If I have a pre-existing tax deficiency, will Illinois apply my overpayment credit to that old deficiency first instead of letting me credit it to a current or future liability?

Subject

Refunds – Credit Of Overpayment To Liabilities

Plain-English summary

A taxpayer had previously received a General Information Letter from the Illinois Department of Revenue (IT 19-0007-GIL) discussing the Department's policy when a taxpayer with a pre-existing deficiency also claims a refund. The taxpayer wrote back with a follow-up question, attaching a sample corporate tax return showing lines for "amount of overpayment to be credited to next period," "Balance of Overpayment," an amount to be credited to another form, and a line for "Refund of Overpayment." The taxpayer asked: if a pre-existing deficiency existed when such a return was filed, would Illinois disallow the requested credits and instead apply those amounts to the pre-existing deficiency?

The Department noted it could not opine on tax forms from other states, but answered the underlying Illinois-law question. It explained that the Illinois Income Tax Act allows a taxpayer to elect to credit an overpayment from one taxable year against the estimated tax for another taxable year (35 ILCS 5/909(b)). Under the Department's regulations implementing that election (86 Ill. Adm. Code 100.9400(b)), once a taxpayer properly elects to credit an overpayment against estimated tax, the Department applies the overpayment against the taxpayer's other liabilities first, and only the remaining balance (if any) gets applied to the estimated tax liability the taxpayer wanted credited. The Department also pointed to the 2019 Form IL-1120 instructions, which warn that a credit carryforward may be reduced to satisfy any unpaid tax, penalty, and interest due for that year or any other year, and that such a reduction may itself trigger a late-payment penalty in a later year.

Bottom line, in the Department's own words: "if a taxpayer with a pre-existing liability files a return requesting that a prior overpayment be credited toward a future liability, the Department will first apply the overpayment to the pre-existing liability. Any remaining credit will then be applied to the current liability."

What this means for you

Businesses and individuals with an existing balance due

If you have an unresolved liability with Illinois — from this year or a prior year — and you also file a return claiming an overpayment that you want credited to estimated tax or another current liability, don't assume the full amount will go where you requested. The Department applies the overpayment to the pre-existing liability first; you only get to direct what's left over.

Accountants and tax professionals

When advising a client with both a pending deficiency and a fresh overpayment, factor in that the ordering rule under 86 Ill. Adm. Code 100.9400(b) works against the client's requested election: other liabilities get paid down before the elected credit is honored. The letter also flags a secondary risk — if the credit carryforward the client used to offset a later year's estimated tax gets reduced because of this reallocation, that reduction can itself generate a late-payment penalty in the subsequent year (per the 2019 Form IL-1120 instructions discussed in the letter).

Anyone relying on this letter

This is a General Information Letter, not a Private Letter Ruling. By its own terms it is "designed to provide general information, is not a statement of Department policy and is not binding on the Department" (86 Ill. Adm. Code 1200.120(b) and (c)). A taxpayer who wants a binding answer on their own specific facts would need to request a Private Letter Ruling under Section 1200.110(b).

Common questions

Q: If I have an old tax deficiency and I file a return asking to credit an overpayment to a current liability, will Illinois honor my request in full?
A: Not necessarily. The Department will first apply the overpayment to the pre-existing liability. Only the amount left over, if any, is then applied to the current liability you requested.

Q: What Illinois law lets a taxpayer credit an overpayment to estimated tax in the first place?
A: Section 909(b) of the Illinois Income Tax Act (35 ILCS 5/909(b)) allows a taxpayer to elect, on an original return, amended return, or otherwise, to credit an overpayment from one taxable year against the estimated tax for another taxable year.

Q: Does the Department's regulation say anything about the order in which an overpayment gets applied?
A: Yes. 86 Ill. Adm. Code 100.9400(b) states that after a taxpayer properly elects to credit an overpayment against estimated tax, the Department "shall apply the amount of the overpayment against other liabilities of the taxpayer and apply only the balance (if any) of the overpayment against the taxpayer's estimated tax liability."

Q: Could this reallocation trigger a penalty?
A: The letter notes that if the Department applies a portion of an overpayment against a different liability than what the taxpayer elected, or refunds some or all of the amount the taxpayer wanted credited, the Department must issue a notice, and no late-payment or underpayment penalty accrues on the reallocated amount if the taxpayer pays the liability due by the later of 30 days after the notice or the applicable due date described in the regulation. Separately, the 2019 Form IL-1120 instructions warn that a reduced credit carryforward "may result in a late-payment penalty in a subsequent year."

Q: Did the Department answer the taxpayer's question about the out-of-state tax return they attached?
A: No. The Department expressly said it "cannot opine on tax forms from other states," and instead answered the question based only on Illinois law and the general scenario described.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 86 Ill. Adm. Code 1200.120(b) and (c), which states it "does not constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department." A taxpayer wanting a binding answer would need to request a Private Letter Ruling instead.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2020/it20-0011-gil.pdf

Original ruling text

IT 20-0011-GIL 05/06/2020 REFUNDS – Credit of Overpayment to Liabilities
Overpayments will be applied to pre-existing liabilities before being credited toward a current
liability. (This is a GIL.)

May 6, 2020

Re: Illinois income tax
Dear Xxxx:
This is in response to your letter received March 28, 2020, in which you request additional information
regarding Illinois income tax in response to the Department’s May 10, 2019 General Information Letter,
IT 19-0007-GIL. The nature of your request and the information you have provided require that we
respond with a General Information Letter, which is designed to provide general information, is not a
statement of Department policy and is not binding on the Department. See 86 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at www.tax.illinois.gov.
Your letter states as follows:
Please find attached a copy of the above-referenced letter, in which you thoroughly
examined the policy of the State of Illinois when faced with a pre-existing deficiency of a
taxpayer combined with a claim for a refund.
Please also find attached a tax return from a CORPORATION.
My question to you is:
Pp 874 -875, esp. lines 95-98, show an amount over paid (exact amount redacted).
Line 96 specifies an “amount of overpayment to be credited to next period”
Line 97 specifies an “Balance of Overpayment”
Line 98 “Amount of Overpayment to be Credited to Form CT-3m4m”
Line 99 Refund of Overpayment:
The remaining tax returns are similar except the last one actually claims a refund.
So my question is: if a pre-existing deficiency appeared when this tax return was filed would
the State of [Illinois] disallow the requested credits on lines 96 and 98 and apply those
amounts to the pre-existing deficiency?
In an email dated March 30, 2020, you stated:
I have decided not to include the actual tax returns referenced therein, because that causes
problems with spam filters. Further, it suggests I am asking a question in a specific case,
which is not true.

IT 20-0011-GIL
Page 2
RULING
The Department cannot opine on tax forms from other states, however, I can answer your question
based on the law in Illinois. The Illinois Income Tax Act does allow for a taxpayer to elect to credit an
overpayment from one taxable year against the estimated tax for another taxable year.
Section 909(b) of the Illinois Income Tax Act, 35 ILCS 5/909(b), states, in part, as follows:
(b) Credits against estimated tax. The Department shall prescribe regulations providing
for a taxpayer election on an original return, an amended return, or otherwise for the crediting
against the estimated tax for any taxable year of the amount determined by the taxpayer or the
Department to be an overpayment of the tax imposed by this Act for a preceding taxable year.
As of the date of this letter, Section 909 may be found here:
http://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=003500050HArt%2E+9&ActID=577&ChapterI
D=8&SeqStart=13500000&SeqEnd=15700000
Section 100.9400(b) of the Department’s Income Tax Rules, 86 Ill. Adm. Code 100.9400(b), states, in
part, as follows:
b)

Credit Against the Estimated Tax. A taxpayer may elect to have any portion of any
overpayment shown on an original or amended return for a taxable year applied against
the taxpayer's estimated tax liability for a subsequent taxable year. (See IITA Section
909(b).) The election shall be made on the form and in the manner prescribed by the
Department, must be made before the overpayment is refunded, and, once an election
is made, the election may not be altered to reduce the amount credited or to change the
taxable year to which the credit will be applied. After an election is properly made, the
Department shall apply the amount of the overpayment against other liabilities of the
taxpayer and apply only the balance (if any) of the overpayment against the taxpayer's
estimated tax liability. (See IITA Section 909(a) and (b) and Section 2505-275 of the
Department of Revenue Law .) If the Department applies a portion of an overpayment
against a liability other than the estimated tax liability to which the taxpayer elected to
apply the overpayment or refunds some or all of the amount that the taxpayer had
elected to apply against its estimated tax liability, the Department shall issue a notice to
the taxpayer stating the amount so applied and the liability against which the application
was made, or the amount so refunded, and no penalty for late payment of estimated
taxes under IITA Section 804(a) or for underpayment of tax under IITA Section 1005(a)
shall accrue with respect to the amount so applied or refunded, if the full amount of the
liability that was due as of the date the notice was issued is paid prior to the later of:
1)

30 days after the date the notice is issued; or

2)

the unextended due date of the return for the year for which the estimated tax
credit was requested or, in the case of the penalty for late payment of estimated
taxes, the due date of the next estimated tax installment (if any) due after the
date of the notice.
2

IT 20-0011-GIL
Page 3
As of the date of this letter, Section 100.9400 may be found here:
http://www.ilga.gov/commission/jcar/admincode/086/08600100BB94000R.html
The instructions for the 2019 Form IL-1099 further elaborate on how a credit may be carried forward
and applied to a future tax liability. The note on page 12 of the instructions, under the discussion of
Line 64, specifies:
Your credit carryforward may be reduced by us due to corrections we make to your return, or
to satisfy any unpaid tax, penalty, and interest due for this year or any other year. If we reduce
your credit carryforward, it may result in a late-payment penalty in a subsequent year.
As of the date of this letter, the 2019 Instructions for the Form IL-1099, may be found here:
https://www2.illinois.gov/rev/forms/incometax/Documents/currentyear/business/corporate/IL-1120INSTR.pdf
Thus, to answer your question, if a taxpayer with a pre-existing liability files a return requesting that a
prior overpayment be credited toward a future liability, the Department will first apply the overpayment
to the pre-existing liability. Any remaining credit will then be applied to the current liability.
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions regarding this letter, you may contact me at (217) 782-2844.
Sincerely,

Michael D. Mankowski
Associate Counsel - Income Tax

cc:

Daily File

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