Every year, a small percentage of businesses throughout each state must undergo an unemployment audit. An unemployment audit is a process in which the state reviews employers’ records to ensure that they are paying into the unemployment insurance fund correctly. This process can be confusing and daunting.
Understanding the basics of how audits are conducted and what is reviewed can help alleviate some of the stress associated with an audit. This blog post will explain how employers are selected for an unemployment audit and what records are examined by the auditors.
What’s An Unemployment Audit?
An unemployment audit reviews an employer’s records to determine whether they have been properly paying unemployment taxes. The audit may be conducted by the state unemployment agency or an independent auditing firm.
Employers are selected for an audit based on several factors, including:
- The size of the employer’s workforce
- The amount of unemployment taxes paid by the employer
- Whether the employer has had previous audits
- Whether the employer has had any complaints filed against them
An audit reviews the following records:
- Payroll records
- Wage reports
- Unemployment tax returns
If you are selected for an unemployment audit, it is important to cooperate with the auditor and provide them with the requested information. Failing to do so could result in penalties or fines.
Do I Receive A Written Notification Before An Audit?
Yes, you will always receive a written notification in the form of an “Intent to Audit” letter. This letter is typically mailed to your last known address on file at least 30 days before the audit begins. The notice will list the time frame that the auditors will be reviewing and request that specific documentation be gathered and sent to their office.
What Employers Get Selected For a UI Tax Account Audit?
The Department of Labor randomly selects most employers who receive an Audit Notification letter. However, there are other instances in which certain employers may be targeted. Businesses that don’t report employees may be selected to ensure that their workers are properly excluded from UC Law coverage.
Businesses that operate in industries with a high rate of reporting errors are more likely to be selected to undergo an audit. Any specific businesses that are known to have a reporting error or are suspected of having one are at a higher risk of being audited than other businesses throughout the country.
When Are Audits Conducted and How Long Do They Take?
The auditor is responsible for scheduling the audit date and time. Normal audits are conducted between 8:00 am and 4:30 pm Monday through Friday. Audits appointments are excluded from happening on major holidays. The auditor will notify a company about the day and time when their unemployment audit will take place.
The amount of time it takes to conduct your audit depends on several factors. For most small to medium-sized businesses, unemployment audits are typically completed in one business day. However, the condition of the business’s records and any issues encountered may increase the number of days that the auditor conducts fieldwork.
Where Are Unemployment Audits Conducted?
Most unemployment audits will take place at the business’s location undergoing the audit. This allows for easy access to the business’s records to make the auditing process much quicker.
However, it’s vital to note that you can request that the audit be performed at your accountant’s business location if you enlist professional accounting services. The auditor must approve this change of location before your scheduled unemployment audit date.
In some states, you may be able to conduct the audit remotely. Again, the auditor must pre-approve this before your scheduled unemployment audit date. When audits are conducted remotely, employers are given a secure link to upload any documents requested by the auditor.
How Many Years of Records Do I Need to Have Ready?
When you receive your Audit Notification letter, you’ll be provided with a specific tax year. You must have records for this tax year easily accessible for the auditor when they arrive at your scheduled date. If the auditor runs into an inconsistency within the chosen record year, they may request records from a previous year. An employer must readily supply these records within a timely fashion.
What Records Will the Auditor Need to See?
Since the point of an unemployment audit is to determine that your payroll is being reported correctly and tax provisions are being followed accordingly, your auditor will need to see all payroll and tax documentation for your business. When you receive your Audit Notification letter, it will include a list of records that you’ll need to supply to the auditor when they arrive.
Some of the most common documents requested include:
- Employee earning records
- W2s and W3s
- Financial statements
- Petty cash records
- IRS payroll forms
- Corporate minutes
- Bank statements
- Master vendor lists
- Payroll registers
- Documents showing non-payroll payments
- Canceled checks
- Cash disbursement journals
- Business income tax returns
- Chart of accounts / general ledgers
You must have all of the requested records readily accessible to your auditor. These documents can be in printed format or digital format. The auditor must have login access to freely obtain records without assistance during the auditing process if in digital format. If you’re unable to provide all the requested records on the date of your unemployment audit, you must notify the auditor immediately.
Can I Withhold Records From the Auditor?
Many state employment laws require that all businesses supply employment and other records when requested by a state-approved auditor. Knowingly withholding or refusing to supply the unemployment auditor with these requested documents can be punishable by fines and potential imprisonment. Additionally, the Department of Labor may subpoena any records you refuse to provide.
Do I Need to Be Physically Present During the Audit?
The business owner that is undergoing the unemployment audit isn’t legally required to be present during the audit. You may appoint a company representative to assist the auditor during their examination. If you enlist accounting services, you can appoint your accountant to be your representative for the audit.
This makes it possible to have the audit performed at your accountant’s office without participation from you or your staff members. It’s still highly recommended that you remain reachable by phone during the audit to quickly answer any questions that may arise that your chosen representative can’t answer.
Why Am I Getting Audited When All My Workers Are Independent Contractors?
While unemployment audits are done to ensure that payroll is recorded correctly and tax provisions are being properly followed, they’re also conducted to ensure that workers are rightly classified. Because classifying a worker as an independent contractor comes with different tax provisions, employers must be able to verify their relationship with independent contractors actively.
You must prove that the independent contractors you pay are not under your control or direction. They must be performing work as part of their independently established businesses. As your chosen auditor verifies your relationships with independent contractors, they may ask additional questions or for additional documentation. In some states, additional criteria may need to be evaluated if the independent contractor is performing work that is of construction in nature.
When Will I Get My Audit Results?
Upon completion of their fieldwork, your auditor will provide you or your approved representative with preliminary results of your audit. These results may include proposed audit adjustments if necessary. After the auditor and their supervisor complete the audit report, you’ll be mailed an official Post-Audit report.
If the Department of Labor determines that you owe money due to your reporting errors, you have two options. If you have the full amount of what you owe, you can pay the back taxes via electronic payment or mail. If you lack the funds at the time of the report’s conclusion, you can opt to set up a payment plan to pay for the amount you owe.
In some cases, a credit may be found in your favor. You have two main options on how to handle this credit. You can apply directly with your state’s tax office to receive the credit as a check or apply the credit balance to your next quarterly report.
How Often Can I be audited?
Unemployment audits vary from state to state, but most states will audit employers every few years. Some states may audit more frequently if the employer has a history of not complying with unemployment insurance laws or if they receive a high number of unemployment insurance claims.
Can I Appeal the Auditor’s Findings?
If you don’t agree with the findings in your Post-Audit letter, you do have the right to appeal the results. You can find detailed instructions on filing an appeal included with your Post-Audit letter. This information is also typically available from your state’s Department of Labor website.
Department of Labor’s Anti-Discrimination Policy
The state and federal guidelines outlining the unemployment audit process specifically mandate that all employers are treated equitably and in a non-discriminatory fashion. This policy ensures that no employer is actively discriminated against based on their national origin, race, sex, color, age, religious affiliation, political affiliation, or disability.
Be Prepared For An Unemployment Audit
Whether your business is big or small, undergoing an unemployment audit can be stressful without the right help. At Nesso Group, we can help you simplify your payroll and employee classification processes.
Our Nesso Accounting team is familiar with both state and federal laws, so we can help your business keep accurate accounting records, making the unemployment audit process much smoother. Don’t hesitate to contact us to learn more about how we can help you.