The 36-year-old had told police he had been the victim of a racist and homophobic attack in the city in January.
However, prosecutors said the attack was staged in a bid to boost his career and ordered Smollett to pay $130,000 (£99,500) to cover the cost of the investigation.
The deadline for payment passed on Thursday and now Chicago plans to sue, it said in a statement, despite prosecutors abruptly dropping plans to charge Smollett for allegedly staging the attack.
It said: "Mr Smollett has refused to reimburse the City Of Chicago for the cost of police overtime spent investigating his false police report on January 29, 2019.
"The Law Department is now drafting a civil complaint that will be filed in the Circuit Court Of Cook County.
"Once it is filed, the Law Department will send a courtesy copy of the complaint to Mr Smollett's LA-based legal team."
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