I am not licensed to practice law in Illinois so the following should not be taken as legal advice, but simply as information based on general principles of law which is intended to educate. If you need legal advice, please consult a lawyer who holds Illinois licensure.
Usually if you buy an item from a store and it's broken, you can return it within a short time and get your money back. You get your money back from the store, and the store returns the item to its supplier and gets its money back.
I don't see why this principle wouldn't apply in your circumstance. You sold somebody a defective IPhone. They want their money back because it doesn't work. You should give them your money back. Then you should ask for your money back from the person you bought it from on Craigslist.
You don't say you sold the phone "as is." You don't say you informed the person you could not vouch for whether or not it was operational. Sounds like you thought it worked and seems to me there's an implied warranty of fitness for its intended use when you sell something like a consumer electronic device.
That's the way I see it. I bet a small claims judge would see it like I do, i.e., if the buyer sued you in small claims to get his money back, he'd lose. Maybe an Illinois lawyer would see it differently, I don't know.