Home improvement chain Lowe’s made headlines recently when it lost a decision under the Illinois False Claims Act. A suit alleged that Lowe’s skirted a higher tax burden by characterizing itself as a building contractor, subject to use tax, rather than as retailer obligated to remit sales tax on the retail price of the sale.
The case included allegations that Lowe’s actively disregarded the advice of its tax consultants when that advice was “contrary to their goal” of being treated as a contractor. The Circuit Court of Cook County opinion said that was evidence, in part, of potentially "reckless disregard" of proper application of the tax laws in Illinois.
While following the advice tax advisors could have exposed the taxpayer to an unpleasant tax burden, it might seem a bargain after potentially “$10 million after back taxes, treble damages, interest, and attorneys’ fees are assessed.”
Although the line between a simple misunderstanding of the tax law and tax negligence is not always crystal clear, purposely disregarding the advice of tax counsel could push a taxpayer into the tax negligence category, or worse yet, into tax fraud territory.
For example, if a business tries to do the right thing but still taxes something incorrectly, it’s less likely to face severe penalties. A line is crossed when the error is due to willful or reckless conduct. In that case, a taxing authority could consider the conduct negligent, or even fraudulent. Generally, the difference between negligence and fraud is a matter of intent. You must intend to commit fraud. Negligence, by contrast, reflects more carelessness than malice.
While heeding tax advice that isn't what you want to hear can be painful, ignoring it can hurt worse in the long run.
Cite: Ill. Cir. Ct. of Cook County, No. 15 L 50776, Order 3/31/21
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