By Nancy E. Joerg, Esq., Managing Shareholder – St. Charles Office, Wessels Sherman Joerg Liszka Laverty Seneczko P.C., St. Charles, Illinois
(630) 377-1554, najoerg@wesselssherman.com, www.wesselssherman.com
As an attorney who has been helping Illinois companies with these kinds of sudden IDES audit notices for the last 30 years, I am well aware of the panic that often sets in when an Illinois company opens a letter from the Illinois Department of Employment Security (IDES), and it is a NOTICE OF IDES AUDIT.
The Notice of Audit letter is often the very first notification that the Company has that it is going to be audited by the IDES (the Illinois state agency that handles unemployment insurance claims, employer taxes called contributions, and unemployment insurance hearings).
The Notice of Audit letter introduces the audit by saying there is no suggestion of fault against the company to be audited. However, most Illinois companies are understandably upset and anxious when they find out they have been selected for audit.
FIRST PAGE OF NOTICE OF AUDIT LETTER: The first page of the Notice of Audit letter specifies the name of the auditor and auditor supervisor assigned as well as their full contact information.
There is a specific audit year indicated (never the current year, but routinely one or two years back). The IDES doesn’t audit the current year because it is not a complete payroll year and also because there are no 1099s issued yet for the current year (since 1099s are issued in the year following the services rendered).
The first page of the Notice of Audit letter also contains a day and time that the auditor wishes to begin the audit. Clients frequently ask me if they can request a continuance. And my response is that it is routine to ask for a continuance so that the Company can better prepare for the audit. I have never known an auditor to refuse just one request for a continuance to a later date to begin the audit.
SECOND PAGE OF NOTICE OF AUDIT LETTER: The second page is a Records Request which is a laundry list of the kinds of records that the auditor wishes to examine. At the bottom of that page, there is a statement that if the Illinois company doesn’t maintain certain records, you are not expected to create those records. In other words, whatever payroll and related records your company has for the specified year is what the auditor wants to see.
Very few companies have all the many types of records detailed on page 2 of the Notice of Audit letter. The IDES auditor does not expect the Company to have all the listed records. Further, the IDES auditor doesn’t expect the Company to be ready to hand over all the records on Day 1 of the audit. It is generally very acceptable for the Company to give the auditor some of the requested records on Day 1 of the audit and then follow up by sending other requested records electronically to the auditor.
AUDIT YEAR: An audit by the IDES always starts with one specific year. The Notice of Audit letter specifies which year the auditor will begin with.
The IDES is permitted by law to audit a company for up to four years but this is highly unusual. It is much more usual to see an IDES auditor audit one year, sometimes two years, and sometimes three years depending on the amount of the proposed assessment owed to the IDES. Although this standard changes from year to year, the IDES will generally not audit the company for a second year if the contributions owed as a result of the audit are less than $5,000. But this is not a hard and fast rule.
The IDES auditor will not mention whether he or she will extend the audit until the auditor has totally finished with the first year of the audit. Then the IDES auditor may announce that the auditor is extending the audit by asking the Company under audit for its 1099 forms for the prior year. In almost all cases, the IDES auditor will only go back in time (rather than coming forward towards the present year when auditing another year).
Often it is not the auditor, but rather the auditor’s supervisor, who makes the very important decision about whether the audit will be extended to a second year.
PREPARING FOR AN IDES AUDIT: You should be thoroughly prepared in the face of an IDES audit. The best way to prepare for an audit is to read over the records request on the second page of the Notice of Audit letter and see which records you can pull together to give to the auditor on the first day of the audit. If your company used independent contractors in the year being audited, start to make lists of the type of services the independent contractor provided and think of how you can prove that they themselves had their own independent businesses and were not your employees.
REFERRAL FEES: If payments to an individual were “mere referral fees” then explain that to the auditor. Mere referral fees are not considered services for which employee wages should have been paid.
CERTAIN WORKERS ARE EXEMPT: Also, certain kinds of workers are actually exempt from being employees (and therefore it was not necessary for the Company to classify the worker as an employee). An example would be “direct sellers” under certain facts and circumstances. See Sections 207 and 208 of the Illinois Unemployment Insurance Act.
UNEMPLOYMENT INSURANCE RATE: The IDES auditor will also check to see that you used the correct unemployment insurance rate when you sent in your contributions to the IDES on your declared employees. Sometimes a company actually overpaid and, as a result of the audit, will be credited for the overpayments that the Company made in error.
WORKER RELATIONSHIP QUESTIONNAIRE: The auditor will sometimes ask the Company to fill out the IDES Worker Relationship Questionnaire. There is a special Worker Relationship Questionnaire for truck drivers who are owner-operators. Always seek experienced legal counsel in filling out these complex Questionnaires.
WHAT TRIGGERS AN AUDIT: Many IDES audits are truly random. In other words, the Company was randomly selected. Other IDES audits are triggered because an independent contractor filed for unemployment insurance benefits and, when the IDES became aware of this discrepancy, it listed the Company as an audit lead.
For assistance with IDES audits, hearings, and independent contractor agreements (or for consultations on limiting your liability in the use of independent contractors), contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in working with companies who use Independent Contractors of all types. Nancy Joerg can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.
The opinions expressed in this article are solely those of the author and do not necessarily represent the official policy or position or the Illinois Chamber of Commerce.