Section 850.101  Overview of the Local Government Revenue Recapture Act

 

The Local Government Revenue Recapture Act (the Act), [50 ILCS 355], establishes a process for municipalities or counties that receive a disbursement of tax proceeds from the Department to contract with third parties to ensure that the municipality or county receives the correct tax disbursements from the Department.  A registered third party must work directly with the municipality or county to acquire financial information.  A third party may, however, directly access a municipality's or county's financial information that is provided by the Department by electronic means under Section 11 of the Retailers' Occupation Tax Act, provided that the third party meets all other conditions under Section 850.120(a) for the receipt of financial information.  [50 ILCS 355/5-10]  The Act also creates a Certified Audit Pilot Program that allows taxpayers to engage a qualified practitioner to perform a certified audit, instead of the Department, based on an actionable referral by a municipality, county, or registered third party under the Act.

 

Section 850.105  Nature and Scope of Certified Audit Pilot Program

 

a)         The Certified Audit Pilot Program is a 5-year pilot project that begins on January 1, 2021 and ends on December 31, 2025, and that is limited in scope to specifically address concerns related to the proper reporting and payment of local occupation and use taxes that are collected and distributed to municipalities and counties by the Department. [50 ILCS 355/10-10]

 

b)         The Certified Audit Pilot Program is intended to enhance tax compliance by allowing audits to be performed by qualified practitioners.  The program is intended to encourage taxpayers to hire qualified practitioners at their own expense to review and report on certain aspects of their occupation and use tax compliance when the Department has notified the taxpayer that it has received an actionable tax compliance referral from a municipality, county, or third party under the Act.  [50 ILCS 355/10-20] The qualified practitioner shall conduct the certified audit based on agreed upon procedures with the Department being the user of the resulting Certified Audit Report.  As an incentive for taxpayers to incur the costs of a certified audit, the Act provides for a waiver of penalties due on any tax liabilities revealed by a certified audit.  The waiver of penalties does not apply to any amount that the taxpayer collected as tax but did not remit to the Department.  In addition, there is no authority to waive penalties resulting from a finding of fraud.

 

c)         The tax compliance reviews shall be limited in scope and may include only:

 

1)         whether the taxpayer is reporting receipts in the proper jurisdiction;

 

2)         whether tangible personal property purchases that were used or consumed by the taxpayer were taxed properly;

 

3)         an evaluation of sales reported as exempt from tax;

 

4)         whether the proper tax rate was charged;

 

5)         whether the tax was properly reported as retailers' occupation tax or use tax; and

 

6)         any other factor that impacts the Department's allocation of sales and use tax revenues to the jurisdiction in which the taxpayer reports sales or use tax. [50 ILCS 355/10-20]

 

d)         The certified audit pilot project shall apply only to taxpayers who have been notified that an audit referral has been received by the Department under the Act and only to occupation and use taxes administered and collected by the Department. [50 ILCS 355/10-20(c)]

 

Section 850.110  Definitions

 

"Audit" means an agreed-upon procedures engagement in accordance with Statements on Standards for Attestation Engagements (AICPA Professional Standards, AT-C Section 315 (Compliance Attestation)).

 

"Certification program" means an instructional curriculum, examination, and process for certification, recertification, and revocation of certification of certified public accountants that is administered by the Department with the assistance of the Illinois CPA Society and that is officially approved by the Department to ensure that a certified public accountant possesses the necessary skills and abilities to successfully perform an attestation engagement for a limited-scope tax compliance review in a certified audit project under this Act.

 

"Certified Public Accountant" or "CPA" means any person who has been issued a certificate as a certified public accountant from the Illinois Board of Examiners and holds a license issued by the Illinois Department of Financial and Professional Regulation.  (See 225 ILCS 450/0.03).

 

"Department" means the Department of Revenue.

 

"Family member" means the following, whether by whole blood, half-blood, or adoption:

 

a parent or step-parent;

 

a child or step-child;

 

a grandparent or step-grandparent;

 

an aunt, uncle, great-aunt, or great-uncle;

 

a niece, nephew, great-niece, or great-nephew;

 

a sibling;

 

a spouse or domestic partner; and

 

the spouse or domestic partner of any person referenced in this definition. [50 ILCS 355/10-15]

 

"Financial information" means the information provided to the municipality or county by the Department under Section 11 of the Retailers' Occupation Tax Act that is reported to the Department by a business located in a given municipality or county.  Financial information is limited to:

 

the business name;

 

the business address;

 

the standard classification number assigned to the business;

 

net revenue distributed to the municipality or county that is directly related to the municipality's or county's local share of the proceeds under the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act, and the Retailers' Occupation Tax Act distributed from the Local Government Tax Fund, and, if applicable, any locally imposed retailers' occupation tax or service occupation tax; and

 

a listing of all businesses within the municipality or county by account identification number and address. [35 ILCS 120/11]

 

"Misallocation" means tax paid by the taxpayer and allocated to one unit of local government that should have been allocated to a different unit of local government. This includes misallocations discovered by a unit of local government through the tax location verification process under Section 8-11-16 of the Illinois Municipal Code and misallocations discovered by the Department other than through an audit of the taxpayer. "Misallocation" does not, however, include any amount reported by a taxpayer on an amended return or any amount discovered in an audit of the taxpayer by the Department or discovered in an audit of the taxpayer by a qualified practitioner under Article 10 of this Act. "Misallocation" also does not include amounts overpaid by the taxpayer and therefore not owed to any unit of local government, nor amounts underpaid by the taxpayer and therefore not previously allocated to any unit of local government. [50 ILCS 355/10-15]

 

"Monitoring disbursements" means keeping track of payments from the Department by a municipality, county, or third party for the limited purpose of tracking previous misallocations. [50 ILCS 355/5-5]

 

"Participating taxpayer" means any person subject to the revenue laws administered by the Department who is the subject of a tax compliance referral by a municipality, county, or third party, who enters into an engagement with a qualified practitioner for a limited-scope tax compliance review under this Act, and who is approved by the Department under the local government revenue recapture certified audit pilot project. [50 ILCS 355/10-15]

 

"Person" means an individual, sole proprietorship, corporation, registered limited liability partnership, limited liability company, partnership, professional service corporation, or any other form of organization. [50 ILCS 355/5-5]

 

"Qualified practitioner" means a certified public accountant who is licensed or registered to perform accountancy activities in Illinois under Section 8.05 of the Illinois Public Accounting Act and who has met all requirements for the local government revenue recapture certified audit training course, achieved the required score on the certification test as approved by the Department, and been certified by the Department. "Qualified practitioner" does not include a third party, as defined by Section 5-5 of this Act, or any employee, contractual employee, officer, manager, or director thereof, any person or persons owning in the aggregate more than 5% of such third party, or a person who is a family member of any person who is employed by or is an appointed or elected member of any corporate authorities, as defined in the Illinois Municipal Code. [50 ILCS 355/10-15]

 

"Third party" means a person, partnership, corporation, or other entity or individual registered to do business in Illinois who contracts with a municipality or county to review financial information related to the disbursement of local taxes by the Department to the municipality or county. [50 ILCS 355/5-5]

 

For purposes of this definition, "contracts with a municipality or county to review financial information related to the disbursement of local taxes by the Department to the municipality or county" means that the true object of the contract is to ensure that the municipality or county receives the correct disbursement from the Department and to monitor disbursements.

 

Section 850.115  Participation in the Certified Audit Pilot Program

 

a)         Municipality, County, and Third Party Participation.

 

1)         The Department shall provide financial information to a municipality or county for review pursuant to Section 11 of the Retailers' Occupation Tax Act.

 

2)         Municipalities or counties may provide this financial information to registered third parties to perform the review of local retailers' and service occupation taxes, if all requirements set forth in this Part are met. Based on this review, if a municipality or county discovers that a taxpayer may have underpaid local retailers' or service occupation taxes, then it may refer the matter to the Department for audit consideration.

 

3)         Third parties must be registered with the Department pursuant to Section 850.130 before referring a taxpayer to the Department for audit consideration.

 

4)         Tax compliance referrals may be made only by a municipality, county, or third party and shall be made in the form and manner required by the Department, including any requirement that the referral be submitted electronically. The tax compliance referral shall, at a minimum, include:

 

A)        proof of registration as a third party, if the referral was made by a third party,

 

B)        a copy of a contract between the third party and the county or municipality, if the referral was made by a third party,

 

C)        the taxpayer's name, Department account identification number, mailing address, and business location, and

 

D)        the specific reason for the tax compliance referral, including as much detail as possible. [50 ILCS 355/10-30(b)]

 

5)         With respect to taxes administered by the Department, units of local government and third parties with which they contract are prohibited from doing the following:

 

A)        engaging in an audit of any taxpayer;

 

B)        assessing tax against any taxpayer;

 

C)        engaging in collection actions against any taxpayer for the tax; or

 

D)        engaging in any other action related to such taxes that is assigned by law to the Department. [50 ILCS 355/5-50(d)]

 

6)         Upon entering into a contract with a municipality or county, a third party shall be prohibited from communicating directly or indirectly in any manner with a taxpayer known or believed to be operating within that municipality or county about any matters directly or indirectly related to, or covered by, the contract.  [50 ILCS 355/5-50(a)]  The Act also prohibits a local government from sharing financial information with another local government or another third party. A local government also may not share the findings of a third party with another local government or another third party.  [50 ILCS 355/5-50(e)]

 

7)         A contracting municipality or county shall refuse to provide any information, including financial information, to any third party who violates this Act or rules adopted pursuant to this Act or the Retailers' Occupation Tax Act or rules adopted pursuant to the Retailers' Occupation Tax Act.  [50 ILCS 355/5-40(a)]

 

8)         A third party must annually provide the local government with a final summary of its review for publication. The third party is responsible for ensuring that the summary contains no personal or identifiable taxpayer information. The summary can only aggregate amounts by tax type and can make no claim of specific tax savings or revenue generation.  No aggregated data may be published that includes taxpayer information for 4 or fewer taxpayers.  (See 50 ILCS 355/5-30).

 

9)         Under no circumstances may a person, including a municipality or county or third party, other than the person audited and his or her attorney, have any right to participate in an appeal or other proceeding regarding the audit, participate in settlement negotiations, challenge the validity of any settlement between the Department and any person, or review any materials, other than financial information as otherwise provided in this Act, that are subject to the confidentiality provisions of the underlying tax Act. In addition, the Department's determination of whether to audit a taxpayer or the result of the audit creates no justiciable cause of action, and any adjudication related to this program is limited to the taxpayer's rights in an administrative hearing held by the Department, an administrative hearing held by the Illinois Independent Tax Tribunal, or related to payments made under protest as provided in Section 2a.1 of the State Officers and Employees Money Disposition Act, as appropriate. [50 ILCS 355/10-40(d)]

 

b)         Department Participation.

 

The Department shall complete its evaluation of all audit referrals under subsection (a) within 90 days after receipt of the referral and shall handle all audit referrals as follows:

 

1)         The Department shall evaluate the referral to determine whether it is sufficient to warrant further action based on the information provided in the referral, any other information the Department possesses, and audit selection procedures of the Department.

 

2)         If the Department determines that the referral is not actionable, then the Department shall notify the local government that it has evaluated the referral and has determined that no action is deemed necessary and provide the local government with an explanation for that decision, including, but not limited to, the following explanations:

 

A)        the Department has previously conducted an audit;

 

B)        the Department is in the process of conducting an investigation or other examination of the taxpayer's records;

 

C)        the taxpayer has already been referred to the Department under the Act and the Department determined that an audit referral is not actionable;

 

D)        the Department or a qualified practitioner has previously conducted an audit under the Act; or

 

E)        for just cause.

 

3)         If the Department determines that the referral is actionable, then it shall determine whether the taxpayer is currently under audit or scheduled for audit by the Department.  If the taxpayer is not currently under audit by the Department or scheduled for audit by the Department, the Department shall determine whether it will schedule the taxpayer for audit.

 

A)        if the tax payer is under audit or is scheduled for audit, the Department shall notify the taxpayer pursuant to established audit procedures and not as provided in subsection (b)(3)(C).

 

B)        if the taxpayer is not under audit or scheduled for audit, and the Department schedules the taxpayer for audit, it shall provide notice to the taxpayer pursuant to established audit procedures.  The reasons why the Department may decide to retain an actionable referral for audit by the Department includes, but are not limited to, the following:

 

i)          the taxpayer has not filed required returns for another Illinois tax;

 

ii)         the taxpayer has outstanding liens or is otherwise the subject of collection action by the Department; and

 

iii)        the taxpayer has delinquent final liabilities for a tax the Department administers (this does not include taxpayers currently on a payment plan approved by the Department's Collection Program Area to satisfy a delinquent final liability).

 

C)        if the Department decides under subsection (b)(3)(B) not to schedule the taxpayer for audit by the Department, then the Department shall notify the taxpayer that the Department has received an actionable audit referral on the taxpayer and issue a notice to the taxpayer as provided under subsection (b)(4). [50 ILCS 355/10-30]

 

4)         If the Department notifies the taxpayer as provided in subsection (b)(3)(B), the notice shall include, but not be limited to, the following:

 

A)        that the Department has received an actionable audit referral on the taxpayer;

 

B)        that the taxpayer must either engage a qualified practitioner, at the taxpayer's expense, to complete a certified audit, limited in scope to the taxpayer's Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax liability, and the taxpayer's liability for any local retailers' or service occupation tax administered by the Department; or be subject to audit by the Department;

 

C)        that, as an incentive, for taxpayers who agree to engage a qualified practitioner to perform a limited-scope certified audit, the Department shall abate penalties as provided in Section 850.195 [50 ILCS 355/10-30]; and

 

D)        a statement as set out in Section 10-30(d)(3) of the Act. [50 ILCS 355/10-30(d)(3)].  

 

5)         Upon receipt of an engagement notice from a qualified practitioner, the Department must determine whether to authorize the engagement. The Department shall not authorize an engagement unless the taxpayer has received notification from the Department that it has received an actionable audit referral on the taxpayer. A taxpayer that has received notice of an audit referral from the Department but has not been issued a written notice of intent to conduct an audit shall be a participating taxpayer under the Act. The Department shall notify the qualified practitioner regarding its authorization in writing within 10 days after receipt of the engagement notice. The Department may exclude a taxpayer from a certified audit or may limit the taxes or periods subject to the certified audit.  (See 50 ILCS 355/10-35).

 

6)         After the conducting of a certified audit by a qualified practitioner, and upon receipt of a qualified practitioner’s report made on behalf of a participating taxpayer, the Department shall do the following:

 

A)        the Department shall review the qualified practitioner’s report of the certified audit and shall accept it when it is determined to be complete.

 

B)        the Department shall then issue a notice of proposed assessment reflecting the determination of any additional liability reflected in the report and shall provide the taxpayer with all the normal payment, protest, and appeal rights with respect to the liability, including the right to a review by the Informal Conference Board. In cases in which the report indicates an overpayment has been made, the taxpayer shall submit a properly executed claim for credit or refund to the Department.  [50 ILCS 355/10-40]

 

7)         A Certified Audit Report is a final and conclusive determination with respect to the tax and period covered. Absent a showing of fraud or material misrepresentation, the Department shall not make any additional assessment for the specific taxes and reporting periods referenced in the report. This determination does not prevent the Department from collecting liabilities not covered by the report or from conducting an audit or investigation and making an assessment for additional tax, penalty, or interest for any tax or reporting period not covered by the report.

 

c)         Qualified Practitioner Participation. 

 

1)         The scope of the qualified practitioner's sales and use tax compliance review may include only the following:

 

A)        whether the taxpayer is reporting receipts in the proper jurisdiction;

 

B)        whether tangible personal property purchases that were used or consumed by the taxpayer were taxed properly;

 

C)        an evaluation of sales reported as exempt from tax;

 

D)        whether the proper tax rate was charged;

 

E)        whether the tax was properly reported as Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax; and

 

F)         any other factor that impacts the Department's allocation of sales and use tax revenues to the jurisdiction in which the taxpayer reports sales or use tax.  [50 ILCS 355/10-20]

 

2)         A qualified practitioner is responsible for the following:

 

A)        planning a certified audit when performing work that involves determining the objectives, scope, and methodology of the certified audit, when establishing criteria to evaluate matters subject to the review as part of the certified audit, when gathering information used in planning the certified audit, or when coordinating the certified audit with the Department;

 

B)        directing a certified audit when the work involves supervising the efforts or reviewing the work of others to determine whether it is properly accomplished and complete;

 

C)        conducting a certified audit when performing tests and procedures or field audit work necessary to accomplish the audit objectives in accordance with applicable professional standards;

 

D)        reporting on a participating taxpayer's tax compliance in a certified audit when determining report contents and substance or reviewing reports for technical content and substance prior to issuance; and

 

E)        answering questions of the Department’s review staff, answering questions raised by the Informal Conference Board, and testifying in any administrative or court proceeding regarding the audit or report.  [50 ILCS 355/10-25]

 

3)         The certified audit must not be a contingent-fee engagement and must be completed in accordance with the Act.  [50 ILCS 355/10-30(f)]

 

4)         Notice of Engagement of Certified Audit. A qualified practitioner hired by a taxpayer who elects to perform a certified audit shall notify the Department to confirm the taxpayer is not already under audit and to establish the basic nature of the taxpayer's business and the taxpayer's potential exposure to Illinois retailers' occupation and use tax laws. The notice shall identify the taxpayer and the specific occupation and use taxes and reporting periods proposed to be covered by the engagement for the certified audit. The notice shall provide the information required by Section 850.155 and be signed and verified by both the qualified practitioner and taxpayer.

 

5)         The qualified practitioner must contact the Department within 30 days of receiving notice from the Department that the taxpayer qualifies as a participating taxpayer and submit a proposed audit plan and procedures for the Department’s review and agreement. The Department may extend the time for submission of the plan and procedures for reasonable cause. The qualified practitioner shall initiate action to advise the Department that amendment or modification of the plan and procedures is necessary if the qualified practitioner's inspection reveals that the taxpayer's circumstances or exposure to the revenue laws is substantially different from those described in the engagement notice.  [50 ILCS 355/10-35(c)]

 

6)         After completion of the certified audit, the qualified practitioner must submit to the Department a report of the certified audit made on behalf of a participating taxpayer. The Certified Audit Report submitted for review must include:

 

A)        an affirmation of the completion of the agreed-upon procedures;

 

B)        all documents required by the procedures; and

 

C)        all documents supporting the audit findings.

 

d)         Taxpayer Participation. 

 

1)         Within 90 days after receiving notice that the Department has received an actionable audit referral on the taxpayer (pursuant to subsection (b)(3)), the taxpayer must respond by stating in writing whether it will or will not arrange for the performance of a certified audit under the Act.

 

2)         If the taxpayer states that it will arrange for the performance of a certified audit, then it must do so within 60 days after responding to the Department or within 90 days after notice by the Department, whichever comes first. [50 ILCS 355/10-30(e)]

 

3)         To participate in the audit, the taxpayer must:

 

A)        have no delinquent final liabilities for any tax that the Department administers (this does not include taxpayers currently on a payment plan approved by the Department's Collection Program Area to satisfy a delinquent final liability);

 

B)        have no voluntary disclosure agreements in place or pending for occupation or use tax for the audit period under consideration for the Certified Audit Pilot Program;

 

C)        not have been issued a notice of an upcoming occupation or use tax audit by the Department;

 

D)        have complete records available for the entire audit period under consideration for the Certified Audit Pilot Program (See 86 Ill. Adm. Code 130, Subpart H for records requirements);

 

4)         During the performance of the certified audit, the taxpayer must produce books and records for inspection and examination by the qualified practitioner upon request and must assist with the audit in the same manner as an audit conducted by the Department. (See 86 Ill. Adm. Code 130.801)

 

5)         If the taxpayer states that it will not arrange for the performance of a certified audit or if the taxpayer does not arrange for the performance of a certified audit within 180 days after notice by the Department, then the Department may schedule the taxpayer for audit by the Department. [50 ILCS 355/10-30(e)]

 

Section 850.120  Third Party Requirements

 

a)         A municipality or county that receives a disbursement of tax proceeds from the Department may contract with a third party for the purpose of ensuring that the municipality or county receives the correct disbursement from the Department and monitoring disbursements. The third party may not contact the Department on behalf of the municipality or county, but instead must work directly with the municipality or county to acquire financial information. A third party may, however, directly access a municipality's or county's financial information that is provided by the Department by electronic means under Section 11 of the Retailers' Occupation Tax Act, provided that the third party meets all other conditions under Section 5-10 of the Act for the receipt of financial information. To be eligible to receive financial information from the municipality or county, the third party must:

 

1)         enter into a confidentiality agreement with the municipality or county in the form and manner required by the Department prior to receiving the financial information; 

 

2)         have an existing contract with the municipality or county at the time the third party enters into the confidentiality agreement with the municipality or county; a copy of that existing contract must be on file with the Department; 

 

3)         abide by the same conditions as the municipality or county with respect to the furnishing of financial information under Section 11 of the Retailers' Occupation Tax Act; and 

 

4)         be registered with the Department as required by Section 850.130.  [50 ILCS 355/5-10]

 

b)         Municipalities and counties may negotiate a fee with third parties. This fee may be in the form of a contingency fee for a percentage of the amount of additional distributions the municipality or county receives for no more than 3 years following the first disbursement to the local government resulting from the third party’s services under the Act.  [50 ILCS 355/5-20(b)]

 

c)         The Local Government Revenue Recapture Act prohibits the following persons from becoming registered third parties:

 

1)         a person who has been convicted of a felony related to financial crimes under any federal or State law, if the Department, after investigation and a hearing if requested by the applicant, determines that the person has not been sufficiently rehabilitated to warrant the public trust, including an individual or any employee, officer, manager, member, partner, or director of an entity that has been convicted as provided in this subsection (1);

 

2)         a person, if any employee, contractual employee, officer, manager, or director thereof, or any person or persons owning in the aggregate more than 5% thereof, is employed by or appointed or elected to the corporate authorities of any municipality or county in this State;

 

3)         a person, if any employee, contractual employee, officer, manager, or director thereof, or any person or persons owning in the aggregate more than 5% thereof, is not or would not be eligible to receive a certificate of registration under this Act or a license under the Illinois Public Accounting Act for any reason;

 

4)         a person who is a family member of any person who is employed by or appointed or elected to the corporate authorities of any municipality or county in the State;

 

5)         qualified practitioners, as defined in Section 850.110;

 

6)         third parties owned, in whole or in part, by any entity that competes directly or indirectly with any taxpayer whose financial information the third party is seeking or receiving; and

 

7)         persons who own in whole or in part, directly or indirectly, any entity that competes, directly or indirectly, with any taxpayer whose financial information the person is seeking or receiving.  [50 ILCS 355/5-35(b)]

 

Section 850.125  Confidentiality Requirements for Third Parties

 

a)         The Local Government Revenue Recapture Act has strict protocols regarding third parties' handling of taxpayers' financial information. A third party may use the financial information it receives from the contracting municipality or county only for the purpose of providing services to the municipality or county as specified in the Act and may not use the information for any other purpose. Electronic data submitted to third parties by the contracting municipality or county must be accessible only to third parties who have entered into a confidentiality agreement with the municipality or county or who have an existing contract with the municipality or county. [50 ILCS 355/5-15]  Any work product containing financial information a third party has received from the contracting municipality or county and any referral made by the third party are subject to the same confidentiality requirements set out in this Section as the taxpayer's financial information itself.

 

b)         Third parties may not permanently retain this information or any work product containing such information and must permanently destroy any physical copies of the financial information or any work product containing such information if the taxpayer is not referred to the Department within 30 days after receipt of the taxpayer's financial information from a local government, unless the third party is monitoring disbursements from the Department on an ongoing basis for a local government, in which case the financial information or any work product containing such information shall be destroyed no later than 3 years after receipt. The third party also must dispose of the information or any work product containing such information within 30 days after the third party submits a taxpayer audit referral to the Department.

 

c)         Third parties must dispose of financial information or any work product containing such information in a manner that renders it unreadable, unusable, and undecipherable. Proper disposal methods include, but are not limited to, the following:

 

1)         in the case of paper documents, burning, pulverizing, or shredding so that the information cannot practicably be read or reconstructed; and

 

2)         in the case of electronic media and other non-paper media containing information, destroying or erasing so that information cannot practicably be read, reconstructed, or otherwise utilized by the third party or others.  [50 ILCS 355/5-20]

 

d)         Third parties are prohibited from selling, leasing, trading, marketing, or otherwise utilizing or profiting from a taxpayer's financial information, except for a fee as negotiated by the local government. Third parties may not permanently or temporarily collect, capture, purchase, use, receive through trade, or otherwise retain a taxpayer's financial information except as authorized in the Act. Third parties may not disclose, share, or otherwise disseminate a taxpayer's financial information.  (See 50 ILCS 355/5-20).

 

e)         Third parties must adhere to the following standards for the safeguarding of digital information:

 

1)         The third party has confidentiality standards for storing encrypted data at rest, using a cryptographic algorithm, that conform to the Federal Information Processing Standard (FIPS) Publication 140-2, or conform to similar security requirements contained in any successor publication;

 

2)         The third party uses multi-factor authentication;

 

3)         The third party uses HTTPS with at least TLS 1.2 or its successor to protect the data files while in transit between a browser and server;

 

4)         The third party adheres to best practices as recommended by the Open Web Application Security Project (OWASP);

 

5)         The third party has a firewall that protects against unauthorized use of the data;

 

6)         The third party maintains and shall continue to maintain at all times a physical location in Illinois; and

 

7)         The third party only transfers and receives information using end to end encryption and password protected files. [50 ILCS 355/5-35(a)]

 

f)         Violations by Third Parties.

 

1)         Any third party who violates any provision of this Act shall be subject to the penalties set forth in Section 11 of the Retailers' Occupation Tax Act.

 

2)         Any third party who violates Section 5-20 of the Act is subject to a civil penalty of not more than $10,000 for each taxpayer with respect to whom financial information is improperly disclosed, profited from, or disposed of in violation of that Section.

 

3)         The Attorney General may impose a civil penalty not to exceed $50,000 for each instance of improper disposal of materials containing financial information.

 

A)        The Attorney General may impose a civil penalty after notice to the person accused of violating Section 5-20 of the Act and an opportunity for that person to be heard in the matter.

 

B)        The Attorney General may file a civil action in the circuit court to recover any penalty imposed for a violation of Section 5-20 of the Act.

 

4)         In addition to the authority to impose a civil penalty under Section 5-60 of the Act, the Attorney General may bring an action in the circuit court to remedy a violation of Section 5-60 of the Act, seeking any appropriate relief. [50 ILCS 355/5-60]

 

Section 850.130  Registration of Third Parties

 

a)         Every third party must apply to the Department for a certificate of registration. Application for registration or renewal of registration shall be made to the Department, by electronic means, in a form and at the time prescribed by the Department. Applications to register (Form REG-1, Illinois Business Registration Application) may be found and must be submitted electronically on the Department's website at www.tax.illinois.gov.  [50 ILCS 355/5-35(a)]

 

b)         Each application shall be signed and verified. Applicants must provide, in an electronic format established by the Department, the following information and documents with the registration application:

 

1)         the name and address of the applicant;

 

2)         the address of the location at which the applicant proposes to engage in business as a third party in this State and the addresses of all other places of business, if any (enumerating such addresses, if any, in a separate list attached to and made a part of the application) from which the applicant will engage in business as a third party in this State;

 

3)         valid and updated contact information;

 

4)         a copy of each contract it has entered into with a municipality or county; if an applicant has a contract with a municipality or county prior to the effective date of the Act, a copy of all existing contracts must be provided;

 

5)         an attestation of good standing to do business in Illinois from the Illinois Secretary of State;

 

6)         an annual certification of process letter signed by an attorney or certified public accountant licensed and authorized to practice in Illinois certifying that, after due diligence, the author is of the opinion that the applicant meets the following:

 

A)        the third party's confidentiality standards for storing encrypted data at rest, using a cryptographic algorithm, conform to Security Level 1 of the Federal Information Processing Standard (FIPS) Publication 140-2, or conform to similar security requirements contained in any successor publication;

 

B)        the third party uses multi-factor authentication;

 

C)        the third party uses HTTPS with at least TLS 1.2 or its successor to protect the data files while in transit between a browser and server;

 

D)        the third party adheres to best practices as recommended by the Open Web Application Security Project (OWASP);

 

E)        the third party has a firewall which protects against unauthorized use of the data; and

 

F)         the third party shall maintain a physical location in this State at all times; if, at any time, the third party fails to have a physical location in this State, the third party's registration shall be revoked; [50 ILCS 355/5-35] and

 

7)         an insurance policy, issued by an insurance company authorized to transact fidelity and surety business in the State of Illinois, which shall be for coverage of potential legal claims, including, but not limited to, penalties set forth in the Act, embezzlement, dishonesty, fraud, omissions or errors, or other financial wrongdoing in the course of providing third party services. The policy shall be continuous in form and run concurrently with the original and each renewal certification period unless terminated by the insurance company. [50 ILCS 355/5-37]

 

c)         Each applicant shall pay an annual registration fee of $15,000 to register as a third party.  (See 50 ILCS 355/5-35).  This fee must be paid to the Department at the time of initial application or renewal.

 

d)         Third parties also must submit to the Department copies of all contracts for all local governments for which the third party will make referrals to the Department under the Act. These contracts may be submitted electronically at the time the third party registers with the Department, or the third party may submit the contract electronically after registering.

 

e)         The Department may, after notice and a hearing, revoke or suspend the certificate of registration of any third party for a violation of any provision of the Act, for noncompliance with any provision contained in the Act, or because the Department determines that the third party is ineligible for a certificate of registration for any one or more of the reasons provided for in this Section. The decision whether to suspend or revoke and, if a suspension is in order, the duration of the suspension shall be made by taking into account factors that include but are not limited to, the registrant's previous history of compliance with the Act as of its creation, the number, seriousness, and duration of the violations, and the registrant's cooperation in discontinuing and correcting violations. [50 ILCS 355/5-40]

 

f)         Any person aggrieved by any decision of the Department under Section 5-35 of the Act may, within 60 days after notice of the decision, protest and request a hearing pursuant to procedures outlined in 86 Ill. Adm. Code 200.120. Upon receiving a request for a hearing, the Department shall give written notice to the person requesting the hearing of the time and place fixed for the hearing and shall hold a hearing and then issue its final administrative decision in the matter to that person within 60 days after the date of the hearing or at a later date upon agreement of all of the parties.  In the absence of a protest and request for hearing within 60 days, the Department's decision shall become final without any further determination being made or notice given.  [50 ILCS 355/5-35(d)]

 

Section 850.135  Qualified Practitioner Requirements

 

A certified public accountant who wishes to participate in the Certified Audit Pilot Program as a qualified practitioner must:

 

a)         be licensed as a certified public accountant in Illinois by the Illinois Department of Financial and Professional Regulation;

 

b)         be properly registered by the Department, as set out in Section 850.140, including having fully paid the registration fee;

 

c)         complete the minimum training required by the Department;

 

d)         pass an examination as required by the Department; and

 

e)         be properly certified by the Department, as set out in Section 850.145.

 

Section 850.140  Qualified Practitioner Registration and Training

 

a)         The Department will establish a standard outline of subject areas that addresses both taxability and procedural matters that may be included in an examination to test the fitness of applicants to participate in the Certified Audit Pilot Program.  All applicants must complete all courses that cover the required training to be eligible to take the examination that is required to be a qualified practitioner.

 

b)         Applicants shall complete the required training by enrollment in the training course administered by the Department. The required training will consist of a self-study review and a separate instructional course covering the basics of sales tax laws and audit procedures.

 

c)         Applicants must register with the Department using a form prescribed by the Department and pay a Qualified Practitioner Registration Fee prior to the training course for which the applicant has been approved.  The Department shall charge a fee of $2,500 to each participant in its certification program. [50 ILCS 355/10-20(c-5)]

 

Section 850.145  Examination

 

a)         Examinations will be given and graded by the Department.

 

b)         Examinations will be conducted at locations that the Department designates.  The Department will set dates, times, instructions, and requirements, including any fees, to take the examination.

 

c)         Applicants must pass the examination with a score of 75% or higher.

 

d)         The Department will not release copies of any examination to applicants.  No applicant is permitted to make copies of the examination, and all applicants are prohibited from disclosing any information about the contents or administration of any examination that could affect the validity of any examination (e.g., disclosing questions appearing on the examination to other applicants).  Applicants who disclose this information will be denied certification or if already certified will have their certification revoked.

 

e)         After the applicant successfully completes the required training and passes the required examination, the Department shall certify the applicant as a qualified practitioner if the applicant has met all requirements for participation set forth herein. All certificates expire on December 31, 2025, to coincide with the end of the initial five-year year project. Should the project be extended, the Department will establish procedures for qualified practitioner re-certifications.

 

f)         Upon certification, the qualified practitioner is required to follow all requirements of this Subpart and 86 Ill. Adm. Code 130, 140, 150 and 160 of the Department's administrative rules.

 

Section 850.150  Revocation of Qualified Practitioner Registration

 

a)         The Department may revoke the qualified practitioner’s registration if the qualified practitioner no longer meets the requirements for participation set forth in Section 850.135.  Further, the qualified practitioner's registration may be revoked if the qualified practitioner does not follow all rules and regulations of the Department.

 

b)         After notice of revocation, the qualified practitioner shall immediately cease performing functions under the Certified Audit Pilot Program.  The qualified practitioner has 60 days from the date of the notice of revocation to file a protest with the Department and request a hearing. Upon receiving a request for a hearing, the Department shall give written notice to the person requesting the hearing of the time and place fixed for the hearing and shall hold a hearing and then issue its final administrative decision in the matter to that person within 60 days after the date of the hearing or at a later date upon agreement of all of the parties. In the absence of a protest and request for a hearing within 60 days, the Department's decision shall become final without any further determination being made or notice given. Final administrative decisions by the Department under this Section are subject to judicial review under the provisions of the Administrative Review Law [735 ILCS 5/Art. III].

 

Section 850.155  Notice of Engagement and Agreed-Upon Procedures

 

a)         A qualified practitioner hired by a taxpayer who has received an actionable referral under Section 850.115(b)(3)(B) to perform a certified audit must submit a Notice of Engagement to the Department notifying it of the taxpayer's participation in the Certified Audit Pilot Program on behalf of the taxpayer on a form prescribed by the Department.

 

b)         The information provided in the notification shall be submitted in the form and manner required by the Department and shall include the taxpayer's name, federal employer identification number or social security number, Department account identification number, mailing address, and business location, and the specific occupation and use taxes and period proposed to be covered by the engagement for the certified audit. In addition, the notice shall include the name, address, identification number, contact person, and telephone number of the engaged firm.  [50 ILCS 355/10-35(a)]

 

c)         The qualified practitioner must agree to conduct the certified audit using the Illinois Department of Revenue’s agreed-upon procedures at the time of the qualified practitioner’s submission of the Notice of Engagement.

 

1)         The Department has established a list of agreed-upon procedures that qualified practitioners must follow in a certified audit. These designated agreed-upon procedures combine elements from the American Institute of Certified Public Accountants' Clarified Statements on Standards for Attestation Engagements with the Department’s own audit standards.

 

2)         Any deviations from the established list of agreed-upon procedures must be approved in writing by the Department. The qualified practitioner must submit a written request to the Department and receive written approval from the Department prior to making any additions, deletions, or revisions to the approved certified audit plan.

 

3)         The Department will be the final authority on the nature, extent, and type of audit procedures.  

 

d)         If the taxpayer has received notice of an audit referral from the Department and has not been issued a written notice of intent to conduct an audit, the taxpayer shall be a participating taxpayer and the Department shall so advise the qualified practitioner in writing within 10 days after receipt of the engagement notice. However, the Department may limit the taxes or periods subject to the certified audit. [50 ILCS 355/10-35(b)] The Department may deny a notice of engagement for any of the following reasons:

 

1)         the taxpayer has delinquent final liabilities for any tax that the Department administers (this does not include taxpayers currently on a payment plan approved by the Department's Collection Program Area to satisfy a delinquent final liability);

 

2)         the taxpayer has voluntary disclosure agreements in place or pending for occupation or use tax for the audit period under consideration for the Certified Audit Pilot Program;

 

3)         the taxpayer has been issued a notice of an upcoming occupation or use tax audit by the Department; and

 

4)         the taxpayer does not have complete records available for the entire audit period under consideration for the Certified Audit Pilot Program.

 

e)         If the Department denies the Notice of Engagement, the written notification to the qualified practitioner must set out the specific reasons for the denial unless an ongoing investigation would be jeopardized or confidentiality provisions would be breached.

 

f)         If the taxpayer, qualified practitioner, or the taxpayer's legal representative files a protest and requests a hearing on the denial of the Notice of Engagement within 60 days after issuance of the denial, the Department shall give notice to the taxpayer, qualified practitioner, or taxpayer's legal representative of the time and place fixed for the hearing and shall hold a hearing in conformity with the provisions of the Retailers' Occupation Tax Act [35 ILCS 120].  After hearing, the Department shall issue a final determination to the taxpayer.  If a protest to the denial of the Notice of Engagement and a request for a hearing thereon is not filed within 60 days after the issuance of the denial, then the denial shall become a final determination.

 

Section 850.160  Submission and Review of the Certified Audit Report

 

a)         Upon the Department's designation of the agreed-upon procedures to be followed by a practitioner in a certified audit, the qualified practitioner shall perform the engagement and shall timely submit a completed report to the Department in the form and manner required by the Department and professional standards. The report shall affirm completion of the agreed-upon procedures and shall provide any required disclosures. [50 ILCS 355/10-40(a)] Additionally, the Certified Audit Report must include all documents required by the agreed-upon procedures and all documents supporting the audit findings.

 

b)         The Department shall review the report of the certified audit and shall accept it when it is determined to be complete by the qualified practitioner.  [50 ILCS 355/10-40(b)]

 

c)         The qualified practitioner is also required to retain comprehensive, detailed documentation of the certified audit work performed, and to make that documentation available to the Department upon request.  The Department shall have unrestricted access to all information and documentation from both the qualified practitioner and the participating taxpayer necessary for a comprehensive review.

 

d)         Once the report is accepted by the Department, the Department shall provide the taxpayer with all the normal payment, protest, and appeal rights with respect to any liability reflected in the report, including the right to a review by the Informal Conference Board. In cases in which the report indicates an overpayment has been made, the taxpayer shall submit a properly executed claim for credit or refund to the Department. Otherwise, the certified audit report is a final and conclusive determination with respect to the tax and period covered. No additional assessment may be made by the Department for the specific taxes and period referenced in the report, except upon a showing of fraud or material misrepresentation. This determination shall not prevent the Department from collecting liabilities not covered by the report or from conducting an audit or investigation and making an assessment for additional tax, penalty, or interest for any tax or period not covered by the report. [50 ILCS 355/10-40(b)]

 

e)         Taxpayers participating in the Certified Audit Pilot Program relinquish no rights provided to them by the applicable tax acts and, therefore, have the same protest rights available to any taxpayer who is audited by the Department as set out in the Retailers' Occupation Tax Act [35 ILCS 120/4].  Taxpayers who participate in the Certified Audit Pilot Program have the same rights to file claims as any taxpayer who is audited by the Department.  Procedures to follow in filing claims for credit are set out in 86 Ill. Adm. Code 130.1501.

 

Section 850.165  Revocation of a Certified Audit in Progress

 

Approval to participate will be revoked by the Department based on the following criteria:

 

a)         the license of the qualified practitioner is suspended or revoked by the Illinois Department of Financial and Professional Regulation; or

 

b)         the Department initiates an investigation for financial impropriety of the qualified practitioner or participating taxpayer or is notified by another local, state or federal agency of an investigation of the qualified practitioner or participating taxpayer subsequent to submission of the Notice of Engagement (See Section 850.155) but prior to Department approval of the Certified Audit Report.

 

Section 850.170  Withdrawal from Certified Audit Pilot Program

 

a)         If the taxpayer withdraws from the Certified Audit Pilot Program subsequent to the Department's approval of the agreed upon procedures, then the Department may conduct an audit of the taxpayer for the same audit period specified in the agreed upon procedures.

 

b)         If the Department completes the audit, the taxpayer will not benefit from the waiver of penalties granted by the Certified Audit Pilot Program.

 

Section 850.175  Extension of Audit Timeframe

 

Upon written request of the participating taxpayer or qualified practitioner, the time within which the certified audit is to be performed may be extended by the Department upon good cause shown.  Good cause shown includes delays beyond the control of the participating taxpayer or qualified practitioner.  The Department may require the participating taxpayer to execute a waiver extending the statute of limitations if fewer than 75 days remain before the expiration of the statute of limitations.

 

Section 850.180  A Certified Audit is Initiated by the Taxpayer but not Completed

 

If, for whatever reason, the taxpayer's designated qualified practitioner fails to submit a completed certified audit report that meets the requirements of this Part after there has been approval of the agreed upon procedures the taxpayer has the option of engaging another qualified practitioner to complete the report.  If an extension of time is necessary in this circumstance, an extension must be requested and granted pursuant to Section 850.175.

 

Section 850.185  Certified Audit Report Not Submitted Within Audit Timeframe

 

If a certified audit report is not provided to the Department within 180 days after the Department's notice (see Section 850.115) and no extension of time has been obtained pursuant to Section 850.175, a Department auditor may complete the audit.  If a Department auditor completes the audit, the taxpayer will not benefit from the waiver of penalties granted by the Certified Audit Pilot Program.

 

Section 850.190  Independence

 

A qualified practitioner or a firm with which the qualified practitioner is associated shall not express an opinion on the books and records of a participating taxpayer unless the qualified practitioner and the firm are independent with respect to the participating taxpayer.  Independence will be considered to be impaired if, for example:

 

a)         During the period of the qualified practitioner's professional engagement, or at the time of expressing an opinion, the qualified practitioner or the associated firm:

 

1)         had or was committed to acquire any direct or material indirect financial interest in the participating taxpayer;

 

2)         had any closely held business investment with the participating taxpayer or any officer, director or principal stockholder thereof which was material in relation to the qualified practitioner’s or firm's net worth, or

 

3)         had any loan to or from the participating taxpayer or any officer, director or principal stockholder thereof.  This latter proscription does not apply to the following loans from a participating taxpayer that is a financial institution when made under normal lending procedures, terms and requirements:

 

A)        loans obtained by a qualified practitioner or the firm which are not material in relation to the net worth of such borrower, or

 

B)        home mortgages, or

 

C)        other secured loans, except loans guaranteed by a qualified practitioner's firm which are otherwise unsecured.

 

b)         During the period covered by the books and records, during the period of the professional engagement or at the time of expressing an opinion, the qualified practitioner or the associated firm:

 

1)         was connected with the participating taxpayer as a promoter, underwriter or voting trustee, a director or officer or in any capacity equivalent to that of a member of management or of an employee, or

 

2)         was a trustee of any trust or executor or administrator of any estate if such trust or estate had a direct or material indirect financial interest in the participating taxpayer or was a trustee for any pension or profit-sharing trust of the participating taxpayer.

 

c)         The above examples are intended to be illustrative and are not intended to be all-inclusive.

 

Section 850.195  Penalties

 

Unless the audit discloses fraud, the Department shall waive penalties that would be based on any tax that is identified to be due as a result of a certified audit.  The waiver of penalties does not apply to any amount that the taxpayer collected as tax, but did not remit to the Department, or to any certified audit that the Department completes for any reason.

 

Section 850.200  Detrimental Reliance

 

In any subsequent audit of the taxpayer by the Department, detrimental reliance that is based upon the results of the certified audit that the qualified practitioner conducts, or incorrect or misleading advice that the qualified practitioner gives, is not a defense against the assessment of tax, penalty, or interest.