May 2014

By: Nancy E. Joerg, Esq.

2013 was a big year for changes as far as audit policy at the Illinois Department of Employment Security (IDES). And just when taxpayer companies in Illinois were adjusting to the new IDES audit changes, even more audit changes are being rolled out by the IDES!

IDES AUDITORS USED TO AUDIT THE YEAR BEFORE: In times gone by, the Illinois Department of Employment Security (IDES) had an informal policy under which its IDES auditors would always audit the year before. This meant that if an IDES auditor began an audit in 2013, the IDES auditor would audit the company for 2012 (i.e., back one year in time). The only time that the IDES auditors deviated from that policy was if the audit began at the very start of 2013 and the 2012 IRS 1099 forms had not been sent out yet. Then, and only then, the year under audit would be 2011 (i.e., two years back).

Now, things are much more chaotic and unpredictable as to which year the IDES auditor will select for the initial audit year. Let me give an example of this unpredictability…

If an IDES auditor begins to audit a company in April of 2014, the IDES auditor may select, as the initial audit year, 2013 or 2012 or even 2011!

HOW DOES THE COMPANY KNOW WHICH YEAR THE IDES AUDITOR HAS DECIDED TO AUDIT: The company receives an introductory audit letter announcing that they are going to be audited by the IDES. At the top of the second page, the initial audit year is clearly started.

Under that announcement is a big list of all of the records that the IDES auditor wants the company to produce for the initial audit year.

At the bottom of the second page is a notification to the taxpayer company being audited by the IDES that there is the potential for three more years being audited (this is a longtime law under the Illinois Unemployment Insurance Act – that a taxpayer company can be audited for up to four years by the IDES).

IDES HAS A VERY STRICT INDEPENDENT CONTRACTOR TEST: Illinois companies being audited by the IDES are particularly concerned about such audits if the company uses independent contractors. The IDES is very strict about its test in deciding whether or not a particular independent contractor is really an independent contractor for IDES purposes (or has in fact been misclassified, according to the IDES auditor, by the Illinois company under IDES audit).

SOME YEARS HAVE MORE POTENTIAL LIABILITY: When one of my clients finds out they are going to be audited by the IDES and that client is a user of independent contractors, the client may be concerned about which year or years the IDES auditor is planning on auditing because some years are frankly better than other years in terms of that company’s use of independent contractors. In other words, some years have more potential liability for my clients under audit than other years.

$2,000 THRESHOLD: Generally speaking, the IDES auditor will only audit years beyond the initial audit year if the audit year produces a liability in terms of contributions owed exceeding $2,000. (Recall that the amount of money that an auditor would look for to make that auditor decide to audit another year beyond the IDES initial audit year used to be $5,000. In other words, if a company owed the IDES more than $5,000 for the initial audit year, then and only then would the auditor go to a second year. Now, in 2014,…a much harsher policy. Now…$2,000 is the threshold.)

Under the current quickly changing IDES audit policies, there is really no way to predict ahead of time whether the IDES auditor will go forward one year for a second audit year or back one year in time from the initial audit year. This lack of predictability under the new IDES audit policies is giving my clients increased anxiety (because they are not certain as to whether or not the auditor would go one year closer in time or one year further back in time from the initial audit year).

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.