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TEXAS WORKFORCE COMMISSION TAX AUDITS AND RULE 13 HEARINGS
As a taxing authority, the Texas Workforce Commission must carry out several responsibilities with regard to the state unemployment tax imposed on employers of Texas employees. Among the more important of those responsibilities are keeping track of all wages paid, reports submitted, chargebacks from benefits paid to former employees, and taxes paid by each employer; using those data to calculate employers' individual tax rates; initiating the remittance of the taxes to the Texas unemployment insurance trust fund so that they can be used to pay unemployment benefits to eligible claimants; auditing selected employers' tax accounts to determine compliance with the wage reporting and unemployment tax laws; and supporting the work of TWC's Regulatory Integrity Division in collecting delinquent taxes and enforcing other aspects of the unemployment tax laws. With the compliance tools of the Texas Unemployment Compensation Act in mind (interest and penalties on unreported wages and unpaid taxes; notice of assessment; liens; bank freeze and levy; warrant hold; posting of a bond to continue employing workers in Texas; injunction; and even receivership), it is understandable that an employer might be concerned if it receives notice of an audit from the Tax Department. Fortunately, the most that ever happens with the vast majority of compliance problems is the imposition of a simple interest charge on unpaid taxes, or else a minor penalty for late submission of a wage report. This paper explains the basics of the audit process.
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 1% of all businesses every year.
The agency may select a business for audit based upon specific criteria that include size, tax rate, decrease in the number of employees, and the audit history of the industry.
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 a few hours, 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
Cash disbursement journal
Individual earnings records
TWC tax reports
IRS Forms 940, W-3, and W-2
IRS Forms 1099, 1096 and
Master vendor files
Chart of accounts
Profit and loss statement
Federal tax return (1040, 1120, 1120S, etc...)
Any other records which may reflect services
Some employers reading an audit notice 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, a Public Information 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 Public Information 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.
As a practical matter, a tax examiner will not ask to see all such records. Most audits are completed within a few hours; some last less than two hours. Audits are generally short if the employer has well-organized documentation and is prepared to give accurate answers to questions about records and those who performed services for the company.
Here are the main things to remember for a TWC tax audit:
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 (see below).
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 (40 T.A.C. § 815.113). Such appeals may be requested via mail, fax, hand-delivery, or e-mail. As long as the employer alleges some disagreement with a Tax Department action other than a tax rate calculation or something similar that is based solely on a mathematical calculation, the appeal will result in a full evidentiary hearing before a hearing officer. Such hearings are usually held over the phone via teleconference. The employer may present witnesses, documentation and other types of exhibits, affidavits, legal briefs, and other forms of evidence that are relevant to the issue in dispute. TWC may present an employee of the Tax Department as an expert witness. The hearing officer places witnesses under oath and records their testimony. Any exhibits offered by the employer should be sent in advance to the hearing officer so that everyone can view them as they are offered and discussed. Procedurally, a Rule 13 hearing is an informal administrative proceeding designed to encourage a full discussion of the issues. Since the format for the hearing does not substantially differ from the format used by TWC for appeals of unemployment and wage claims, the Hearing Officer Manual on TWC's Web site at http://www.twc.state.tx.us/ui/appl/app_mant.html can be a useful basic reference, and many specific procedures relating to Rule 13 hearings are outlined at http://www.twc.state.tx.us/ui/sphrgs/tax-liability-appeals-process.html. After concluding the hearing, the hearing officer 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 an employer disagrees with a tax rate, or the amount of interest or penalty, but alleges nothing other than a general statement that the rate, interest, or penalty is excessive, it is likely that no hearing will be held. Rather, the Commission will issue an on-the-record decision explaining how the disputed amount was calculated and what statutes were involved.
With either type of Rule 13 decision, if the employer is still dissatisfied, it can file a motion for reconsideration with the Commission, the deadline for which is the thirtieth calendar day following the date of mailing of the first Commission decision (if the deadline falls on a weekend or a national or state holiday on which TWC offices are closed, the deadline is extended until the next business day following the deadline).
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, or that whatever other determination the Tax Department made was erroneous in some way.
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