ALABAMA audit

[joanmcq]

Does anyone have experience with theses? Audit notice is from AL Dept. of Industrial Relations, Umemployment Compensation Division. Want to perofrm audit at place of business. I'm guessing it may have something to do with the $180,000 of labor COGS for a psychiatry office, although they ask for all records including AR, corp minutes, bank statements, and financial statements, as well as all the employment filings and records.

[Gail in Virginia]

Does anyone have experience with theses? Audit notice is from AL Dept. of Industrial Relations, Umemployment Compensation Division. Want to perofrm audit at place of business. I'm guessing it may have something to do with the $180,000 of labor COGS for a psychiatry office, although they ask for all records including AR, corp minutes, bank statements, and financial statements, as well as all the employment filings and records.

When we see these in Virginia, what they are looking for is to see if you are treating employees as though they are contract labor to avoid the employment taxes. Can't say for sure about AL, but since it is the Unemployment Compensation Division, I suspect it might be the same.

[joanmcq]

Just got more info; one shareholder took a distribution for the $180,000 and did treat clerical help as independent contractors. And the other shareholder's accountant is going to handle it.

Good.

[GeneInAlabama]

I have been through a few Dept of Industrial Relations audits, and as gailtaxed stated, they are looking for employees being treated as contract labor. They are usually more strict about that than the IRS.

Gene

[JSU77]

I had an Alabama unemployment audit recently and the auditor told me that he was looking for contract labor.

[jainen]

>>They are usually more strict about that than the IRS<<

States are not only more strict, they have DIFFERENT rules and it is usually very hard to win this kind of review. This is not something that should be handled by the regular company bookkeeper. For your own protection you should formally advise them of the need to engage competent representation. It could be extremely serious, because if they make a correction for this year they will almost automatically make it for EVERY year past and future. Then they notify IRS and the state income tax people. With penalty and interest it can get very expensive very fast.

[Wayne Brasch]

Does anyone have experience with theses? Audit notice is from AL Dept. of Industrial Relations, Umemployment Compensation Division. Want to perofrm audit at place of business. I'm guessing it may have something to do with the $180,000 of labor COGS for a psychiatry office, although they ask for all records including AR, corp minutes, bank statements, and financial statements, as well as all the employment filings and records.

I may have been very lucky, but everytime I've had to deal with a State Unemployment Division auditor, they just compared the payroll records with the returns that were filed and that has been the extent of it. So far, no problems have arisen with any of them. They were in and out very rapidly in each case. I hope you are as fortunate.

Wayne

[TAXBILLY]

Agree with Jainen that this could be a serious money matter and competent representation should be obtained.

taxbilly

[joanmcq]

I'm not the representative, thank god.

[jainen]

>>I'm not the representative<<

No, but you seem to be the professional consultant. A few months from now, when they owe state & federal payroll taxes on 200 g's and the bookkeeper doesn't get to deduct her office-in-home anymore, they all might remember your relationship somewhat differently.

I repeat -- "For your own protection you should formally advise them of the need to engage competent representation." That means in writing.

[veritas]

We have audits like this all the time. Yes they are going to look at contract labor. Secondly they are going to look at distributions. If the shareholder has a small salary they will gross the distributions up to the max which is 28k here. They also will reclassify distributions early in the year to get the max as soon as possible which will add more interest and penalties. They will then report to the feds so you will have to pay the futa tax. They also look at amounts paid to corporations for services and if the corportaion is a sub only of our client they will reclassify as wages and collect suta and futa.

[joanmcq]

No, I simply work for a company that the husband of the minority shareholder bought audit protection from for his personal return. We do not provide audit protection on payroll issues. I looked over the return and pointed out what appeared to trigger the audit, ie the COGS deduction for labor on the 1120-S. He had come to the same conclusion. The 1120-S was professionally prepared by an accountant hired by the majority shareholder, who appears to be providing representation.

[kcjenkins]

Joan, CYA just the same, with advice in writing, to get legal representation.

[jainen]

>>I looked over the return and pointed out ... <<

Look at this from their point of view. They showed you the return because you are a professional in the field of taxation. You agreed to review it, you analyzed it, and you advised them about how the IRS was probably interpreting it. That makes you responsible!

If you do not follow through with a conclusion and recommendation about how to handle this, you are suggesting there is nothing wrong with what they are doing.

Even from what little you have posted, it seems to me possible that this company did some things improperly. Maybe they can explain it. Maybe they will have large tax liabilities (for which your friend might be personally liable under the 100% penalty). Maybe somebody will go to jail. Who knows?

You accepted the engagement. It may have been informal and unpaid, but you should still treat it professionally. Write the letter.

[TAXBILLY]

Agree with Jainen. You need to protect yourself.

taxbilly

[joanmcq]

>>I looked over the return and pointed out ... <<

Look at this from their point of view. They showed you the return because you are a professional in the field of taxation. You agreed to review it, you analyzed it, and you advised them about how the IRS was probably interpreting it. That makes you responsible!

If you do not follow through with a conclusion and recommendation about how to handle this, you are suggesting there is nothing wrong with what they are doing.

Even from what little you have posted, it seems to me possible that this company did some things improperly. Maybe they can explain it. Maybe they will have large tax liabilities (for which your friend might be personally liable under the 100% penalty). Maybe somebody will go to jail. Who knows?

You accepted the engagement. It may have been informal and unpaid, but you should still treat it professionally. Write the letter.

I am composing a letter, but please let me straighten this out. I am an employee for a company that is not providing audit protection for this person. I was assigned the case to look over, and let him know why they may be auditing him. Actually its not him. It is his wife's 5 % ownership s-corp. He is not a friend. I provided assistance as an employee of a company.

[jainen]

>> I provided assistance as an employee of a company<<

Then follow your employer's instructions. Apparently you ARE being paid for your analysis, so it is especially important that your conclusions include a referral for the additional expertise that they need. It doesn't have to be anything more detailed than, "The issues can be very technical and affect other tax years and taxing agencies, so we highly recommend that you engage competent representation."