APPENDIX B
TEXAS WORKFORCE COMMISSION TAX AUDITS AND RULE 13 HEARINGS
A TWC tax audit generally begins in one of four different ways:
A former worker may file an unemployment claim. If no wages were reported for that claimant by the employer, the claim may be disallowed, in which case the claimant will probably appeal. The Tax Department will investigate, and such an audit has the highest priority; it must be completed within 30 days.
A competitor or someone else may report that a company is misclassifying its workers. The Tax Department will audit the company's entire workforce and keep the source of its information confidential.
TWC may perform a random audit of the employer as part of its goal of auditing about 4% of all businesses every year.
TWC may decide to target a specific industry or geographical area. For instance, the hair salon industry was targeted back in the late 1980s due to a high number of reports both from within the industry and from workers.
An employer receiving a notice that a tax audit will occur should try not to panic. The main purposes of an audit are to review an employer's payroll records and to try to discover misclassified wages that should have been reported and taxed. Many audits result in no finding of anything wrong and are finished within one or two days, depending upon how well the employer has been keeping records of workers and payments to workers. The process may take longer if large numbers of workers are involved, or if the employer's records are incomplete or inconsistent.
Certain records must be kept under TWC statutes and regulations. Business information required to be maintained by each employing unit includes:
name and address of each employing unit
address of the main (central or HQ) office of the business
addresses of the employing unit's branches and divisions in Texas
names and addresses of owners, partners, officers, and/or directors
address where business records are located
in the case of a group account, the address of the group representative
Records that must be kept on individuals performing services include:
name, address, and Social Security number
dates of employment and state or states where service is performed
wages paid in each pay period
dates on which wages are paid
remuneration in forms other than cash (this is also important in Texas Payday Law cases)
pay periods during which the individual works less than full-time
job descriptions specifying duties of each worker
records on workers other than "employees" (statutory non-employees, independent contractors)
Tax auditors sometimes ask for several different kinds of documentation, depending upon the nature and purpose of the audit. More documentation might be required if one of the questions to be settled is the nature of the employing unit itself, since there are some differences in taxes between corporations and sole proprietorships and partnerships. There is no real alternative to supplying the documentation. If documentation needed for a decision is not available, then the tax examiner has the authority to base the decision on the best evidence that exists, which may or may not result in a decision you like.
Specific records that an auditor might search include:
All cancelled checks
Time cards
Cash vouchers
Cash disbursement journal
Petty cash
Individual earnings records
Check register
Payroll journal
TWC tax reports
IRS Forms 940, W-3, and W-2
General ledger
IRS Forms 1099, 1096 and
Master vendor files
Chart of accounts
Profit and loss statement
Corporate minutes
Corporate charter
Federal tax return (1040, 1120, 1120S, etc...)
Any other records which may reflect services
Many employers feel as if TWC is overreaching by calling for all of those records to be made available for review. The problem is that payments to workers show up in a huge variety of places other than normal payroll records, and many of the records listed above give clues as to the status and duties of people whose names appear in the documents. Some employers worry that if they allow the TWC field tax examiner to see confidential business records, their sensitive business information will be at risk of exposure, whether through misconduct, an Open Records Act request by a competitor or newspaper, or negligence. State law prescribes serious penalties for any state employee who intentionally releases such information to unauthorized parties, and further, any employee who did such a thing would be subject to discharge. The Open Records Act does not cover an employer's business records that are furnished in connection with unemployment tax or benefit laws, so such information could never be released under the open records law. Finally, several procedures are in place to discourage accidental or negligent release of an employer's confidential business information - for example, that is why an employer must furnish suitable proof of identity and authorization in order to receive information about its tax account. Negligent release of such information is extremely unlikely and, to this author's knowledge, has never occurred.
Employers may access TWC's Audit Systems Manual (used by Tax Department employees) online at http://www.twc.state.tx.us/ui/tax/manuals/audit/index_aud.html.
If the tax audit results in a ruling that a claimant is entitled to additional wage credits from your company, and you disagree, you may appeal such a ruling to the Appeal Tribunal through the normal unemployment appeals process, since that kind of case has to do with an unemployment claim. If it is any other type of audit, and the ruling is unfavorable for your company, you may file a different kind of appeal under Commission Rule 13.
An audit may result in a finding that back taxes and interest are owed. In such a case, installment payment plans are available simply by asking the Tax Department.
Employers do not have to simply wait to be audited. It is usually better to find out sooner rather than later if something is wrong. Employers who are in doubt about the status of their workers may request a Form C-12 from their local TWC tax office. After the completed form is submitted, a tax examiner will review the matter and make a ruling one way or the other. An employer who disagrees with the ruling in any way has the right to request an appeal hearing under Commission Rule 13. That will result in a full evidentiary hearing before a hearing officer, who forwards the evidence developed at the hearing to the Commissioners, along with a recommendation as to the outcome. The Commissioners then vote on the case at a regular docket meeting. If the employer is still dissatisfied, it can file a motion for reconsideration with the Commission. There are two ways the case can be appealed to a court. One is by not paying the tax owed and waiting for TWC to sue, which TWC must do within three years, or else the tax debt can no longer be collected. The other is by paying the amount in dispute, petitioning for a refund, having the petition denied, and then suing TWC for its failure to refund the money. Either way, the employer will have the chance to make its arguments in court for the proposition that certain workers were really independent contractors.