One of the most frequent questions that Illinois companies have asked me over the years is, “Why me?” They want to know why the Illinois Department of Employment Security (IDES) has selected their company to be audited.

IDES auditors have a legitimate and important function: to make sure that Illinois employers are paying their fair share of unemployment insurance contributions. These contributions are used to fund the Illinois unemployment insurance system which has a historic social and economic function. But of course, Illinois employers do not want to pay more than their fair share.

HOW THE IDES SELECTS COMPANIES FOR AUDIT: IDES auditors obviously cannot audit all Illinois employers every year. So, there has to be a system under which IDES auditors decide which Illinois companies they will audit. Surprisingly, roughly half of all IDES audits are purely random.

I find that some clients are suspicious about this concept of a random audit. Many of my clients over the years believed that a competitor turned them into the IDES thereby triggering an IDES audit. It is possible that such a scenario has occurred over the many years in which the IDES has been auditing, but I can report (having represented hundreds of Illinois employers in IDES audits over the last 30 years) that I have never experienced the situation where a competitor of my client has strategically triggered an IDES audit against my client.

Besides the purely random audits, there are also IDES audits for the following reasons:

1. An independent contractor working for the Company has filed for unemployment insurance benefits and named the Company as a source of income.
2. The IDES is doing a “follow up” audit of a company that has had a prior IDES audit where certain deficiencies were found.
3. There is some specific concern (such as an overpayment) the IDES has about a certain company.

PURPOSE OF THE IDES AUDIT: When a client asks me why the IDES is auditing them, one key reason is that the IDES auditor is making sure that the Company has properly calculated how much money (contributions) the Company should have been paying in quarterly on its payroll. The IDES auditor, upon reviewing the payroll records and other records, makes sure that the Company has done its math correctly.

I have seen several instances where the IDES auditor finds that the Company has actually overpaid the IDES. When there is an overpayment, the money is credited to the Company’s IDES account. In other words, the Company comes out in better shape as a result of the IDES audit.

A complex legal issue in an IDES audit is the auditor’s evaluation of whether independent contractors used by the Company are indeed independent contractors, or whether they are misclassified and really should have been treated as employees.

The IDES auditor uses a special legal test, Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act, to define when a worker is an independent contractor and when the worker is an employee. Companies who have been notified by the IDES that they are going to be audited should spend some time understanding Section 212(A), (B), and (C) or whatever part of the Illinois Unemployment Insurance Act might pertain to the kinds of independent contractors used by the Company during the audit year [for example, independent contractor real estate appraisers may fall under Section 217.2, direct sellers may fall under Section 217(b), and truck owner-operators may fall under Section 212.1].

WHAT YEAR IS AUDITED: IDES audits are for one year only (to begin with). When a Company gets a Notice of Audit letter from the IDES, the letter specifies what year is being audited. That year is almost always the year before. For example, if the Company receives a Notice of Audit letter in May 2021, the audit year would likely be 2020.

The only time the audit begins two years back in time is when the Company receives the Notice of Audit letter at the beginning of the year. For example, if the Company received a Notice of Audit letter on January 10, 2021, the audit will be two years back (in this example, 2019), rather than the immediate year before (2020) because 1099s and other tax related documents have not been issued yet for the year before.

IDES audits don’t go forward in time. The practical reason is because there would be no payroll documents or 1099s to make such an audit meaningful.

THE AUDITOR WILL REQUEST MANY RECORDS FROM THE AUDIT YEAR: The Notice of Audit letter includes a standard Records Request. The Records Request asks for Payroll Records, Cash Disbursements Records, General Ledger, Copies of 1099s and 1096s, Master Vendor List, and any other pertinent records from the audit year.

Clients often express outrage at the list of records that the auditor wants to review. I find clients often mistakenly think they will be audited for the entire history of their company. Records will all pertain to that one specific year being audited.

Auditors have a legal right to review these records. Sometimes there can be negotiations between the client and the auditor as to which documents are appropriate for review.

EXTENDED AUDITS: IDES audits always begin with one year, but audits can be extended by the auditor to include up to three additional years. Naturally my clients become upset and disappointed if the audit is extended beyond the first year to be audited because that means there is an additional year or more of potential liability that could be charged against the Company.

Generally speaking, the IDES auditor will only audit beyond the initial audit year if the initial audit year produces a liability in terms of contributions owed exceeding $5,000.  If a Company owes more than $5,000 in the second year, then the auditor might extend the audit back to a third year. The most years an IDES auditor can audit a Company for is four years.

Note that interest is not considered when the auditor evaluates whether the amount owed to the IDES is $5,000 or more. (The IDES interest is 24% per year, or 2% per month.) Over the many years that I have represented companies in IDES audits, I have seen this $5,000 benchmark change. Many years ago, IDES auditors would extend the audit for another year if the amount owed to the IDES was just $2,000 or more. These benchmarks are just practical guidelines because the IDES wants to use its auditing resources wisely. These guidelines are informal policies used by the IDES, and the IDES can change these guidelines at any time.

SEEK CONSULTATION WITH A PROFESSIONAL: Due to the considerable legal complexity of an IDES audit, it is best to have an in-depth strategy session (between the Company and an experienced attorney who has handled many such IDES audits) prior to the Company’s first interaction with the IDES auditor.   This kind of strategy session is particularly important in the current COVID-19 era during which many strange and confusing IDES decisions have been handed down….changing the legal landscape for independent contractor coverage by the IDES.

Questions? If you have questions or wish to schedule a consultation to review and defend your Company’s usage of independent contractors or if you need assistance with an IDES audit, a protest, or a hearing, please call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.