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Unemployment Insurance Tax
Preparing for an Audit
Questions and Answers to Help You Prepare for a UI Tax Audit
Why does the Unemployment Insurance Division (UI) perform UI Tax Audits?
State and federal taxing agencies perform UI Tax Audits to ensure compliance with the laws. South Dakota Codified Law (SDCL) 61-3-1 and 61-3-2 give the South Dakota Department of Labor and Regulation (DLR), Unemployment Insurance Division, authority to audit employer records. Employers must allow DLR to review records when asked.
There may be several reasons your business was chosen for an audit. Employers may be randomly selected. The random sample includes a variety of employers based on size and type of firm.
A former employee may have filed a UI Claim and there may be a question concerning wages that were not reported or the amount wages that were reported.
What will the auditor look for?
The auditor confirms all wages were reported correctly and all taxable wages were computed correctly.
What type of issues may arise?
Common types of errors are: payments for casual and day labor, contract labor, commissions, corporate officer pay, reporting of some types of employee benefits, and misclassification of workers as independent contractors.
How long does a UI Tax Audit take?
This depends on the number of employees, the condition of the records, and any questions that are raised. Some audits take two hours and others longer.
What if I paid for services, such as subcontractors, that I don’t consider payroll? Can I later be taxed for those payments?
Yes. Any individual who is paid to perform services for you can be considered an employee unless their services meet exclusions in the UI Tax Law.
How far back will the audit cover?
The usual audit covers one calendar year, but can go back up to six years. After the audit begins, the time frame may be expanded based on the findings.
What records will be needed?
Payroll records including W-2s, 1099s, 940, 941s, federal income tax returns, general disbursement journal, check register, cancelled checks, and invoices.
Where will the audit take place?
The audit will take place in the location of the records. This is typically the employer’s office, but may be at an accountant’s or attorney’s office. You may also bring the records to the auditor’s office.
Should my accountant be present?
That decision is up to you. You may consult with your accountant at any time during the audit process.
What if I don’t have any employees?
An audit may be performed to confirm this.
When can I expect to hear the audit results?
There will be a post-audit interview as soon as the audit is complete. At the post-audit interview you will be given an Audit Summary Report.
What if the DLR determines that I owe tax, interest, and penalty, but I am unable to pay?
A reasonable payment plan can be arranged if the liability cannot be paid immediately.
Will I owe money to the IRS and/or the South Dakota Department of Revenue?
You will need to contact those agencies to determine if you owe additional tax.
What if I don’t agree with the audit findings?
You may request a hearing upon receipt of the Audit Summary. An appeal must be made within 20 days, must be in writing, and state why you believe the audit result is incorrect. Hearings are conducted by telephone before an Administrative Law Judge.
Does my hearing request stop interest from accruing?
No. However, you can do so by paying the amount owed. If you prevail at the hearing, your money will be refunded.
Can I reschedule the audit?
Yes, unless the audit is dealing with an urgent matter such as an unemployment insurance claim. To arrange another date and time, contact the auditor as soon as possible.
For more information, contact us.