Over the many years during which I have helped Illinois companies with their use of independent contractors, the most urgent call I get is from Illinois companies who have just found out they are going to be audited by the Illinois Department of Employment Security (IDES).
Receiving a letter in the mail from the IDES announcing that the IDES is going to do an audit (in the next few days or weeks!) can cause understandable panic for the recipient of the letter, especially if the company has never before been audited by the IDES.
This article is devoted to answering ten of the most common questions that I receive from such callers:
QUESTION #1: Why is the IDES auditing me?
ANSWER #1: Many callers are sure that a competitor has turned them in to the IDES. I have never found that an IDES audit was triggered because a competitor turned the company in.
In recent years, IDES audits are most frequently triggered by:
- random selection,
- a follow-up IDES audit because the company was previously audited years ago by the IDES (this is a recent trend),
- one of the independent contractors filed for unemployment insurance benefits with the IDES, or
- a lead from the IRS because the company has issued "many 1099s" (this is a recent trend).
QUESTION #2: Do I have to actively cooperate with the IDES auditor?
ANSWER #2: It is wise to cooperate with the IDES auditor. If you interact with the auditor in a cooperative fashion, you will learn what actually concerns the IDES auditor, and you will be able to address those issues.
QUESTION #3: What is the IDES auditor looking for?
ANSWER #3: The IDES auditor is going to audit you for a particular year (for example, 2015). The auditor will see if you accurately paid in all contributions (i.e., unemployment insurance taxes that the company must pay).
QUESTION #4: Where should I have the IDES audit?
ANSWER #4: Usually the IDES auditor will come to your workplace. However, if you do not have a convenient place to meet, you can suggest that the audit be in your accountant's or attorney's office. Sometimes the auditor will suggest that you bring the records to the auditor's office. In recent years, I have heard that some auditors suggest that the company simply send its records electronically to the auditor, thereby eliminating the need to meet at all!
QUESTION #5: Will this be just a one year audit?
ANSWER #5: I have found that all IDES audits start with just one designated year. The year is clearly noted on page 2 of the Notice of Audit letter. The auditor will extend the audit to an additional year if the amount owed to the IDES (because of mistakes made by the company) is over $5,000, or if there are many (for example, more than 10) independent contractors found to be misclassified. Sometimes the audit will extend to a third year. This is somewhat rare.
QUESTION #6: How long will the audit last?
ANSWER #6: Some auditors meet with the company and spend many hours questioning the company and looking through records. Other auditors come in and get the records, and then quickly leave and thereafter communicate with the company representative through emails and by phone. There is no standard way that these audits are handled. I have found over the years that even the same auditor might vary his/her approach from one audit to the next.
QUESTION #7: What is the significance of the four page IDES Worker Relationship Questionnaire that the auditor gave me to complete?
ANSWER #7: The Worker Relationship Questionnaire is a tricky document. You should have an attorney well versed in the right and wrong answers review your responses carefully. It is easy to inadvertently make a mistake. You need to understand the unique legal angle that the IDES is taking in asking the questions.
QUESTION #8: Will the auditor tell me how much I will owe the IDES at the end of the audit?
ANSWER #8: There will be an "exit interview" at the end of the audit. It may occur in person or by phone. The auditor will tell the company what the auditor's findings are in terms of what mistakes, if any, the company made. The auditor doesn't know what the full tax bill (known as Notice of Determination and Assessment) will be in terms of dollars and cents. However, the auditor will have a rough idea of how much money the company will owe.
QUESTION #9: Can I negotiate with the IDES auditor during the audit if I'm starting to feel I have made some mistakes and I want to correct them right then and there?
ANSWER #9: No, the IDES auditor does not have the legal authority to negotiate with the company being audited.
QUESTION #10: How will I know exactly what I owe as a result of the audit?
ANSWER #10: A few weeks after the audit is completed, the IDES will mail you a Notice of Determination & Assessment which is the actual tax bill. You have only 20 days from the date on the Determination & Assessment to protest. If you miss the 20 day deadline, you will lose all rights of appeal and the money that the IDES says you owe will become a final judgment and it is due and owing.
In my opinion, it is almost always worthwhile to protest. By timely protesting the Determination & Assessment (tax bill), the company has the opportunity for a Hearing before an Administrative Law Judge. The Administrative Law Judge is a lawyer and also an employee of the IDES, but the Administrative Law Judge is charged with the legal responsibility of fairly evaluating the issues involved in the audit and making an independent and unbiased decision. It is not unusual for the Administrative Law Judge to exercise this independence and make a decision contrary to the decision of the IDES auditor.
For assistance with an IDES audit and/or Hearing 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].