Tax Audits

North Carolina employment security law , contained in Chapter 96 of the North Carolina General Statutes, gives the Division of Employment Security the right to inspect employers' records and requires employers to allow review of their records in North Carolina. Audits are performed to ensure compliance with unemployment tax laws. DES samples employers for compliance by size and type of firm and by random selection.

Audit Process

Why am I being audited?

Why am I being audited?

There are several reasons why the Division of Employment Security audits employers. A former employee may have filed an unemployment insurance claim only to find that the wages reported to DES were different from their records. You may not have regarded that person as an employee. Sometimes there may be indications that an employer may have completed the quarterly tax report (Form NCUI 101) incorrectly, or the employer did not report employees.

What will the auditor look for?

What will the auditor look for?

A Division of Employment Security tax auditor will confirm that all wages have been reported correctly and that all taxable wages have been computed correctly. The most common types of payroll that are not reported involve payment for casual and contract labor, commissions, remuneration to corporate officers and independent contractors. The auditor will review your records to make sure that your payroll is classified correctly.

What if I paid for services for people who are not on my payroll? Can I be taxed for those payments that I do not regard as wages?

What if I paid for services for people who are not on my payroll? Can I be taxed for those payments that I do not regard as wages?

Often employers pay for what they believe are independent contractors not subject to the law. Later it’s found that these workers are employees and that tax payments should have been made. You may also have liability over casual labor, commission, payment or other remunerations to corporate officers. The auditor will make findings using clear legal and administrative guidelines.

What time frame will the audit cover?

What time frame will the audit cover?

A normal audit is for one calendar year, but it can be for up to five years. If there is an exception, the auditor will explain the situation to you.

Which records will the auditor review?

Which records will the auditor review?

Records reviewed include payroll records, W-2’s, 1099s, IRS records, North Carolina Department of Revenue records and general disbursement records such as your check record journal, invoices and canceled checks. Additional records may be reviewed depending upon the type of business or entity that you have.

How long is the audit likely to take?

How long is the audit likely to take?

The length of the audit depends on the number of employees, the condition of your records and any irregularities that are found. Some audits take three to four hours, while others may take longer. The auditor will best be able to answer this question for you.

What if I don’t have any employees?

What if I don’t have any employees?

DES may still want to conduct an audit to confirm that you do not have employees.

Where will the audit take place?

Where will the audit take place?

Audits usually take place at the employer’s primary place of business in North Carolina. Sometimes audits may be partially conducted at an accountant’s office, or the local Division of Workforce Solutions or public employment office. In many cases, the auditor may need to visit an employer on site during the audit.

Should my accountant be present?

Should my accountant be present?

It is not required, but you may have your accountant available to answer questions about the audit if you choose.

When may I expect to hear the results of the audit?

When may I expect to hear the results of the audit?

When all the information is received and the audit has been completed, you will receive the audit results from the tax auditor.

What if DES finds that I owe taxes, but I can’t pay?

What if DES finds that I owe taxes, but I can’t pay?

If you can’t pay the entire amount immediately, the Division of Employment Security can usually work with you to arrange a payment schedule.

If I owe taxes to DES, will I also owe more to the IRS and/or the North Carolina Department of Revenue?

If I owe taxes to DES, will I also owe more to the IRS and/or the North Carolina Department of Revenue?

Your responsibilities to the Division of Employment Security are separate from those of other agencies. You need to contact the other agencies to determine if you owe additional tax.

What if I don’t agree with the auditor’s findings?

What if I don’t agree with the auditor’s findings?

After you receive the audit results letter (NCUI-673), you may be mailed a Tax Assessment and Demand for Payment. The tax assessment contains the instructions for protesting the auditor’s finding. The protest must be timely, in writing, state specifically why you believe that the tax assessment is incorrect and signed by an owner of the business. Send the timely protest and a copy of the tax assessment to the Raleigh address on the assessment. You will receive more information concerning a hearing after Division of Employment Security receives your protest.

Does my hearing request stop interest from accruing?

Does my hearing request stop interest from accruing?

No, your request for a hearing does not stop interest from accruing on the amount that the Division of Employment Security believes that you owe. You may stop the interest from accruing by paying the amount that the DES believes you owe. Your money will be refunded to you if you prevail at the hearing.