A recent national trend in the practice field of state and local tax has been the uptick in local jurisdictions' audit activity. The Cook County Department of Revenue ("Cook County" or "Department") is no exception to this trend where in recent years, the Department has increased its audit activity, and much to the chagrin of taxpayers, has taken aggressive positions in the interpretation of its tax ordinances. Consequently, this has led to increased litigation in the administrative proceedings before the Cook County Department of Administrative Hearings ("D.O.A.H."). This post provides an overview of the Department's audit and ensuing D.O.A.H. processes and will highlight some of the procedural differences compared to other jurisdictions such as Chicago and Illinois. This background should assist any taxpayer in navigating the pitfalls and traps they will likely face if they receive a notice of Tax Assessment and Determination ("Assessment").
Authority to Tax
The Illinois Constitution grants a home rule unit, which includes a county that has a chief executive officer elected by electors of the county, with authority to exercise any power and perform any function pertaining to its government and affairs, including the power to tax. Ill. Const. Art. VII, § 6(a), 55 ILCS 5/5-1009. For taxes that are measured by income or earnings or that are imposed upon occupations, Cook County only has the power provided by the General Assembly. Ill. Const. Art. VII, § 6(e). Cook County, however, is not preempted from imposing a home rule tax on (1) alcoholic beverages; (2) cigarettes or tobacco products; (3) the use of a hotel room or similar facility; (4) the sale or transfer of real property; (5) lease receipts; (6) food prepared for immediate consumption; or (7) other taxes not based on the selling or purchase price from the use, sale or purchase of tangible personal property. 55 ILCS 5/5-1009.
Cook County, like the Illinois Department of Revenue and the City of Chicago Department of Finance, initiates an audit by issuing an individual or business a notice of audit to the taxpayer. The notice will generally identify the taxes subject to review, the periods under audit, and the time and location where the Department will undertake the audit. The notice will likely also include document requests and/or questionnaires that the Department has requested to review as part of audit. In some instances, however, if the Department believes that a taxpayer is not reporting a tax that the Department believes it is subject to, the Department will skip the audit and issue a "jeopardy assessment." A jeopardy assessment assesses liability based on the books and records of who the Department deems to be similarly situated taxpayers.
Additionally, as my colleague Samantha Breslow discussed in " Navigating a Chicago Audit and the Procedure for a Formal Protest", taxpayers should take the Department's information requests seriously. It is especially important that the taxpayer stays engaged and responsive to Department auditors as a failure to do so may result in the Department issuing a jeopardy assessment. Cook County Code of Ordinances ("C.C.O.") § 34-63(c)(2).
While the Department's audit process is very similar to Illinois, Chicago, and most other jurisdictions for that matter, the Department's tax appeals process differs significantly. Unlike the Chicago Department of Finance which affords taxpayers 35 days to protest a notice of tax assessment, and the Illinois Department of Revenue which affords taxpayers 30-60 days to protest a notice of tax assessment, a taxpayer subject to a Department tax assessment must file its protest within 20 days of the Department's mailing the notice of tax determination and assessment. C.C.O § 34-80. The taxpayer must either personally serve the Department with its protest, or place its protest in an envelope, properly addressed to the Department and postmarked within twenty days of the Department's mailing of the protest. C.C.O. 34-79. At a minimum, a protest must identify the date, name, street address of the taxpayer, tax type, tax periods, the amount of the tax determination and assessment, and the date the county mailed the notice of assessment. The protest should also include an explanation of reasons for protesting the assessed tax and penalties. The Department has published a " Protest and Petition for Hearing" form which must be used by a protesting taxpayer. The form must be signed, and must include a power of attorney if the taxpayer is represented by someone other than the taxpayer.
Taxpayers should pay attention to the extremely short time frame in which to a protest must be filed. When considering the Department is only required to serve this notice by United States registered, certified or first class mail, a taxpayer is often left with less than 15 calendar days to file its protest. This is especially true for corporate taxpayers whose headquarters may differ from the address of its tax or legal department or the individual responsible for protesting tax assessments.
Upon timely receipt of a taxpayer protest, the Department will determine whether any revisions to the Assessment are warranted. This stage may result in a continuation of the audit where the Department will request additional documentation from the taxpayer and the Director of the Department does have the authority to amend the Assessment. While nothing prohibits the Department from increasing the Assessment during this stage, generally if a revision to the Assessment is made, the result is a reduction in the Assessment.
If the parties are unable to resolve the audit, the Department then institutes an administrative adjudication proceeding by forwarding a timely filed protest to the D.O.A.H. C.C.O. § 34-81; C.C.O. § 2-908. The Director of the D.O.A.H. is appointed by the President of the County Board, and is subject to approval by the County Board of Commissioners. C.C.O. § 2-901(b).The Director appoints hearing officers, or administrative law judges ("ALJ"), who are independent adjudicators authorized to conduct hearings for the Department.C.C.O. § 2-901(a). The ALJ has authority to hold settlement conferences, hear testimony, rule upon motions, objections and admissibility of evidence. C.C.O. § 2-904. Note, however, the ALJ is prohibited from hearing or deciding whether any ordinance is facially unconstitutional. C.C.O. § 34-81.
At all proceedings before the ALJ, the Department will be represented by the State's Attorney. The ALJ will set the matter for an initial pre-hearing status where the parties should be prepared to provide the ALJ with a brief overview of the facts and issues in dispute. The parties will then work to narrow the issues for presentment of findings by the ALJ. This will likely be accomplished by pre-hearing motion practice and the parties' attempt to stipulate to facts and legal issues to be decided by the ALJ. Ultimately, the taxpayer and the Department will participate in a hearing, or trial, before the ALJ prior to the ALJ issuing a final order with findings of fact and conclusions of law. C.C.O. § 2-904.
Most taxpayers and practitioners are surprised to learn that the D.O.A.H. has no formal discovery. In fact, the parties are only entitled to conduct discovery with leave of the ALJ. Cook County D.O.A.H. General Order No. 2009-1 ("General Order"), Rule 6.3.In our experience,the ALJ will occasionally permit limited interrogatories and requests to admit, but requests to produce have been denied, and depositions arestrictlyprohibited. This is true even where a party intends on introducing an expert witness at the hearing. Notably, because the Illinois Supreme Court rules do not apply, there is also no corresponding requirement that an expert submit its conclusions and opinions of the witness and bases thereof to the adverse party. See Ill. S. Ct. R. 213(f). The ALJ may subpoena witnesses and documents which the ALJ deems necessary for the final determination. General Order, Rule 6.4. The lack of procedure naturally increases the likelihood of surprise at final hearing.
After the completion of any pre-hearing motions and the narrowing of the issues, the parties proceed to a hearing where each party will present its case. This is where the record is made for purposes of appeal. No additional evidence is permitted to be introduced at the Circuit Court. The Petitioner, often the Department, must present its case first and bears the initial burden. However, the Department's Assessment is deemed to be prima facie correct. C.C.O. § 34-64.Thus, a taxpayer has the burden of proving with documentary evidence, books and records that any tax, interest or penalty assessed by the Department is not due and owing. C.C.O. § 34-63. The formal and technical rules of evidence do not apply at the hearing. C.C.O. § 2-911. A taxpayer can also present fact and expert witnesses in support of its position and may wish to call Department personnel such as the auditor and supervisor as adverse witnesses to support its case.
After both parties have concluded their case, each may request an opportunity to present a closing argument. General Order, Rule 9.4. In lieu of, or in addition to a closing argument, the ALJ may request the parties to file post hearing briefs. It is during the closing argument and/or brief, that the parties will have the opportunity to present its legal and factual defense to the Assessment.
After the hearing and review of post-trial briefs, the ALJ will issue a final order which includes findings of fact and conclusions of law. The findings of the ALJ are subject to review in the Circuit Court of Cook County pursuant to the Administrative Review and the aggrieved party has 35 calendar days to file an appeal. C.C.O. 2-917.
Conclusion and Takeaways:
The D.O.A.H. presents some unique litigation and procedural challenges for a taxpayer wishing to protest a Department Assessment. The major takeaways for a taxpayer protesting an assessment are (1) a taxpayer must file its protest within 20 days of the Department's mailing of the assessment; (2) the D.O.A.H. has limited discovery rules and prohibits the use of depositions which can inhibit a taxpayer's ability to build a case. Accordingly, a taxpayer must present adequate witnesses and documentation to support its case at hearing; and (3) a taxpayer must build a record at the administrative proceeding because it will be foreclosed from doing so at the circuit court if an appeal is necessary. These takeaways can go a long way in assisting a taxpayer's chances of success in what is at times, an unpredictable venue.