UI Audit Best Practices

[HV Ken]

Just got a call from a client today - they do their own books, we only do their tax return. They have been selected for an Unemployment Insurance audit (we are in NY) and were asking for us to come along for the ride. For payroll, they were doing their own in QuickBooks and switched to ADP about 1.5 years ago.

I have never been involved in a UI audit - does anyone have any recommendations on "best practices" for handling this? For example - Should the auditor be allowed to go to their work site, or is it better to meet in my office?

Thanks for any advice on this!

[ILLMAS]

Sorry this is for IL workmen comp, Not NY

These audits are a piece of cake, just have handy the quarterly returns and 1099's for the period they are requesting. Just remember the policy period is not going to match their calender or fiscal year, for example my last client was being audited for 02/20/13 to 02/20/14, I provided 2013 quarterly returns and printed out a payroll summary for the period, they'll tie it out. If you are busy, ask to see if you can fax them the information, saves them the visit.

MAS

[joanmcq]

If they are insured by the NY workers comp fund they'll be audited every year. They want to verify wages to set next years insurance rate and make sure no workers are improperly misclassified as ICs.

I had to do one for my private WC insurer.

[JohnH]

I have the client give me the contact info for the W/C auditor. If there's an email address, I email them the info, either by filing in their form and sending them a scan, or my preparing my own worksheet. I also attach the quarterly reports and any other info they need as a part of the scan.

If there's no email address on their contact info, I call and ask for their email address or fax number. For my state, most of the time they are glad to have the info emailed to them. I password protect the file and then call the auditor to give them the password.

On the rare occasion when they must meet in person, I have the auditor come to my office.

Either way, it's billable time, and a lot more efficient that trying to relay this info through a clueless client.

[joanmcq]

Very true!

[Lee B]

In my state it is not always a piece of cake. I always have the auditor come to my office since I prepare the financial statements

and process the payroll or do the payroll recordkeeping for almost all of my clients. In Oregon the auditor will review the cash disbursements records looking for payments to individuals, asking for documentation to see if they should have been classified

as an employee. They will also ask for documentation on all independent contractors reported on 1099s to see if they were

really independent contractors. The last UI audit I had took almost 4 hours and the auditor proposed an adjustment

for some payments to a independent contractor reported on a 1099 because my clients documentation was somewhat weak.

The audit drug on for over 6 weeks as I emailed the auditor more information as my client passed it on to me.

In my state if a tax return only client asked me to take care of a UI audit I would have to say NO !

[michaelmars]

HAVE it in your office, they can be a snap or a pia audit, depends on the auditor. In either case you don't want the auditor overhearing your client at work and you want to be in your office so you can work on something else. We practically have a UI or Work Comp auditor in our office daily, we leave the records in the conference room and let them do their thing. The agents have an area so if in your office you will get to know your local auditor. our local guy even asked if we could stock some splenda since he doesn't like sweet n low, that's how often they are here. They switch areas every 2-3 years because the supervisors don't want them that comfortable anywhere. They will look at payroll and general ledger and 1099's. In the ledger they will look for payments to individuals and question you on them. Recently they are also questioning 1099's saying they should be employees. On the state website there is info on what makes this distinction, mostly its control, who controls the work of the Independents, schedules it etc.

As stated above the periods don't always match the pr tax quarters but most agents will fudge this, ie as stated above the period was 2/20 to 2/20, some agents will use march to march. The audit can be 15 minutes to 2 hours tops. If they pick up on some people that they want to make employees and you don't agree, having it in your office gives you a stall to talk with your client. Also, you don't have to agree, and you can have an unagreed to audit. then a supervisor gets involved. But remember its only a few points on the first $8500 someone earns so all the adjustments might be too small to fight over.

[Jack from Ohio]

If you are not doing the Payroll, just say no. Huge minefield....

[kcjenkins]

One factor not mentioned is whether you have a space for them to work. If he's using ADP why are they not dealing with it? At minimum, they should provide the payroll stuff in good order for you, monthly as well as quarterly.

[Naveen Mohan from New York]

New York U.I. Audit is not the same as workers compensation audit. Here is what is involved:

Auditor WILL visit client worksite as part of the audit program. You cannot prevent it. There they will observe number of employee working. They will also look for weekly work schedule posted and they will copy name listed on that schedule.

they will look at general ledger/ tax return, quarterly payroll return and most definitely they want bank statements.

Paychex/ADP do not handle this type of audit for their clients.

I had several NY U.I audit and this is the standard operating procedure that they have followed.

Naveen Mohan

[HV Ken]

Sorry this is for IL workmen comp, Not NY

These audits are a piece of cake, just have handy the quarterly returns and 1099's for the period they are requesting. Just remember the policy period is not going to match their calender or fiscal year, for example my last client was being audited for 02/20/13 to 02/20/14, I provided 2013 quarterly returns and printed out a payroll summary for the period, they'll tie it out. If you are busy, ask to see if you can fax them the information, saves them the visit.

MAS

My question is for UI = Unemployment Insurance, not Workers Comp. Thanks for taking the time to post, though!

[HV Ken]

Thanks michaelmars and Naveen Mohan from New York.

Naveen - what part of NY are you in? I am in Dutchess County - Poughkeepsie.

[Naveen Mohan from New York]

HV Ken:

I am in Albany, New York.

[michaelmars]

One factor not mentioned is whether you have a space for them to work. If he's using ADP why are they not dealing with it? At minimum, they should provide the payroll stuff in good order for you, monthly as well as quarterly.

adp doesn't have the general ledger records or contracts etc that the auditor might ask for, nor do they have job descriptions or even know the 1099's.

Really, these are mundane and common in the course of business, every client gets one every year or two, sometimes through mail, with the bigger clients annually. There is "almost" no exposure and I have had auditors that were still students in school, just gathering the info and leaving. And as I wrote above, here in NY the dollar amount is almost insignificant for any adjustments they propose.

I did once have an interesting one, an audit on a pizzeria that had 2 employees, the agent said that according to the usda, even a small pizzeria needs 3 people to operate. I explained that this shop is in a south Bronx getto and I would never go there, the owner mails me bank statements monthly and I do tax returns. She charges for a third employee, cost $200 and I signed off on the audit. Not a big deal.

One item to be careful of is sometimes agents walk a block counting heads in a store then comparing the number to your next quarters filings. That makes for an interesting conversation. They once hit a block in the Bronx and 8 entities were my clients. Nice lady auditor, spend 1.5 days in my office while I did other work and she left with agreed to audits and I now had clients that were forced to be more legit.

[Gail in Virginia]

When we have had Virginia UI audits, they basically want to see everything that deals with financial or payroll records. They are looking to see that employees are properly paid for the hours that they worked, and they look at every check to an individual in the financial records to see if that is someone that should have been treated as an employee instead of a vendor or subcontractor. They look at tax returns and the financials to make sure there are not obvious cash payments to under-the-table employees.

I don't know about New York, but agree that this is not the piece of cake a WC audit is.

[michaelmars]

When we have had Virginia UI audits, they basically want to see everything that deals with financial or payroll records. They are looking to see that employees are properly paid for the hours that they worked, and they look at every check to an individual in the financial records to see if that is someone that should have been treated as an employee instead of a vendor or subcontractor. They look at tax returns and the financials to make sure there are not obvious cash payments to under-the-table employees.

I don't know about New York, but agree that this is not the piece of cake a WC audit is.

What you are describing, here in NY, is a labor audit done by the department of labor. And I agree they aren't a cake-walk. The unemployment insurance is different and not as intrusive.

[kcjenkins]

Gee, in 35+ years in business in AR I never had a single client have a UI audit! And only one WC audit! NY sounds like a real pain.

[Lee B]

I've had 3 "randomly selected" UI compliance audits in the last two years.

Almost every payroll processing and payroll recordkeeping client has a workers compensation audit every year.

[michaelmars]

Gee, in 35+ years in business in AR I never had a single client have a UI audit! And only one WC audit! NY sounds like a real pain.

now you know why we get the fees we do.

[HV Ken]

Michael, so if the UI audit determines that a sub should have been an employee and zings them for the UI on the first $8,500, do they then report that to the Federal government so they will then go after the FICA and Medicare? Or does it really end with the UI audit?

[joanmcq]

CA will report to the IRS.

[Gail in Virginia]

Supposedly, Virginia reports them to the federal agencies, but I have yet to have IRS or DOL come in wanting money after a UI audit reclasses an employee. I expect them, but so far my clients have gotten by.

[michaelmars]

sui does not report, but a ny state labor audit does.

[Lion EA]

CT and NY and a large number of state (40ish) departments of labor have agreements with the federal department of labor to share information. Often the feds get a lead on an IC who they think is an employee and pass the lead on to the state. In CT, they're known as the audits from hell. I think they can go back ten years, charge both the employer and employee payroll taxes, penalties (50%?) and interest are huge (CT interest rates are higher than the feds).

[michaelmars]

CT and NY and a large number of state (40ish) departments of labor have agreements with the federal department of labor to share information. Often the feds get a lead on an IC who they think is an employee and pass the lead on to the state. In CT, they're known as the audits from hell. I think they can go back ten years, charge both the employer and employee payroll taxes, penalties (50%?) and interest are huge (CT interest rates are higher than the feds).

CT is tough they check the 1099 people and if they didn't file then they come after you for the taxes. Yes they share with the state as does NY but only on labor audits not SUI - its a different creature. I know in CT that they are the same.