[ Audit System Manual- TOC ] [ Ch 1 - Introduction ] [ Ch 2 - Preparing for an Audit ] [ Ch 3 - Conducting the Audit ] [ Ch 4 - Completing the Audit Forms and Schedules ] [ Ch 5 - Audit System Screens ] [ Ch 6 - Miscellaneous ] [ Ch 7 - USDOL - Tax Performance System ] [ Ch 8 - Computer Fundamentals & Hardware ] [ Appendix ]
[ 3.1 - General Information ] [ 3.2 - Understanding the Payroll Flow ] [ 3.3 - Books and Records ] [ 3.4 - Employee vs Independent Contractor Decision ] [ 3.5 - Sample Audit Procedures] [ 3.6 - Minimum Audit Requirements of the TWC Tax Department & the Tax Performance System (TPS ] [3.7 - Post Audit Conference] [3.8 - Audit Report and Work Papers]
Chapter 3: Conducting the Audit	comments to: Tax Department

3.6 Minimum Audit Requirements of the TWC Tax Department and the Tax Performance System (TPS)

[ 3.6.1 - Minimum Audit Requirements]

The following audit procedures must be followed in order to meet the minimum requirements set by the TWC Tax Department and the Tax Performance System (TPS) as mandated by the Department of Labor.

3.6.1 Minimum Audit Requirements

Ownership of the business must be verified.

Verification may be accomplished through a review of business licenses, partnership agreements, corporate charters, income tax returns, etc. It is always best to verify ownership by using a document covering the year of the audit, such as a tax return for the year of the audit. If the agreement, tax return, license, etc. is for a year other than the audit year, attempt to verify ownership using another method or another document.
If all methods of verifying ownership have been exhausted without success, a recent year's federal tax return may be used to verify ownership. In this case the audit work papers must indicate the search for valid ownership information, and the reason for using another year's document.
The specific information in the work papers on income tax returns and licenses reviewed are to include the form number or license reviewed and the document's year. Examples of forms include Form 1120 - Corporation, 1120s - Subchapter S Corporation, Form 1040 - Schedule C- Business Expenses for an individual owner, Form 1040 - Schedule H for reporting a household employee, State Sales Tax License, State Fuels and Use Report, and Comptroller Franchise Tax Report.
Verifying the ownership of domestic employment and the ownership of a farm or ranch may be accomplished through reviewing the accounting records and canceled checks of the employer. Federal income tax form 1040 - Schedule H may also be used to verify the ownership of domestic household employment.

The audit scope explained if other than four (4) quarters.

An explanation for expanding the audit will continue to be required on audits that are more than the mandated four (4) quarters. Audits must be expanded back at least one year and forward through the last completed quarter of the following year if the employer underreports tax is more than the expand audit criteria. (Reference: Chapter 1 – "Tolerance⁄Expanding the Audit")

Audits of less than four (4) quarters may be conducted on employers who opened a business and then went out of business before four quarters had elapsed. The employer must be closed and out of business and not merely operating without employment.
New account audits must meet the same scope and documentation requirements as other audits.
Audits conducted to obtain delinquent reports must meet the same scope and documentation requirements as other audits.

A pre-audit discussion was held with ownership.

The completed audit must include the name, title, and telephone number of the individual involved in the pre-audit discussion. This must be the owner, partner, officer, or representative designated by the employer. If the meeting is held with a designated representative, the documentation must include the name, title, and telephone number of the owner, partner, or officer making the designation.
This information must appear on the C-51 report even though it may also appear on the C-102 Pre-Audit questionnaire.

The existence of the business was verified.

The best way to verify the existence of a business is to conduct the audit at the employer's business location.
"Personal knowledge" is acceptable with a thorough explanation.
A personal visit to the business satisfies this requirement. The visit could have occurred during the time period covered by the audit, or during a later time period up to the completion date of the audit.
Telephone listings, newspaper advertisements, and licensing agencies are acceptable. Visible signs may be used, but the type of visible sign must be listed. Internet web pages containing advertising or information about the particular business may be used. A description of what evidence was used to verify the existence of the business must be given.
Verifying the existence of a business for domestic employers, trust accounts, or agricultural employers can be accomplished by reviewing the employer's accounting books and records.

The payroll records tests were performed.

This activity involves 4 tests of the employer's payroll records.

Verify the payroll posting system.
Reconciliation of total payroll to total wages reported.
Computation of total taxable payroll.
Reconciliation of total taxable payroll to total reported taxable wages.

Schedule 1 and Schedule 2 of the audit work papers are used to document the performance of these 4 payroll tests. Information regarding how to complete Schedule 1 and Schedule 2 may be located through the Index section of this manual.

A search for misclassified wages was performed.

Four different categories of employer records are required to be examined during the search for hidden wages or misclassified workers.

Examination of contract labor records.
Examination of cash disbursement records.
Examination of the general ledger or detailed general ledger.
Examination of miscellaneous reports and records.

Schedule 3 MUST reflect an effort to locate hidden or misclassified wages. If canceled checks or check stubs are used for this search, beginning and ending check numbers and the beginning and ending dates of the reviewed checks must be listed on the schedule. Other information pertaining to the completion of Schedule 3 may be located through the Index section of this manual.
One of five outcomes must be identified for each record reviewed in the search for unreported/incorrectly reported wages.

Result Code #1 = No suspicion of wages.
Result Code #2 = Suspected but found NOT to be wages.
Result Code #3 = Suspected and found TO BE wages.
Result Code #7 = Misclassified worker.
Result Code #8 = Overreported wages.

A post audit conference was held.

The name, title, and telephone number of the owner, partner, officer, or designated representative with whom the post audit conference was held must be listed. If the information is the same as that reflected in the pre-audit conference, then indicate "Same as #36". Sending a post-audit letter does not satisfy the requirement of discussing the audit results with the employer or his representative.
It is preferred that the authorization to meet with a designated representative be in writing. This serves as a legal protection for both the employer and the Accounts Examiner. Authorization may also be verbal as long as it is documented on the C-51. Documentation will include the name, title, and telephone number of both the designated representative and the owner, partner, or officer making the designation. Note: Information from the employer submitted on a C-102 Pre-audit questionnaire would meet this requirement.
IMPORTANT: If the audit results in additional tax the post-audit discussion must be held with an individual that is authorized to make payment for the business being audited. If this is not possible, the audit documentation must explain why. Reference: Chapter 7 - "TPS Acceptance Sample Rationale", question #8 for additional information concerning post-audit discussion when employer owes additional tax.

Adjustment reports were prepared and submitted.

An Amended C-1 is required if the employer is a corporation, the account needs to be updated, or if there has been a change in ownership. It is recommended, but not required for all other employers.
Adjustment forms must be completed and submitted. Copies of the adjustments and supporting documentation will be included in the audit work papers.

Monies were collected or an explanation provided.

The amount of money collected will be listed, and if less than the amount due, an explanation is required as to why the full amount was not collected.
The explanation must include information indicating that the employer was asked for the money, and also what collection action was taken.
The comments "Will Pay When Billed" or "No Action Taken" are not acceptable.
Minimum acceptable statement "Employer was asked for amount due and stated will pay when billed". Reference: Chapter 4 – "Audit Results Section of the C-51", question #47 for additional information.

A written audit report was prepared.
The report must state the final determination and all facts contributing to or supporting that determination, the C-51 Field Audit Report, and all supporting documentation. Additional information pertaining to proper completion of the C-51 Field Audit Report and other required audit documentation may be located through the Index section of this manual.
Send NEC assignments to appropriate tax areas. If the employer correctly issued a Form 1099 to an independent contractor for at least $100,000, attempt to determine if the independent contractor had employees. If the independent contractor had employees, but lacks an active TWC tax account, the Auditor will refer the Form 1099 to the appropriate tax area for a status investigation.

Any deviation from the above TWC Tax Department and TPS procedures will require a full explanation in the Comments & Narrative section of the C-51 Audit Report.

Texas Workforce Commission | Unemployment Tax

Last Revision: May 05, 2011

Chapter 3: Conducting the Audit

3.6 Minimum Audit Requirements of the TWC Tax Department and the Tax Performance System (TPS)

3.6.1 Minimum Audit Requirements