Employment and Training Administration
Washington, D. C. 20210






October 23, 1998




October 31, 1999











Unemployment Insurance Service




Field Audit Task Force (FATF) Recommendations for Policy and Procedural Changes on the Completion of Field Audits


  1. Purpose.  To distribute recommendations to State Employment Security Agencies (SESAS) for proposed revisions to the field audit policy outlined in the Employment Security Manual (ESM) and to solicit comments on those recommendations.

  2. Reference. ESM, Part V, Section 3670-3693. Field Memorandum No. 19-98.

  3. Background. At the National Tax Conference held in Crystal City, Virginia during August of 1997, a plenary session on field audits was conducted to provide State tax representatives an opportunity to discuss the current field audit policy which is contained in Part V, Section 3670-3693, of the ESM. This policy defines a field audit and establishes requirements for conducting field audits, the results of which are reported on Federal Form ETA 581.

    A majority of the State tax representatives attending the conference expressed a desire to broaden the definition of a field audit. Specifically, they clearly indicated that field audits should be conducted in cases where the employer had not previously been assigned an account number and had not been filing tax and wage reports to the SESA as a result of the employer's misclassification of employees as independent contractors. Current U.S. Department of Labor policy, as expressed in the ESM, prohibits field audits, conducted on employing units that have not been established as liable tax paying employers prior to the field audit, from being counted as field audits for ETA 581 reporting purposes. Additionally, the conference participants requested more latitude in converting non-audit assignments, covering issues such as blocked claims and collection activities, into field audits.

    As a result of these discussions, a task force of State field audit managers and National and Regional Office staff met during the week of June 22-26, 1998. The task force deliberations resulted in several recommendations for revisions to the ESM.


    1. Section 3671, Field Audit definition: This section requires that an employer be "subject" to the State's law prior to being audited. The proposed revision from the FATF would allow audits to be performed on employing units that have not yet been determined liable, as long as the employing unit is found to be liable as a result of the audit.

    2. Section 3675, Scope of Audits: This section requires that "An audit must cover a minimum of four (4) consecutive quarters for which reports have been submitted by the employer, except registered (active) or out of business (inactive) employers who at the time of the audit have operated fewer than four quarters."

      The FATF recommends that this policy be changed to allow for the conduct of field audits covering fewer than (4) four quarters under the following two conditions:

        (1)  The employer discontinued business prior to incurring liability for four (4) quarters.

        (2)  The employer was determined to be misclassifying employees as independent contractors. Field audits conducted under this misclassification of worker exclusion must cover all quarters of the calendar year in which the issue occurred. Expansion of an audit to include additional years must follow State guidelines for expansion. Once a field auditor has made the decision that workers have been misclassified by the employer and an audit has been conducted, the audit should be reported on the ETA 581 report even if the field auditor's determination is subsequently reversed as a result of an appeal.

    3. Section 3679, Selection of Employers for Audit: This section currently precludes "routinely" converting assignments issued to resolve report and/or monetary delinquencies, blocked claims, and status assign-ments into audits. The section currently reads in part as follows:

      "Assignments issued to resolve report and money delinquency, blocked claims, and status assignments should not be routinely converted or expanded to audits. If circumstances indicate problems or conditions not apparent when the assignment was made, then expansion of the assignment to include an audit may be warranted."

      "Field collections incident to delinquent employer contacts or collections made at the time of initial employer registration (status assignments) in the field are not audit performance measurements. Such collections are not to be counted as audit yield."

      It is recommended by the FATF that these two paragraphs be deleted. Removal of these two paragraphs will allow SESAs more latitude in converting non-audit assignments into field audits. Once converted, however, the audit must meet all requirements of the audit policy, including the four quarter requirement outlined in section 3675.

    4. Section 3689, Control of Field Audit Assignments: It is recommended that the second sentence of the second paragraph, be changed to read, "Explanation for the decision to convert an assignment into an audit should be included in both the audit report and, if appropriate under State procedures, the report submitted to complete the non-audit assignment."

    5. Section 3693, Field Audit Program Evaluation:

      A recommendation was made to revise the ETA 581 by adding one cell to the report which would contain the number of workers reclassified from independent contractors to employees as a result of the field audit program. Therefore, parts A, B and C of section 3693 should be revised to provide for the collection, analysis and use of the number of independent contractors that are reclassified as employees.

      Part A, Data Collection, should be revised to add, "No. 13, Number of alleged independent contractors reclassified as employees."

      Part B, Data Analysis, should be revised to add, "No. 12, Total number of alleged independent contractors that were reclassified as employees."

      Part C, Data Uses, should be revised to read, "States are encouraged to collect and utilize audit data to evaluate individual and/or overall audit performance. Effective analysis of audit results assures the most productive utilization of resources. Data elements used to measure the success of completed audits should include: the percent of change (total wage adjustments divided by total wages audited), additional wages discovered, unpaid taxes discovered, and alleged independent contractors reclassified as employees. In addition to the above, States should also consider the employer's size, industry code and location in the selection of audits. Analysis of past audit program results should be a prominent factor in the ongoing selection of employers for audit."

  4. Action Required. SESA Administrators are requested to ensure that this directive and the attached revised draft of Part V of the ESM are made available to UI staff responsible for coordinating and performing audits and Tax Performance System (TPS) reviews. Comments on these proposed changes should be directed to Bill Whitt, USDOL, Room S4231, 200 Constitution Avenue, N.W., Washington, D.C. 20210, or Fax #202-219-8506, or E-mail Bwhitt@doleta.gov, with a copy to the appropriate Regional Office. Comments should be submitted prior to November 7, 1998.

  5. Inquiries. Please direct all inquiries to the appropriate Regional Office.

  6. Attachment.  Draft of Employment Security Manual, Part V, Field Audits, showing proposed revisions.