Chapter 1 Employer Taxes and Wage Reporting
Section 7 - Audit Process
Why are audits performed?
How are employers selected for audit?
How much time will the audit take?
What if I cannot provide records on the scheduled audit date?
Must I be available at the time of the audit?
What period of time will the audit cover?
What records will the auditor examine?
Why is the auditor examining records and documents in addition to payroll records?
Can I refuse to provide records to the auditor?
When will I know the audit results?
What if I don't agree with the audit results?
What if I am unable to pay the monies due?
Will I owe additional taxes to the I.R.S.?
Why are you auditing me when I don't have employees? I pay only independent contractors or subcontractors!
What if I have other questions regarding the audit?
The following explanations address frequently asked questions from employers who receive notice of a New Jersey Unemployment Compensation (UC) audit. This information will help you prepare for the audit and let you know what to expect during and after the audit.
The United States Department of Labor requires New Jersey to implement a comprehensive field audit program as an efficient means of ensuring compliance with the New Jersey Unemployment Compensation law and the timely collection of taxes on an equitable basis. Audits are performed to verify your reported payroll and exclusions taken for unemployment compensation purposes, to ensure that benefits have been charged correctly to your account, and to answer any questions you may have regarding the Unemployment Compensation law.
Each year, several thousand employers are selected for audit. Some employers are selected randomly from the entire list of employers covered under the New Jersey UC law to verify that wages are being reported correctly. Others are selected to resolve report delinquencies or benefit claims (both unemployment and temporary disability). If you are not currently covered under New Jersey UC law, we may do an audit to determine if you should be a covered employer for unemployment compensation purposes. The auditor can tell you why you were selected.
The length of time depends on the size of the employer, the condition of the employer’s records, and questionable issues or problems encountered, if any. Some audits take from two to four hours while others may take longer. The auditor will be able to answer this question for you.
Contact the auditor immediately at the telephone number listed on the scheduling letter. We will reschedule the audit if necessary. Please provide several alternate dates when you will be available so that we can reschedule promptly.
You may designate a representative to provide the records to the auditor. That individual should understand your records and be able to answer questions. Your designated representative may be your accountant, bookkeeper or other responsible individual.
Usually, the audit will cover one calendar year unless we discover issues that could affect other years. The scheduling letter lists the time period for which records must be provided. If the audit is not expanded beyond the one-year period, it may not be necessary for the auditor to examine the records of other years.
However, have all requested records available for all years in case they are needed. Records must be retained and readily accessible at the New Jersey place of business for the current calendar year and for the four preceding calendar years per N.J.A.C. 12:16-2.4a.
The records to be examined are listed in the scheduling letter. These include, but are not limited to: payroll records, cash disbursements records, or check books and canceled checks, federal and state tax reports, financial statements, general ledger, corporate minutes book, Form W-3 Transmittal with Forms W-2, and Form 1096 Transmittal with Forms 1099. Not all employers maintain all these records, but those you do maintain must be made available to the auditor.
Furthermore, payments to individuals for personal services will be scrutinized for proper classification as an “independent contractor” or “employee.” Have the following information available for the auditor’s examination: invoices, contracts, agreements, advertisements, business licenses, business telephone listings, business cards and stationery, and the address and telephone listing for each individual receiving such payments.
The auditor must examine a variety of records and documents to verify that payroll was correctly reported for unemployment compensation purposes. Payments for personal services are made differently, and through different accounts, from employer to employer. The auditor is required to scrutinize all records that may show payments to individuals for personal services, and determine if these payments have been properly classified.
New Jersey Unemployment Compensation Law (N.J.S.A. 43:21-11(g) and N.J.A.C. 12:16-2) requires employers to provide records to the auditor for examination. If you refuse to do so, the records can be subpoenaed. The same law declares that all records, reports and other information obtained from employers will be held confidential.
The auditor will discuss the results before leaving your place of business or the location where the audit is conducted. If the audit is not complete at that time or you are not available, the auditor will meet with you, if practicable, or contact you later to discuss the results. An “exit letter” will also be sent to the employer or representative.
If required, the auditor will provide you a summary of any audit adjustments with contribution reports for signature and the payment due.
The auditor’s immediate supervisor will contact you to discuss the audit results. If possible, we will clarify and resolve issues at this time. However, this may not always be possible. Thereafter, you will receive a Chief Auditor’s Notice of Employer Liability with a “Request for Hearing” form.
To appeal the auditor’s determination, you must make a written request for a hearing on the prescribed form within 30 days after the date of the notice, providing your reasons for disputing the determination, and return the request to the Chief Auditor.
Any contributions, interest, and penalty due must be paid. If you are unable to make full payment immediately, you can initiate an installment arrangement with the auditor. Interest will continue to accrue on the unpaid balance of the contributions.
In certain situations, audit results are shared with the federal government, such as the certification of wages for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, that you file each year. Contact the IRS or your accountant to determine if you are liable for any additional taxes.
Under the New Jersey UC law, individuals receiving payment for personal services are presumed to be your employees unless it is determined that the services are either exempt by law or such services satisfy the three provisions of N.J.S.A. 43:21-19(i)(6), known as the “ABC” test.
The auditor must determine that all three test requirements are satisfied for each individual. These tests are listed in Chapter I, Section 3. The auditor will answer your questions about the “ABC” test.
You can contact the auditor directly at the telephone number on the scheduling letter, or ask to speak with the auditor’s supervisor.