Chapter 1: Introduction

A tolerance level has been established for determining the need to expand an audit. Any decision to disregard the tolerance level must be justified and documented in the audit report. An audit must be expanded to the preceding year and to the succeeding year if:

If an audit must be expanded to another year and an error is discovered in the expansion year that meets the criteria for expanding an audit, the audit must again be expanded to a prior year. The audit investigation should continue to be extended until the error rate does not meet the expansion criteria. However, the audit should not cover more than the current year and the three (3) preceding calendar years.

The C-51 report would reflect the year audited plus all quarters in the expanded years. The Auditor must explain in the audit report why the audit was expanded, and what documents were reviewed for the expansion years.

EXAMPLE:   An audit is conducted in 20XX for the prior calendar year.  The Auditor discovers underreported taxes that are greater than the expanded audit criteria.  The audit must be expanded back two years and forward to the current quarter of the current calendar year.

NOTE:  If an audit is expanded beyond the original audit year because of errors noted on Schedule 3, the expansion may be limited to that area where the initial discrepancy was discovered.  For example, an audit of the 20XX Form 1099 Miscellaneous Income Statements revealed that the employer misclassified some employees as "contract labor".  This action created additional tax due greater than the expand audit criteria, which requires expansion of the audit back to the prior year(s).  On Schedule 3 for the expansion year, the Accounts Examiner need only expand the search for hidden and misclassified wages using the Form 1099 Miscellaneous Income Statements.   The same expansion criteria applies if additional tax due is found in the expanded year. 

An exception to the above procedure is if the employer changed accounting systems during the audit year, such as replacing an in-house system with a vendor accounting program.  If this occurred, then the audit must include a review of all record groups listed on Schedule 3.   See Section 7.5, question #30 for additional information.

If an audit is expanded beyond the original audit year, is it required to conduct a payroll test for each year? 

ANSWER:  No, unless the Auditor suspects inaccuracies in the payroll system during the period the audit is extended to cover, there is no need to repeat the payroll accuracy tests that were conducted to cover quarters in the original scope of the audit.  However the search for misclassified workers and hidden wages must be conducted on all quarters covered by an audit, including the quarters that the audit was extended to cover.  If wages or tax are adjusted on quarters for which no search for misclassified workers or hidden wages is conducted, the quarters are not to be counted as quarters audited and the adjustments for those quarters are not to be included in the audit under-reported or over-reported figures.                         March 1995

Reference: Chapter 7 - "TPS Questions and Answers", question #30.

The Department of Labor (DOL) has established a Performance Measure for audits. Each fiscal year Texas is required to audit 2 percent of the active employers excluding reimbursing and governmental accounts. The DOL also requires that 1 percent of all audits be "large" employers.

Each region is assigned a calendar year audit quota. The quota is calculated by dividing the state's quota by the number of Field Tax base staff positions, and then multiplying by the number of base staff positions in a region.

The audit quota for this region would be 864 audits.

Regional Tax Managers assign audit quotas within each region, therefore audit quotas for individual Accounts Examiners may vary.
Screens for entering the audit quotas for each Tax region and each Accounts Examiner may be found in Chapter 5 of this audit manual.