits for tax years before 2011.

“I am so pleased at the resolution of this case,” said Cara Griffith, president and CEO of Tax Analysts, adding that taxpayers will now have access to the audit manual.

Tax Analysts undertakes these lawsuits for the benefit of the public to improve the transparency of federal and state tax systems, and to provide taxpayers with access to a taxing authority’s working law,” Griffith said. She added that less enforcement is needed when taxpayers have this type of guidance because they are more likely to comply.

Cornish Hitchcock of Hitchcock Law Firm PLLC, counsel for Tax Analysts, told Tax Notes December 7 that “it was disappointing that it took three years and a lawsuit to accomplish this,” noting that Tax Analysts has managed to acquire audit materials from at least 39 other states and the District of Columbia.

Litigation

The settlement resolves litigation brought by the publisher after the department denied its Freedom of Information Act requests.

Tax Analysts submitted a FOIA request in February 2017 for the field audit manuals and audit training manuals used by the DOR since January 1, 2011. In a March 2017 denial, the DOR argued that the audit manual “contains opinions and discussions that guide the enforcement of tax law, but it does not codify or reflect the Department’s policies.”

The DOR contended that the audit manual is exempt under 5 ILCS sections 140/7(1)(d)(i), 140/7(1)(d)(ii), 140/7(1)(d)(v), and 140/7(1)(f) because “it is an administrative enforcement manual that contains specialized investigative techniques.” The DOR also said disclosure of the audit manual would harm and interfere with its ability to enforce the state's tax laws.

Tax Analysts filed a narrower request in April 2018 for the field audit manuals currently in use by the DOR, which the department also denied, calling the request unduly burdensome under 5 ILCS section 140/3(g) and citing the same exemptions used to deny the previous request. The DOR contended that every page of the 3,106-page audit manual and 212 pages of updates would need to be reviewed to determine whether any information in the manual or updates are exempt from disclosure.

Tax Analysts then filed suit in December 2018, arguing in a complaint filed in the Sangamon County Circuit Court that a majority of revenue departments in other states either make their manuals available online or have provided them to Tax Analysts with limited or no redactions.

In a December 2019 order, the court granted Tax Analysts’ motion for summary judgment, finding that the DOR had not provided sworn testimony “that identifies and explains why specific portions of the requested manual satisfy the statutory requirements” to be withheld.

The court continued that the DOR’s “failure to submit any such evidence is fatal to its effort to assert that exemption on this record.”

The trial court awarded Tax Analysts full attorney fees in February 2020, and the DOR filed a notice of appeal March 9.

Under the settlement, Tax Analysts will file a signed release and satisfaction of judgment and receive $35,000 and the redacted manual, and the parties agreed to dismiss the appeal with prejudice and without attorney fees.

Audit Manual

According to the settlement agreement, each chapter of the audit manual provided to Tax Analysts contains a disclaimer, and no chapter may be published or distributed without inclusion of the disclaimer.

The disclaimer in Chapter 1, general audit information, states that the manual “is a guideline for assisting and training auditors in the completion of their audits.” Adding that every audit “is an independent review of a particular taxpayer’s books and records,” the disclaimer says that an “auditor is authorized to use any reasonable procedure or method necessary to obtain the information necessary to determine the correct amount of a tax liability and to apply his or her best judgment in making that determination” if a taxpayer fails to maintain or provide the required books or records or does not timely comply with any reasonable request for information.

The DOR disclaimer continues that the “failure to follow a suggested procedure or method, deviation from a suggested procedure or method, or any additional investigation outside the scope of a suggested procedure or method is at the discretion of the Department and shall not be grounds for invalidating any audit finding.”

The audit manual also contains chapters on various income tax subjects including nexus, apportionment, unitary determinations, holding companies, and tax shelters.

The sales tax chapters provide overviews of the state’s service taxes and sales and use taxes, the procedures for audits and claims for credits, and issues concerning specific industries like contractors, vehicle dealers, and foods and medicine.

Tax Analysts has requested field audit manuals and audit training manuals from each state for its Audit Insight research tool, which was launched March 1, 2018. Including Illinois, 40 states and the District of Columbia have either provided audit materials or made materials publicly available as of December 7.

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