Employment and Training Administration
Washington, D. C. 20210






March 18, 1992




March 31, 1994











Regional Management




UC Tax Audit Documentation Requirements


  1. Purpose. To provide State unemployment insurance (UI) program administrators with revised documentation standards for unemployment compensation (UC) tax audits.

  2. Reference. Employment Security Manual (ESM), Part V, Section 3670-3693; Field Audit Function (ETA Audit Policy); Core Revenue Quality Control, Operations Handbook; and Unemployment Insurance Program Letter No. 48-92.

  3. Background. The Employment and Training Admnistration (ETA), in response to unfavorable reports by Federal and State audit agencies, has taken certain actions to improve the quality of State UC field tax audits. To this end, the ETA has developed procedural changes in its oversight functions to ensure that field audits are of consistent and acceptable quality. A number of tests included in the Revenue Quality Control (RQC) program will be used to evaluate the adequacy of documentation to support auditors' actions, findings, recommendations and other pertinent information in performing employer audits. The audit documentation criteria were developed in a workshop of State and Federal UC tax specialists.

    Compliance with the taxation and coverage provisions of complex State UC laws, complicated by their inter-relationship with Federal employment tax laws, is subject to a broad range of interpretation. Inadequate audit performance supported by little or no reliable documentation has been cited by outside authorities such as the Inspector General as a major deficiency in State UC tax operations. Lacking specific guidance or a definition of "documentation," the States have supplied their own interpretation of what documentation means, often based on expediency, with disparate and generally inadequate results. Although ETA Audit Policy has stated that documentation should support auditor findings, there has been no definitive discussion of what constitutes documentation.

    RQC studies have confirmed that very few State audit programs could meet even rudimentary quality requirements because of a general lack of reliable documentation. In an eight-State pilot test, RQC found that only two of the eight participating States have audit programs with adequate documentation.

    The reliability of State UC audit performance can be improved by expanding the ETA Audit Policy to prescribe documentation requirements and to include documentation criteria in the RQC requirements. A work group of State and Federal UC tax experts, using the results of the eight-State review as a basis, proposed criteria establishing minimum levels of acceptable field audit documentation. The work group divided their recommendations into five categories, and further, concluded that to be applied uniformly by the States, the documentation requirements must be standardized.

  4. UC Tax Audit Documentation Requirements. As set forth in UIPL No. 48-92, modifications to the UC Field Audit Policy and RQC documentation criteria were proposed and submitted to the States for their consideration and comment. Major State concerns centered on increased workload, reduction of the four percent audit penetration desired level of achievement (DLA), and the amount of detail required in pre-audit and post-audit documentation.

    The bases for field audit documentation criteria, taking into consideration State comments and recommendations, have been incorporated into the Employment Security Manual (ESM), ETA Audit Policy, a copy of which is attached.

    The Field Audit Acceptance Sample instructions in the draft RQC Operations Handbook have been revised to address State concerns about the stricter documentation standards. The revised instructions, which will be provided to State Quality Control staff under a separate directive, address issues such as employers who do not maintain full accounting systems.

  5. Desired Level of Achievement. Although States anticipate few problems implementing higher documentation standards, it is recognized that increasing the amount of documentation required will increase the time needed to complete an audit. Several States have indicated they will be unable to meet both the heightened documentation standards and the current four percent DLA for audit penetration. Therefore, it is agreed that the current DLA will be adjusted to accommodate the new documentation criteria.

    The four percent audit penetration DLA is replaced with a two percent minimum DLA for FY 1993. However, States deeming a more aggressive audit program to be advisable are encouraged to raise their standards accordingly. The DLA shall remain at the two percent minimum until a DLA can be established under the Performance Measurement Review project.

  6. Action Required. State Administrators are requested to review the attached documents and to provide the information and instructions to appropriate UI staff.

  7. Inquiries. Direct inquiries regarding this directive to the appropriate ETA Regional Office.

  8. Attachment. MTL 1469