DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 48-92
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	BARBARA ANN FARMER Administrator for Regional Management
SUBJECT	:	UC Tax Audit Documentation Requirements

1. Purpose. To provide State unemployment insurance (UI) program administrators with proposed documentation standards for unemployment compensation (UC) tax audits and to solicit their comments and recommendations.

2. Reference Employment Security Manual (ESM), Part V, Section 3670-3693, Field Audit Function (ETA Audit Policy)

3. Background The Employment and Training Administration (ETA) has long recognized that most States need to improve the Unemployment Insurance Service (UIS) has included in its Revenue Quality Control (RQC) program a major objective to ensure that field audits are of adequate quality. A number of tests are being proposed to determine the adequacy of documentation to support auditors' findings, recommendations and other pertinent actions in performing employer audits. State UC tax specialists have stressed the point that good documentation is the key to gaining an acceptable level of field audit quality.

   The taxation and coverage provisions of State UC laws are extremely complex and further complicated by their interrelationship and Federal employment tax laws. Auditor actions and conclusions are subject to constant challenge. Inadequate and unreliable audit performance has been cited by outside auditors such as the Inspector General as a major deficiency in State UC tax operations. RQC studies and the recently completed RQC pilot tests in eight States found that very few State audit programs could meet basic quality requirements because of a lack of reliable documentation.

   ETA Audit Policy states that documentation should support auditor findings but does not define what constitutes documentation. Lacking detailed instructions or a definition of "documentation" the States have supplied their own interpretation of what documentation means with disparate and generally inadequate results. In the RQC pilot tests, only two of the eight participating States were found to have audit programs with adequate documentation.

   The RQC task force and UIS Tax Group have cooperated in a two-year effort to resolve the documentation problem by expanding the ETA Audit Policy documentation requirements. A work group of State and Federal UC tax experts was convened by RQC in December 1991 to review the task force results and to propose criteria establishing minimum levels of acceptable field audit documentation. The workgroup refined its recommendations into five categories and submitted them for consideration (Attachment 1). The workgroup also recommended that to be uniform, the documentation requirements should be standardized. The work group also concluded, during its deliberations, that increasing the amount of documentation required would increase the time needed to complete an audit, bringing the issue of audit penetration to a renewed prominence. Adjusting the four percent Desired Level of Achievement (DLA) for audit penetration would be necessary if States are to meet heightened documentation standards.

4. Proposed Changes (1) The four percent audit penetration DLA will be replaced with a two percent DLA for FY 1993 and subsequent years until the completion of the Performance Measurement Review (PMR) project. The PMR project will establish levels of adequate performance. Adjustment of the DLA at this time should accommodate the additional time and work required to upgrade audit programs and to train audit staffs on the new requirements. 2) The proposed documentation criteria will be incorporated into the ETA Audit Policy, which will be implemented in FY 1994 (Attachment 2). (3) RQC is revising the Field Audit Acceptance Sample in the draft RQC Handbook to reflect the stricter documentation standard (Attachment 3).

5. Action Required State Administrators are requested to review the attached documents and to provide comments and recommendations regarding the proposed changes in the ETA Audit Policy and the RQC Handbook, Acceptance Sample procedures and the associated reduction in audit penetration desired level of achievement rates. Comments should be provided to the ETA Regional Administrator not later than thirty days from the date this directive was issued.

6. Inquiries Direct inquiries regarding this directive to the appropriate ETA Regional Administrator.

7. Attachments: 

   1. UNEMPLOYMENT COMPENSATION (UC) TAXES FIELD AUDIT DOCUMENTATION

   2. EMPLOYMENT SECURITY MANUAL (ETA Audit Policy)