Tax Audits Investigations
Do I have to be available at the time of the audit?You may designate an authorized individual to provide the records to the auditor. However, this person must have the knowledge to answer any questions the auditor may have regarding the records, and be able to act on your behalf. This allows for less confusion and misunderstanding regarding the audit/investigation results. If the designated person is your representative, such as an accountant or attorney, please make sure that they have submitted a power-of-attorney to this Agency to discuss your tax matters. In addition, a separate interview with the owner or corporate officer may be necessary.
How long will the audit take?Most random audits can be completed in a short period. Audit/Investigation times can vary greatly depending on the size and complexity of the employer and the auditor’s access to the required records. In some circumstances, audits/investigations may require return visits by the auditor.
How many years can the audit or investigation cover?In most cases, the audit/investigation will start with the most recent complete calendar year, or with the year(s) specified by the auditor on the Notice of Audit/investigation letter. If an adjustment to taxable wages is found in that year, previous or subsequent years may be audited. An audit can cover up to the three (3) previously completed calendar years, plus the current year. In cases of fraud, the three (3) year limit can be extended to six (6) years.
How will I know the person conducting the audit is from the UIA?All UIA auditors are required to wear picture identification and carry a badge to identify that he/she is an UIA auditor. Employers or their representatives who still have concerns after viewing the auditor’s credentials may contact the UIA’s Field Audit Section at (313) 456-2170 for additional verification.
What happens if I owe additional taxes and if I cant pay them?The auditor will request that any balance due, including interest and penalties, if applicable, be paid upon completion of the audit/investigation. If you are unable to pay the full amount due, you may arrange a payment agreement.
What if we paid for the services of individuals whom we do not consider to be our employees?What are taxable wages is the most frequent question arising from a UIA audit. Employers may consider an individual to be an independent contractor or sales agent, but the UIA may consider their earnings to be taxable wages, based on legal precedent and UIA policies and procedures. The auditor will apply all precedents and procedures prior to making an adjustment for these services, and will fully explain to you the rationale behind this decision. If you do not agree with the auditor’s decision, you have the right to request that a written determination be made by the UIA. You further have the right to appeal this determination, first through the UIA’s and the State’s administrative appeal process, then through the court system.
What is the purpose of the audit?The Agency may audit for verification of wages, compliance with rulings issued by the Agency, securing delinquent tax returns, the filing of Claims for bankruptcy or other circumstances that may arise in the normal course of business. The auditor will explain the purpose for the audit/investigation at the time the appointment is confirmed.
What records will be reviewed?
The following books and records, if maintained, are to be made available to the UIA auditor:
- Forms UIA 1020, Employer’s Quarterly Tax Reports, and Forms UIA 1017, Wage Detail Reports.
- Michigan Sales and Withholding Tax Reports, monthly, quarterly or annual return.
- Federal Form 940, Annual Federal Unemployment Tax Report.
- Federal Forms 941, Employer’s Quarterly FICA & Withholding Tax Reports.
- Employer’s Federal Income Tax Returns, Federal Schedule C for Sole Proprietors, Federal Form 1065 for Partnerships or Federal Form 1120/1120S for Corporations, LLCs and LLPs.
- Federal Forms W-2, Employee’s Wage and Tax Statements, and Federal Forms W-3, Transmittal of Wage and Tax Statements (W-2 Summary).
- Federal Forms 1099 and Federal Forms 1096, Annual Summary and Transmittal of U.S. Information Returns (1099 Summary).
- Michigan Annual Corporation Return (corporations only).
- Employee’s Individual Earnings Records, along with any monthly, quarterly and year-to-date summaries that are maintained regarding these records.
- Check Register and Cash Disbursement Records, both for general and payroll accounts.
- Receipts and Invoices for disbursements from the general account.
- Check stubs and/or canceled checks.
- General Ledger, General Journal and the list of accounts for these records.
- Petty cash records.
- Financial Statements (Profit and Loss, Income Statement, Balance Sheets, etc.).
- Master Vendor Files.
- Time cards.
- Proof of Workers’ Compensation Insurance.
Note: In addition, Employee Leasing Companies (sometimes know as Professional Employer Organizations) are required to provide the following:
- Completed Form UIA 1045, Status Questionnaire for Employee Leasing Companies.
- Completed Form UIA 1045-A, Disclosure Statement for Employee Leasing/Client Companies with Common Officers/Ownership/Family Members.
- Lists of client entities by year (must include: full legal name, business address, Federal Employer Identification Number, contact name and phone number, and current or previous UIA account numbers, if known).
- Signed copies of the employee leasing contracts between the employee leasing company and each client entity.
- Lists of the employees leased back to client entities, by client entity (with employee names and social security numbers).
What will the auditor be looking for?The auditor will be verifying that your liability has been properly established, that all wages taxable under the MES Act were properly reported, and that the tax rate is accurate. The auditor will also be reviewing the records for casual and sub-contract labor, independent contract labor, certain sales commissions, corporate officer remuneration, etc., that may be taxable under the MES Act.
When will I be advised of the audit results?Upon completion of the full audit, the auditor will discuss the results with you or your designated representative in a post-audit interview. Following the post-audit interview, the UIA auditor may provide a letter explaining that, based on a review of the audit/investigation, the Agency may make adjustments involving one or more UIA accounts. These adjustments will be issued as a written Determination. The letter will also explain the right to protest/appeal the Determination in accordance with the MES Act.
Where will the audit or investigation take place?Generally, the auditor will try to schedule the audit/investigation at the site where the records are located or are readily available. This may be your place of business or the office of your accountant or attorney. Regardless of where the audit/investigation is conducted, the auditor may visit the place of business to verify the business operation.
Why does the UIA conduct audits investigations?Section 9 of the MES Act gives the Agency the authority to audit/review the books and records of employers to assure compliance with the tax requirements of the Act and Agency polices and procedures. Employers are required, by law, to comply with an audit/investigation request from the Agency, as they are legally required to comply with similar requests from other taxing authorities.
Why is the auditor examining records other than the payroll records?The auditor reviews records other than the payroll records to trace the payment of wages from the source of original entry to the individual payroll records, and to look for taxable wages that may have been misclassified as non-taxable payments. The auditor also reviews some non-payroll records to ensure that liability has been established properly and that the tax rate is accurate. Section 9 of the MES Act authorizes the UIA to review all records maintained by the employer, to verify that all taxable wages have been properly reported, and to impose legal remedies for failing to produce the requested documents.
Why was I selected for a UIA tax audit investigation?All UIA tax audits/investigations are conducted to ensure compliance with the Michigan Employment Security (MES) Act. UIA tax audits/investigations are based on computer-generated sampling or employer account referrals.
Will the taxes I pay to the Internal Revenue Service be affected by the audit?Possibly. Under certain circumstances, the Internal Revenue Service will be notified if you fail to report wages to the UIA. Additionally, the amount of credit for payment of your Federal 940 or FUTA may be affected.