Audit System Manual graphic

[ 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 ]
[ 7.1 - TPS Acceptance Sample Rationale - Questions and Answers] [ 7.2 - TPS Questions and Answers on the ETA 581 Report] [7.3 - TPS Questions and Answers on Computed Measures] [7.4 - TPS Questions and Answers on Systems Review] [7.5 - TPS Questions and Answers on Acceptance Sampling (A/S)] [7.6 - TPS Questions and Answers on Other Problems ]

Chapter 7:    U.S. Department of Labor - Tax Performance System

comments to: Tax Department

7.1    TPS Acceptance Sample Rationale - Questions and Answers

DOL Term: Workpapers - Texas defines this as the field audit report (form C-51) and schedules 1, 2 and 3, detailed audit summary by quarter, adjustments reports and any attachments that explain the audit results. Reference Chapter 3 - "Audit Report and Work Papers" for additional information.

  1. A pre-audit discussion concerning the purpose of the audit must be held with the employer or an identified designated representative. (10 points)

    RATIONALE: A preliminary discussion must be held with the employer or an identified designated representative, in which the purpose of the visit and any pre-audit questions are discussed. At a minimum, the owner, a partner, or a corporate officer should be advised in person, by telephone, or letter that an audit is to be performed and have the opportunity for a meeting.

    DOCUMENTATION: The completed audit must record the name and title of the individual involved in discussion. If the employer designated a representative, record the name and title of the designated representative, and also record the name and title of the employer who designated the representative.

  2. An acceptable explanation will be given as to how the Auditor verified the existence of the business. (5 points)

    RATIONALE: Conducting the audit at the employer's place of business is the best way to verify its existence. Otherwise, the business entity must be verified in accordance with SESA audit procedures to ensure it is a bona fide operating establishment and not part of a fictitious employer scheme.

    DOCUMENTATION: The completed audit must contain documentation of an on site visit, or other sources of verification in accordance with State audit procedures (e.g., business license, business advertisement in yellow pages).

  3. An acceptable explanation must be given as to how the Auditor verified the ownership of the business. (5 points)

    RATIONALE: The current status of the business must be verified each time an audit is performed. If there has been a change of which the SESA was not aware, information on the change must be reported by the Auditor in accordance with the SESA's policies and procedures.

    DOCUMENTATION: The completed audit must contain confirmation that the Auditor examined documents regarding partnership agreement, articles of incorporation, corporate charter, income tax returns and their findings (the type of income tax returns should be identified - e.g., 1120S - Sub-Chapter S Corporation, 1040 - Schedule C - Individual Ownership, 1065 - Partnership, 1120 - Corporation), business license, verification with the Secretary of State, or other sources of verification in accordance with State audit procedures.

  4. Test of employer's payroll records must be performed to verify the accuracy and completeness of reported payroll. (25 points)

    RATIONALE: To establish that the Auditor can rely on payroll data reported to the SESA, a minimum of 4 tests are required. 1) The accuracy and completeness of the employer's payroll posting system(s) should be verified to establish that the Auditor can rely upon payroll data reported to the State Agency. 2) Reconciliation of total payroll to total wages. 3) Computation of total taxable payroll. 4) Reconciliation of verified total taxable payroll to total taxable wages on the UI contribution report are performed as an essential check on the accuracy of reported wages.

    DOCUMENTATION: The reviewer must confirm that all four tests were conducted, and that each test was documented with evidence to support the conclusions drawn.

    The four tests and their required documentation are described below:
  1. Verification of the payroll posting system(s).

    There are two acceptable methods of verification of the payroll posting system(s).

    Provide documentation showing that the audit verified the gross payroll by adding all of the individual gross wages from a source document (e.g., check stubs, cash disbursements journal, check register, etc.) for the quarter and compared that to the gross wages reported on the SESA's records. (Documentation may be in the form of an annotated calculator tape showing quarter or year and source document. The comparison may be annual or by quarter.)

    or

    Provide documentation showing that the Auditor traced transactions of at least one employee's wages from source document(s) through to the employer's copy of the quarterly contribution and wage report. If the Auditor is supplied with detailed wage information from SESA records prior to conducting the audit, then the Auditor must trace the wage data of the individual through to the SESA's records.

    Work paper(s) for each individual traced, must contain the record examined, name, SSN, amount of pay and dates of payments, and total wages. (Documentation may be in the form of an annotated calculator tape, copies of documents, work papers.)

  2. Reconciliation of total payroll to total wages.

    Work paper(s) must show that the Auditor compared a payroll record (which was established as correct through verification of the payroll posting system(s) to the total wages on the employer's copy of the UI contribution report, and to the amount posted to the SESA's records. Payroll records could be in the form of W-2's, payroll summaries, individual earnings records, payroll journals or ledgers. The comparison may be annual or by quarter. If discrepancies are identified which cannot be explained, the Auditor will perform a quarterly analysis.

    Work paper(s) for the reconciliation must include identity of the payroll record examined, calculation of total payroll, and an explanation of variances/differences.

  3. Computation of total taxable payroll.

    Work papers must include the identity of the payroll record used in the calculation and also record the calculations to verify the total taxable payroll.

  4. Reconciliation of total taxable payroll to total reported taxable wages.

    The reconciliation can be performed by comparing the verified total taxable payroll figure arrived at in Test C to total taxable wages recorded on the employer's copy of the UI contribution report, and to the amount posted to the SESA's records. The comparison may be annual or by quarter. If discrepancies are identified which cannot be explained, the Auditor must perform a quarterly analysis.

    Work papers for the reconciliation, must contain summary calculations and an explanation of variances/differences.
  1. Other employer records must be examined to search for misclassified workers and hidden wages. (25 points)

    RATIONALE: Misclassified workers and hidden wages are the most significant areas of noncompliance among registered employers. Auditors must examine all appropriate documents or records of original entry as are available or maintained by employer to determine whether non-wage payments to acknowledged employees were properly classified and whether persons not in covered employment who received payments for services were properly classified. RQC has divided employer records into four types that will be examined for the discovery of hidden wages or misclassified workers. If no records or partial records are maintained by the employer, the Auditor must document that in the report. The audit is not to be penalized when the employer does not maintain all of the records described on the next page.

    The Auditor must examine the nature and extent of the employer's business to identify and resolve any issues of noncompliance. The nature of the business may identify a type of business with a historical pattern of noncompliance. In this case, the nature of the business may alert the Auditor to perform a detailed investigation of specific accounting records.

    Likewise, the extent of the business may indicate multi-state employment, and may require that the Auditor's investigation ensure the employer reported employees to the appropriate State.

    DOCUMENTATION: There are, at a minimum, four types of employer records that must be examined. Each should be considered as a separate source of potential information. Included in the completed audit file should be Auditor-prepared documentation that is the principal record of the four separate examinations for this test. The documentation must present the evidence discovered through the test.
  1. The essential test which must be conducted and its required documentation is described below. If the records deemed essential/necessary to conduct the audit are kept by the employer they must be examined by the Auditor. If no records or partial records are maintained by the employer, the Auditor must document that in the report. There are at a minimum four types of employer records that must be examined (i.e., contract labor, cash disbursements, detailed general ledger and miscellaneous reports and accounts). The audit is not to be penalized when the employer does not maintain all of the records described below.
  1. Examination of the records of contract labor. These records include, but are not limited to: 1099s MISC and 1096 summaries, and master vendor files.

  2. Examination of the cash disbursements. These records include, but are not limited to: cash disbursements journal, petty cash journal, check register and canceled checks/check stubs.

  3. Examination of the detailed general ledger and, if available, any directories of subsidiary ledgers such as a chart of accounts which may lead to other sources of misclassified workers and hidden wages.

  4. Examination of miscellaneous reports and accounts. These records include, but are not limited to: state tax returns, federal income tax returns, financial statements, corporate minutes and records, and federal adjustment reports.
  1. Potential outcomes of the test are (1) no suspicion of additional wages, (2) suspicion of additional wages, and (3) payments of wages not previously identified. If, through one or more of the tests performed, wages are suspected or found, the audit papers must contain such information.
  1. For Part I (examination of records of contract labor): If there is no suspicion (payment not suspected to be wages) or the payment was identified and examined elsewhere in the audit, documentation should contain classification of categories of payment (e.g., 1099s MISC, and/or 1096, and/or master vendor files) and a brief description of why there was no suspicion of misclassified workers and/or hidden wages.

    For Parts (2), (3), and (4): If there is no suspicion (payment not suspected to be wages) or the payment was identified and examined elsewhere in the audit, the documentation will contain a checklist or summary statement of accounts reviewed and findings.

  2. If, initially, wages were suspected, but payment was subsequently not found to be wages, documentation will contain the number of individuals, the labor categories examined which turned out to be exempt or non-subject, explanation of evidence that payments do not constitute wages, and conclusions.

  3. If payment to individuals was found to constitute wages, work papers for each individual found must contain the audit period, name of payee, total quarterly amount, explanation of evidence that payments were wages, and findings. Also acceptable is a summary statement that the suspect amount was found and can be traced to a specified account, referencing another work paper. Adjustment reports can be used as a part of the supporting documentation when the reviewer can trace each individual discovered to the resulting increases and decreases in total wages and taxable wages. Adjustment reports must be supported by narrative or other documented sources before they can be used as part of the supporting evidence to wage changes.
  1. The audit must cover four consecutive calendar quarters or an acceptable explanation must be provided. (5 points)

    RATIONALE: To preserve the integrity of the audit program and to enhance the capability of the Auditor to verify taxable wages, the scope of the audit must be at least four consecutive calendar quarters. A tolerance level for error in reporting taxable wage and/or tax must have been established by the SESA as a guide for justification in extending an audit beyond the four quarter scope. A SESA may establish reasons other than monetary for expanding an audit in which case the Auditor will record the reason in the audit report.

    DOCUMENTATION: When the Auditor elects to extend the audit, the audit file must contain an explanation for the expansion which conforms to the SESA's tolerance level guidelines. If the Auditor elects to disregard the established tolerance guidelines, an explanation will be given in the audit report. When the audit is less than four quarters, the completed audit file must also contain an explanation.

  2. A post-audit discussion concerning the results of the audit must be held with the employer or an identified designated representative. (10 points)

    RATIONALE: Upon completion of the audit, a meeting must be held to discuss the audit findings and conclusions. Any discrepancies or issues of non-compliance must be discussed with the employer or designated representative who has authority to make changes in the organization's reporting procedures. This is also a time when the Auditor must inform employers of their rights and responsibilities regarding the audit. If the Auditor does not follow this procedure, an acceptable explanation must be given.

    DOCUMENTATION: The completed audit must contain the name, title, and telephone number of the individual involved in the post-audit discussion.

  3. If the audit resulted in the employer owing additional tax, the Auditor either must collect it or provide an acceptable explanation why the collection was not accomplished. (5 points)

    RATIONALE: The Auditor must contact a person authorized to make payment for the business being audited and attempt to obtain payment of all contributions found to be due as a result of the audit. If the Auditor is unable to collect, an explanation must be provided in the audit report.

    If the audit under review is a no-change audit and question 8 is not applicable, the reviewer will answer the question "NA" and the points will be awarded as though the question had been answered "Yes".

    DOCUMENTATION: The completed audit file must record the amount collected. If the Auditor does not collect the balance due, an explanation as to why the collection was not accomplished must be recorded in the completed audit file.

  4. If discrepancies or unreported wages and tax were found, adjustments must be made in accordance with the completed audit. If the audit is being appealed, adjustment reports must be made in accordance with the completed audit. (10 points)

    RATIONALE: Establishing a system to ensure the proper accounting of audit results is an important component of the SESA's tax operation. The SESA has a fundamental obligation to guarantee the accuracy of the posting to ensure the employer is given the correct tax rate; subsequent billings are correct and that the collection unit is provided with timely information to process indisputable legal documents.

    By assessing the accuracy of the posting of Field Audit adjustments, the reviewer will have sufficient information to confirm the existence of a system which assures that audit results are properly posted. If discrepancies are found, the reviewer will note this in the Annual Report.

    If the audit under review is a no-change audit and question 9 is not applicable, the reviewer will answer the question "NA" and the points will be awarded as though the question had been answered "Yes."

    DOCUMENTATION: Adjustments to employer's account, quarter and year, total wages, taxable wages, and tax/contribution due, resulting from the completed audit must be posted accurately.

    In addition, if the audit is being appealed and actual posting is not made, the completed audit file must contain a copy of the adjustment forms when prepared manually. The forms must record title of report, the audit period, name and account number of employer, and findings.

    If computer-assisted, a printout of the adjustments which includes the audit period, name of employer, and findings will be sufficient documentation.
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Last Revision: May 05, 2011