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NYS Dept of Labor Audit


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#1 schirallicpa

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Posted 28 July 2009 - 10:48 AM

I have 2 clients who have been selected for audit by NYS Dept of Labor. They have sent me a list which includes the kitchen sink! I would fully expect requests for payroll returns, check registers, and income tax returns, but these guys want corp documents and founding paperworks, sales records and sales tax returns, all ledgers, including sales, a/p, a/r, disbursements and general, contractor agreements, certs of insurance (ok, I can see that one), and even the poster for w/c!! What do they need all the sales info for? Can they go that far? And one of the audits is from inception! I'm not even sure when that was, and I doubt very seriously that they have records still around. This is a small proprietor trying to make a living. Not Madoff ponzi schemers.
Any advise today would be appreciated.

#2 jainen

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Posted 28 July 2009 - 11:25 AM

>>a small proprietor trying to make a living<<

On one level, it's easy to see that small businesses are vulnerable to state money grabs because they can't afford a big fight. But on another level, we must observe that they have had years to get their act together.

You haven't said what the issues in these audits are, but we can guess that someone has filed a complaint about employment practices. Maybe it's misuse of independent contractor status, or unfair scheduling, or health and safety violations. These are extremely dangerous audits. Your clients could be ruined by back taxes and fines "from inception," not to mention mandated compliance in the future. And then the audit decisions can be used in further personal lawsuits.

Never mind the kitchen sink or Bernie Madoff. Your clients must approach these audits very seriously as major business projects, with a budget, timeline, goals and strategies. They probably need qualified counsel.

#3 kcjenkins

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Posted 28 July 2009 - 12:30 PM

I agree. The list of items indicates this is not just some common garden-variety audit. They should almost certainly hire an attorney, and then have the attorney hire you to assist, if they have many years of potential exposure. More companies have been destroyed by such an audit than most people realize.

#4 Lion EA

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Posted 29 July 2009 - 02:09 PM

CT is doing employment audits, as well as the CT Dept. of Labor. They're looking for misclassified employees. And, sales tax. They've politely been called the "Audits from Hxxl." Audit department went from only 10 employees to 30 or 40. It was suggested by a lawyer speaking at a CtSEA meeting that we warn our small businesses to keep Form CT-W4 forever.

#5 Mike D

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Posted 29 July 2009 - 03:06 PM

At my initial meeting with them, I would provide only the requested documentation relating to their domain. I would not provide sales tax, etc.

If they were not satisfied with this approach I would suggest they obtain a subpoena or official request from the appropriate agencies in order warrant this additional information.

In my professional career this approach has generally worked for me as these agencies tend to not want to get into a long protracted dialogue and most certainly don't want to confront the legality and propriety of their positions.

For example one of my clients was being audited by the IRS for his personal taxes for one specific year and the auditor requested addition year’s tax returns for both personal and business taxes. The fact that they originally requested only one year's personal taxes I refused their request and suggested that they file additional paperwork to obtain these records. This audit concluded favorably and they never followed up with their request.

Just some of my thoughts on the matter.

Good luck

Mike Dubin CPA

#6 jainen

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Posted 29 July 2009 - 07:29 PM

>>these agencies tend to not want to get into a long protracted dialogue<<

Oh, no. Your example is the IRS requesting other years which they have no intention of auditing anyway. These employment status audits are a whole different thing.

They get started when some screwball you tried to help but had to fire files for unemployment insurance. The fact that you fired him is pretty much proof that he was an employee--by definition you can't fire an independent contractor. And if he was an employee so was everyone else who ever worked for you. And since you didn't file payroll tax forms for independent contractors there is no statute of limitations, and as the original post says, "I doubt very seriously that they have records still around." These are easy pickings for the state agency.

When the labor guys get through (holding the owner personally liable for the debts of the company), they turn it over to IRS for Social Security and withholding, for which the owner is also personally liable even if the worker already paid all his taxes in full!

No, I can't recommend you go in railing about "their domain." They have enormous power and you must deal with that up front. Sales tax data, for example, will be used to prove your business activity for which you will be deemed to have had employees in the absence of payroll records for past years. You can only win these with technical presentations backed by excellent documentation. Otherwise, your best bet is a negotiated deal--a bribe in which you let let them skim off the quick stuff in exchange for a quick close and a blood oath of future compliance.

#7 kcjenkins

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Posted 30 July 2009 - 01:42 PM

Jainen is totally correct here. Listen to his wise advice.

#8 Mike D

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Posted 30 July 2009 - 02:27 PM

I beg to differ, if deemed necessary, you could always acquiesce after the fact and give them what they originally requested.

This is my suggestion and how I would approach it.

Good luck

Mike Dubin CPA

#9 jainen

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Posted 30 July 2009 - 04:25 PM

>>you could always acquiesce after the fact <<

No. That approach throws away the possibility of a quick settlement, which for many taxpayers is the best strategy and for some the only possible hope. And anyway how would that help schirallicpa's client, who doesn't even HAVE what they want? Challenging the auditor's scope of authority could only be an empty bluff, which an experienced agent will immediately see through and probably resent.

A very experienced and skilled advisor might pull it off in exceptional circumstances, but generally turning an employment audit into any kind of power struggle will be disastrous. You want to talk power? That smiling guy with the necktie has the district attorney on speed dial, just in case he thinks your client is being unusually evasive about his business practices. So unless you can put lawyer-drafted contracts on his desk, you'd better think hard about saying some version of, "Gee, sorry, I didn't know."




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