Chapter 6:   Miscellaneous

1. Advanced Earned Income Credit.
   An employee receives Advanced Earned Income Credit from his employer. Should this be picked up as additional wages for the employee?

No. The Earned Income Credit is a credit taken on an individual’s federal tax return. The employee can get an advanced payment of this credit from an employer, but Circular E states that the advance payment to the employee in anticipation of the employee taking the credit on Form 1040 is not wages. It would not be wages for state UI purposes either.

2. Audit Candidates.
   Is there a reason why we cannot audit a reimbursing account (most school districts, hospitals, state agencies, non-profit accounts, etc.)?
   

A reimbursing employer repays the state for benefits paid to their former employees, and that dollar amount is already known without auditing the employer’s records. Because no additional taxes would be discovered in an audit of a reimbursing employer, the Department of Labor does not allow Texas to count the audit towards the state quota. If it doesn’t count towards the state quota, it doesn’t count towards the individual AE’s quota.

3. Audit Candidates.
   Is there any way we can get a fresh group of audit candidates?
   

Tax personnel are not authorized to refresh their entire audit candidate list in December. On the 3rd Wednesday of December, the system will automatically refresh the entire audit candidate list for each accounts examiner.

Note: Audit assignments currently listed on the annual refresh will be voided and a new list of candidates created. Auditors should print their current audit candidate list prior to the annual refresh. When an audit form the list that was refreshed is completed, the examiner will add it via the Add Audit Candidate screen.  

Reference: Chapter 5 - "Reject Audit Candidates – FA09" for additional information.

4. Audit Scope.
   What is the scope of the audit (which year) for audits that AE’s are scheduling in January?
   

As long as the audit letter is dated on or before March 31, 2011 they may still audit the year 2009. Anytime after Jan. 1, 2011 they may start auditing 2010.

Recommend requesting 2011 records around the end of February or the first part of March, simply because about that time, it becomes easier to get records for the most recently completed year rather than records that are over a year old.

5. Audit Scope.
   An Accounts Examiner scheduled an audit in March, 2011 and asked for Year 2009 records. The employer was very ill and the audit was rescheduled for May, with additional follow-ups required in July and August. Is it a valid audit, or was the audit of 2009 records too late to be counted as a good audit?
   

If the audit letter was sent before the end of March, 2011, the Accounts Examiner could audit 2009 records. If the auditor went to the employer’s business in April or May (because it had been postponed), the auditor could have audited year 2010 records instead. Follow-ups took so long because the employer was ill. It is unusual for an audit started in March to last until August, but it did. The Auditor may claim it as an audit.

6. Bank Account Number and Styling.
   Is it necessary to list the bank account number and styling on Schedule 3?
   

Bank account number and account styling is not required in the audit work papers. Bank name will be recorded with the each Record 2 entry on the Schedule 3.

7. C-51 Comments.
   A C-102 Pre-Audit Questionnaire lists a designated representative as the contact for the audit. It is signed by someone other than an owner, partner, or officer. Must the Accounts Examiner place a statement in the Comments section of the C-51 that an owner, partner, or officer verified that the Accounts Examiner should deal with the designated representative?
   

No, not in the Comments section, but it is required elsewhere on the C-51. A similar statement is already required for #36 (pre-audit conference), and #45 (post-audit conference). Entering the statement a third time is unnecessary.

8. Change Audit or Not.
   The only changes required during an audit investigation are to correct several SSN’s. Does this qualify as a change audit?
   

No. If the Accounts Examiner makes an adjustment to what is already recorded on the Agency’s records for Total wages, Taxable wages, or the amount of Tax, then the audit qualifies as a change audit.

9. Change Audit or Not.
   An Accounts Examiner prepares reports for a new employer. During the process of reviewing the employer’s records, the Accounts Examiner is able to meet the minimum requirements for completing an audit investigation. Is this a change audit?
   

Yes. So long as the audit meets the 4 quarters of wages, recent DOL change allow this audit to count as a change audit.

10. Change Audit or Not.
    During an audit, an Accounts Examiner discovers that the liability date on the account is wrong. The Accounts Examiner corrects the liability date, and in the process adds a new quarter to the account. The new quarter is included in the audit scope. Is this a change audit?
    

Yes. The Total wages recorded on TWC’s system were definitely changed. It is also possible that Taxable wages and Taxes owed also changed as a result of the audit.

11. Copies of C-7’s.
    The PC audit program prints all C-7’s whether they are inside or outside of the base period. What should be done with C-7’s printed by the PC audit program if they are outside of the base period and will not be submitted for processing?
    

Copies of all reports (inside and outside the base period) that are printed by the audit program are required to be attached to the completed audit work papers. Tax Department procedures for processing documents outside of the base period may still be followed.

12. Copies of C-7’s.
    The PC audit program prints C-7’s when the spelling of a name is corrected. What do you do with these C-7’s when there is no SSN change and no wage change?

If the only adjustment needed is for the spelling of a name, merely attach the C-7’s to the audit work papers. There is no need to submit documents to correct spelling. If there are other SSN changes or wage changes on the C-7, it must be submitted. Option: Fix Name ONLY in pre-audit phase can be done and will not produce C-7.  Important: If auditor fixes name(s) only in pre-audit, audit must fix names via WRCE in the Tax system to match.

13. Domestic Employers.
    Are domestic employers who file on a yearly basis subject to an audit by the Texas Workforce Commission?
    

Yes. Domestic employers who file quarterly or yearly are subject to a TWC audit. Reimbursable accounts are the only group excluded from the audit candidate selection routine.

14. Keying Audits.
    What is the time frame for entering the results of a completed audit?
    

The audit results should be keyed within two weeks of completing the audit. Signing and dating the C-51 indicates completion of the audit.

15. Keying Audits.
    I finished my audit quota before the end of October, but I have several additional audits scheduled before the end of the year. If I conduct the additional audits this year, do I have to key them this year?
    

If an audit notification letter is dated during the last quarter of the year, and the audit is not needed to meet an audit quota, the audit MUST be signed, dated, and keyed during January of the succeeding year.

16. Ownership Verification.
    I have a year 20YY audit set up with a sole proprietor. The employer hasn’t done the 20YY tax return, doesn’t charge sales tax (no license), and doesn’t file a franchise tax report. What do I use to verify ownership?
    

If the sole proprietor has some type of professional license that requires registering with a state agency … barber, beautician, CPA, pest control, private investigator, etc… that could be used to verify ownership information. If there is no other method to verify ownership information for the sole proprietor, use the 20YY (most recent) federal tax return to verify ownership (not for other audit purposes though) and state why you had to use that year’s tax return to verify the ownership.

17. Manual Audits.
    Are manual audits acceptable?
    

Manual audits will not be accepted. Audit must be completed, reviewed and submitted using TWC approved audit software.

18. Ownership Verification.
    May an Assumed Name Certificate filed in a Texas County be used to verify ownership?
    

Yes. If possible, attach a copy to the audit work papers or submit via EInput under Audit Documents.

19. Purging Completed Audits from Local Files.
    How long must completed audits be retained in the local field files?
    

Per Federal law, the Texas Workforce Commission will retain all audit work papers and all related documents for the current year plus three years. Reference: Chapter 1 - "Audit Retention" for additional information.

20. Schedule 2.
    Is it necessary to reconcile payroll records?
    

Yes. The object of the reconciliation is to make sure that wages earned by an employee were correctly recorded in all of the employer’s payroll records, correctly reported to our Agency, and correctly entered into the Agency’s records.

The process starts by examining the source documents for an employee’s wages. The amounts on the source document are then compared to the wages recorded in the various payroll records kept by the employer. Next, the payments are compared to the quarterly report submitted by the employer and to the wage data recorded on the Agency’s records. If the wage amounts are different in any of the payroll records or reports, the Accounts Examiner must investigate to see what caused the variance, and make all appropriate adjustments to the Agency’s records.

21. Schedule 2.
    How do you satisfy the requirement for Schedule 2 when you audit a new employer? The posting of wages cannot be traced to the Employer’s Quarterly Report and to the wage data on the Agency’s records because those two things do not exist.
    

Verification of the payroll posting system for a new employer requires the Auditor to trace the wages of an employee for one quarter from a source document (such as a cancelled check, check stub, time card, etc.) through the different types of payroll records maintained by the employer. Tracing of the wages should begin with the source document and go through to the last employer record used by the Auditor to prepare the quarterly reports. In cases where the only payroll record that exists is the source document, the Auditor must explain in the final audit report why the verification of the payroll posting system could not be conducted.

22. Schedule 2.
    How many Schedule 2’s are needed?
    

A single Schedule 2 showing wages for one person for one quarter is the minimum requirement for an audit where no variances are found in the posting of wage items. If the Accounts Examiner finds a variance in any of the payroll records, payroll reports, or TWC’s records, additional work must be done to isolate what caused the variance. The "additional work", and the number of Schedule 2’s needed for the audit, depends upon the work that the Accounts Examiner must do in order to discover the cause of the differences. The additional work might include looking at the wage postings for more people, looking at the wage postings for more quarters, or looking at other records that the employer might have, until the Accounts Examiner knows what adjustment reports are required.

23. Schedule 3.
    Is it necessary to list the records not reviewed on Schedule 3?
    

The format for Schedule 3 has a box that can be marked if the employer has no records in a particular category of records. If there were no records to review in a particular category, checking the "No Records" box satisfies the requirement for that particular category of records.

24. Schedule 3 .
    If the employer correctly reported employees and their wages on the C-3 and C-4, but the Agency’s wage record system are incorrect for some of the employees, should the Auditor add Code 3 wages for those employees on Schedule 3?
    

No. Code 3 indicates you are adding previously unreported wages. The employer correctly reported the wages, but for some reason they do not appear on the Agency’s wage record system.

Correction must be entered in the pre-audit phase of Tax Audit for the affected employees, so no C-7s are produced. Changes made in the audit phase will produce C-7s.

25. Styling of Employer Name.
    Should the employer’s name in the audit work papers match the account styling?
    

Yes. Styling of Status information on the screen, Status Report, and audit work papers should match. Exception:  If the Audit program truncates this information, due to space limitations, the auditor is not required to correct (write in) the missing information.

26. Verifying the Existence of a Business.
    An audit is not conducted at the employer’s place of business. The Auditor uses a local telephone directory to verify the existence of the business. Must the year of the telephone directory be the same as the audit year?
    

No. An audit is usually conducted on a previous year’s records. Few people continue to keep old telephone directories.

27. Verifying the Existence of a Business.
    Must I list the year of the local telephone directory used to verify the existence of the business?
    

No. The year of the local telephone directory is not important. You are trying to verify that the business existed, and is not a fictitious business.