I am getting an increasing number of phone calls from very nervous people who have heard that the Illinois Department of Employment Security (IDES) is now auditing Illinois companies based solely on the fact that the company had a prior IDES audit involving alleged "misclassification of independent contractors" ("follow-up audits").
In the past, the IDES didn't target a company for an audit based only on the fact that the company had a prior IDES audit and "flunked the independent contractor test." This is a dramatic change by the IDES in its auditing policy! Naturally, many business owners are alarmed by this change (and what it means!)
I thought it might be helpful for readers to consider the kinds of questions I've been getting and the answers that I have been giving:
Question 1: Does the IDES have the legal right to do a "follow-up audit"?
Response to Question 1: Yes, the IDES can audit any company in Illinois on whatever basis it wishes.
Question 2: How many years can the IDES go back if it does do a "follow-up audit"?
Response to Question 2: The IDES is regulated by the Illinois Unemployment Insurance Act, a state law. Under the state law, the Statute of Limitations is four years.
The Statute of Limitations expires four years (sixteen full quarters) from when the company's quarterly report was due to be filed with the IDES.
The Statute of Limitations is based on a rolling quarter system. The IDES "closes" quarters after the due date of the quarterly report. (The quarterly report is due to be filed with the IDES at the end of the month following the close of the quarter.)
If a Determination & Assessment was dated on or before January 31, 2016, the Statute of Limitations would allow the IDES to go back sixteen full quarters prior to October 1, 2015-or as of October 1, 2011.
Note: If the IDES believes an employer has knowingly failed to pay contributions, the IDES can go back further and the Statute of Limitations does not apply.
Question 3: Will the IDES negotiate with the company if an assessment is issued as a result of a "follow-up audit"?
Response to Question 3: No, the IDES auditor has no ability to negotiate any assessments as a result of any kind of IDES audit.
Question 4: How are fraud penalties tied in with IDES "follow-up audits"?
Response to Question 4: Illinois companies who are "re-audited" should brace themselves for Determination and Assessments (audit tax bills) with 24% interest---and then ANOTHER 60% piled on top of that-if they are found to have intentionally MISCLASSIFIED their independent contractors (fraud).
Question 5: Are all companies who are audited by the IDES and then found to be guilty (i.e., misclassified independent contractors) hit with a "follow-up audit"?
Response to Question 5: No, it seems to be the luck of the draw. Certainly not all of the companies that I've worked with over a great many years on IDES audits have been hit again by a "follow-up audit". However, in this past year, there has been an alarming increase of follow-up IDES audits. This disturbing trend shows no signs of ending.
For assistance with an IDES audit or evaluating your use of Independent Contractors, contact Nancy Joerg at Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at [email protected].