So you’ve received an audit notice from L&I or ESD telling you that you’ve been selected for an audit. The notice will give you the audit date, which will almost certainly induce panic since there’s no way you can be ready by the noted date. Plus it will include a checklist of records the auditor wants you to provide before that date, which will induce even more panic since there is absolutely no way you can collect all those documents…in the time specified…on top of everything you have to do for your business.
While it’s never good news to be selected for an audit, the good news with the initial notice is that the dates are proposed dates, and you will be able to negotiate with the auditor for a date that works, and for you to otherwise get the time needed to prepare for the audit.
Below is an outline of what we recommend in preparing for an audit.
- Treat the audit as a serious matter. While audits are fairly routine and while your business could have been selected for an audit by pure chance, the reality is that only a very small percentage of audits are random. Rather, if you’re selected for an audit, it’s more likely that something occurred that triggered the audit. That something could be a complaint to the agency about your business practices; a workplace injury that triggers an automatic workplace and/or covered worker investigation; an unemployment claim that leads ESD to investigate the accuracy of your quarterly reporting; a claim by an independent contractor that he or she is really an employee and is being misclassified as an independent contractor. Bottomline, there usually is a reason for the audit that requires that the audit be taken seriously.
- Determine if you need an attorney. You don’t need an attorney to represent you in an audit. The process is designed so that business owners can prepare for and represent themselves without legal representation. But because you can represent yourself, does that mean you should? My recommendations diverge based on the size of your business. If you’re a very small business (with just a few employees) and “feel” confident about your employment and business practices, and you’re certain (as far as you know) that you’ve done nothing to be concerned about, then it may be fine to represent yourself. There still will be a risk that the audit could turn up something that is problematic for your small business and that you shouldn’t be handling on your own, but it’s probably not unreasonable for you to choose to represent yourself in the audit, if you’re comfortable with that risk. If you’re a large business, regardless of how confident you are in your practices, you should be represented by legal counsel. The reason is that audit assessments are often associated with deficiencies in reporting payroll and hours worked on a per-worker basis, and so the larger your payroll and the more workers you have, the larger your assessments will be if your practices are determined to be deficient. So for large and medium size business, it’s best to take all the precautions needed to ensure that your audit leads to the correct result.
- Request Rescheduling of the Audit. As noted above, auditors will propose an audit date that it typically a couple weeks from the date of the notice. These are proposed dates and usually an auditor will accommodate a reasonable request to reschedule. So if you or your attorney need additional time, you should feel free to request a couple weeks more to prepare. Unreasonable requests to reschedule for a couple months later, for example, will of course be rejected.
- Compile Records Requested. The audit notice will provide a list of records requested for the audit. While most of the records will need to be provided, you may not have to provide all. Experienced counsel can guide you in determining the records you need to prioritize providing. Lots of business owners will consider the audit requests for tax returns and other sensitive information to be invasive, and will instinctively ask if they have to provide those records. The answer is yes. There’s no way to shield those documents from examination from an auditor. Indeed, the reason for the audit is to get a close look at your books and all of your business records. So do expect to have to produce all or most of the records requested.
- Identify and Address Areas of Concern. Most business owners often will have an idea of the things they are concerned about leading up to an audit. Sometimes, an audit is triggered by a disgruntled employee, and a business owner will guess correctly that an interaction with the employee is what led to the audit. If you’re a general contractor and you were recently visited by an L&I inspector who found unregistered contractors at the job site, then you can expect the audit is an unregistered contractor issue. Often, you’re able to ask the auditor the reason for the audit, which will let you know what issues to be prepared for during the audit. Unfortunately, even when you know the reason for the audit, you won’t be able to remedy what has happened in the past. If you were out of compliance for the past couple years, there’s not much you can do now to correct compliance deficiencies, except deal with the consequences of noncompliance. But for some issues, you may be able to correct the error, or at least explain the reason for the error, which can favorably impact your audit result. This is why it’s always a best practice to fix problems before an auditor comes knocking at your front door.
- Meet with the Auditor. Audits can either be “paper” audits which are conducted primarily through providing records over email, and answering follow-up questions via email or phone calls. Other audits may involve the auditor meeting with the business owner or the owner’s representative. Regardless of the method of engaging with the auditor, it often works best to be respectful to, and cooperative with, the auditor. Many auditors do good work, and even where they find deficiencies, they try to show leniency where the law allows. And they are more likely to show leniency with people who engage with them in good faith. Whenever clients come to me with penalties of unusual size, it’s often the case that they had a bad/dysfunctional relationship with their auditor, which unfortunately ended up being reflected in their audit result. Of course, being kind and cooperative doesn’t require divulging each and every wrong you’ve done, but it does mean providing what auditors ask for in order for them to do their job, and to be truthful in answering questions asked. Owners who are afraid they will inadvertently say the “wrong” thing may want to consider engaging experienced counsel to deal with the auditor on their behalf.
- Review the Results to Decide whether to Appeal. The best audit result is one that you don’t have to appeal, as an appeal can feel like going through a second audit. For this reason, it makes sense to ensure that you or your attorney navigate the audit properly, while avoiding mistakes and missteps that will force you to have to appeal. And if you do have to appeal, see our four-part series regarding Things to Consider When Appealing an Audit Decision.
While it’s undoubtedly stressful to go through an audit, having the right plan in place to address the audit can make it a…not-unpleasant experience. And if you’ve done the work ahead to ensure you’re in compliance, then the audit itself should end up being nothing more than a period business routine, rather than something to be concerned about.