Preparing for an Unemployment Insurance Tax Account Audit

The United States Department of Labor requires Iowa Workforce Development (IWD) to randomly perform an Unemployment Insurance (UI) Tax Account Audit on a percentage of Iowa employers each year. Others are selected to verify that wages are being reported correctly or individuals are classified correctly in accordance with UI law. This requirement results in several thousand Iowa employers being selected for a UI Tax Account Audit. The audits are conducted to ensure compliance with the provisions of Iowa Code Section 96.11.6A and Iowa Administrative Code 871, Chapter 22.17(4)

UI audits have two purposes: 

  • to verify payroll is reported accurately
  • to ensure all workers are correctly classified as either employees or independent contractors 

Businesses with or without an active UI account may be selected for an audit to determine if they are a liable employer. The auditor can answer any questions regarding the UI law as it relates to reporting individuals. 

Time Period and Duration of an Audit

The audit typically covers one calendar year. The Audit Notification letter, selected employers receive, will indicate the audit year. It may be necessary to expand to other years if issues are discovered. If so, the auditor will request records for additional years. 

The length of time to conduct an audit varies significantly from employer to employer. It depends primarily upon the size of the employer, the condition of the employer's records and the number of issues encountered. Most field work performed on small-to-medium-sized employers (1-50 employees) is completed in a day or less. The field work of the audit may take longer for larger employers (over 50 employees). 

Scheduling the Audit

The auditor will set the date and time of the audit. The employer will be notified by mail or phone. Audits are usually conducted Monday through Friday (excluding holidays) between the hours of 8:00 am and 4:30 pm. The auditor will try to be as flexible as possible to minimize any disruptions to business operations. Audits are normally conducted at the business, however, with proper authorization audits may be held at the employer's accountant’s office. 

The auditor or employer may reschedule the audit when unforeseen circumstances arise. Immediate notification should be given when a scheduled date cannot be kept. Requests to reschedule should be kept to a minimum. 

Participation During the Audit

The business owner is not required to be present at the audit. A staff representative can be designated to work directly with the auditor. If possible, the owner should be available by phone. 

An auditor can work directly with an accountant if they are an active agent on the employer’s tax account. If there is not an active agent on the account, the employer may assign an agent on myIowaUI or designate an agent by completing the Employer’s Authorization section of the Pre-Audit Questionnaire. The owner should be available by phone to answer questions the agent cannot. 

Records Examined by the Auditor

Iowa Administrative Code 871 Chapter 22.1 requires all employers to keep adequate records for reporting payroll. All documents used to track payroll should be provided. 

Records requested for examination are listed below and in the Audit Notification letter. Any records maintained in electronic format do not need to be printed, as long as the auditor is granted access. Additional records may be requested at the time of the audit. 

  • IRS 940, 941, 1099, 1096
  • earnings records of each employee 
  • W-2s and W-3 
  • general ledger detail/chart of accounts 
  • business income tax return 
  • financial statements 
  • cash disbursement journal 
  • petty cash records 
  • payroll register, journal or time sheets 
  • corporate minutes 
  • master vendor listing/vendor files 
  • bank statements 
  • canceled checks, check register or stubs 
  • any other records showing payments to individuals for services performed 
  • documents showing non-payroll payments to individuals, such as: invoices, business cards, certificates of insurance, contracts, receipts, etc. 

If the records cannot be provided on the scheduled date, contact the auditor immediately. The auditor will reschedule the audit allowing the employer reasonable time to gather records. 

Under Iowa law employers are required to provide records for examination as defined in Iowa Administrative Code 871 Chapter 22.17(2). A refusal to provide records can result in a subpoena in accordance with Iowa Administrative Code 871 Chapter 22.17(3)

Payments to individuals that were not processed through the payroll system must be analyzed. The United States Department of Labor and Iowa Administrative Code 871 Chapter 22.17 require each audit to include a search for unreported wages and/or misclassified workers. These types of payments may be found when examining non-payroll records. 

Independent Contractors  

Under Iowa UI law, an individual being paid for services performed is presumed to be an employee unless facts determine the worker is an independent contractor. Determinations concerning employer-employee relationships and independent contractor relationships are based on Iowa Administrative Code 871 Chapter 23.19

Results of an Audit 

The auditor will discuss the preliminary results of the audit upon completion of field work. In addition, a Post-Audit Report will be mailed when the audit has been completed. The employer can view their online account for any changes. 

The auditor will contact the employer and request payment for any amounts due. The employer can make a payment electronically or by mail. If full payment cannot be made at the conclusion of the audit, a payment plan can be established. If the audit creates a credit, the employer may apply the amount to the next quarterly report or request a refund. 

Decisions made based on audit findings may be appealed. Instructions for appeal are included in the Post-Audit Report.

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