Colorado Unemployment Lawyer Discusses How To Fight an Unemployment Audit

Our Colorado unemployment lawyers represent businesses facing Colorado and federal Department of Labor audits. In this article, we discuss how to fight a Colorado unemployment audit.

The Colorado Employment Security Act (CESA) requires employers to provide unemployment insurance (UI) to employees. These quarterly employer-paid premiums finance unemployment benefits for eligible individuals facing unemployment through no fault of their own. 

The state unemployment agency bases employer contributions on how many employees they have and how much money the business makes. Over the past five years, employer contributions have enabled roughly 139,100 Coloradans a month to receive unemployment benefits, according to the U. S. Bureau of Labor Statistics. 

Thus, the success of the state’s unemployment insurance program hinges on qualifying payments from Colorado employers that:

• Paid wages of at least $1,500 in a quarter during the current or most recent calendar year; or

• Employed at least one person for any part of a day for 20 weeks during the current or most recent calendar year C.R.S. 8-70-113

A business does not have to employ the same person for all weeks, nor do all weeks have to be consecutive. Most Colorado employers meet the minimum requirements to contribute.

It’s important for me to note that independent contractors are not eligible for unemployment benefits because they are assumed to be independent business owners responsible for managing their own insurance and tax obligations. 

Unemployment audits are administered to affirm that employers are meeting their unemployment insurance tax obligations. To this end, the Colorado Department of Labor and Employment conducts audits to verify: 

• Wages are reported accurately

• Workers are classified properly

• Reports are filed appropriately

For instance, when a worker is classified as an independent contractor, and their scope of work more properly aligns with that of an employee, employers are more likely to fall behind on premiums, thus undermining the unemployment insurance system set up for eligible workers. In theory, the point of conducting an unemployment audit is to catch these types of problems, in turn, helping the state maintain the integrity of its unemployment insurance system. 

The Colorado Department of Labor and Employment (CDLE) and independent auditing firms conduct audits that fall into one of three categories.

Most businesses chosen for audit are selected at random. The U.S. Department of Labor requires Colorado to audit 1% of employing businesses. Thus, businesses registered with the state that have an active employment insurance account number can be selected for the unemployment auditing process. 

While it’s true that your business’s chances of being audited for unemployment remain relatively low, a 2023 report from the Colorado Chamber of Commerce counted more than 600,000 operational businesses in the state. In other words, about  6,000 companies will be randomly selected for an audit in any given year. 

A focused audit for unemployment improves how the state issues guidance to the businesses tasked with making reasonable worker classification decisions. In recent years, the CLDE has come under scrutiny for paying out unemployment benefits to workers who didn’t qualify. With this understanding, audit participation can help the state be more effective in identifying workforce trends, advising employers responsible for classifying workers, and implementing measures to improve the program’s administration and ensure longevity overall. C.R.S. 8-70-115

Finally, the state will conduct audits based on complaints and leads it receives about employers. For instance, a former employee may report a company for intentionally misclassifying employees as independent contractors. Competitors and even the U.S. Department of Labor will tip off the state labor department. Failure to file complete reports, submit accurate documentation, and a poor payment history can also trigger a complaint-based audit. 

These types of audits ensure employer compliance with the system. 

Many states have auditing procedures similar to those in Colorado, where auditors can request certain items to determine compliance with state and federal requirements. Auditors might look at:

• Personnel information

• Contractual agreements

• Payroll reports

• Wage details

• Tax documentation

Auditors really just want to know that your business has kept up with UI premium payments. However, these requested records can give auditors a better view of employer-employee dynamics. For instance, auditors may be able to discern the level of control employers have over workers or the nature of the tasks workers are asked to complete. 

Knowing that the state will audit unemployment at random or with purpose does not need to cause distress. The well-seasoned tax attorneys at Robinson & Henry can help your business overcome tax challenges by providing valuable legal advice throughout the audit process, because protecting your rights as a business owner starts well before your business receives an unemployment audit letter.

Your business can actually prepare for an audit before one begins. To begin, confirm that your employee records from the last five years include: 

• Names and addresses of employees

• Social Security numbers or Identification numbers of employees

• Start dates, last day worked, year-to-date earnings, and wages for the last week worked of employees

• Reason for separation or termination of employees

Your business can anticipate an unemployment audit by taking additional proactive steps as well. For example, it could identify a point person to maintain organized, accurate records for every year of operation, paying special attention to records from the last five years. 

Businesses receive detailed instructions from auditors, including what tax year they will be audited for. Your business may choose to use resources from the Colorado Department of Labor and Employment (CDLE) to anticipate common issues audited employers encounter. The department employs professionals to assist employers with questions and inquiries related to worker classification standards and the unemployment audit process. 

Here’s what you can expect if the state selects your business for an unemployment audit.

You will receive an unemployment audit letter from the CDLE stating its notice of intent to conduct an audit and detailed instructions, including: 

• Date, time, and location of audit

• Name of auditor 

• List of requested records 

• Record format requests (reproductions vs. original copies) 

• Deadline for submitting additional records, if requested

Audits are typically conducted where your business records are located. In most cases, this will be your place of business. However, audits can be conducted remotely under certain circumstances upon request.  Auditors must provide a detailed written request for records at least 10 business days before the audit takes place. Note the statute of limitations for an auditor to inspect a business’s records for any given year is five years. 

Prepare the list of records requested in the format requested. These records may include any of the following: 

• Payroll records

• Federal forms

• Tax returns

• Business ledgers

• Check registers

• Bank statements

• Employee classification documents

• Contracts/written agreements

• Employee information

Generally, employers are allowed to submit copies or excerpts of records if originals are not readily available. However, your auditor may still request originals to determine document authenticity. 

The audit typically begins with an introductory interview with the business owner. The auditor will ask questions to verify business ownership and to learn more about the business and the types of services it provides. 

Following the pre-audit interview, the auditor will review the records provided based on the instructions in the audit notification letter. This step can take several hours to complete. 

After the audit, the business will receive an Audit Report during the post-audit interview. This report includes a Liability Determination, indicating whether you owe taxes with interest and if a penalties assessment is warranted. Businesses can pay these charges after the audit or set up a payment plan.

After the post-audit interview, employers will have the option to cure or appeal the audit results. If the employer seeks to appeal, they can seek additional guidance from the department on where to submit additional information before proceeding to appeal. Supplemental information may allow for clarification or correction of any issues identified during the audit, which is a favorable alternative to having to appeal. 

The duration of an unemployment audit depends on the audit’s outcome. It typically takes about two weeks from the initial notice of intent to audit to completion. However, requests for additional information and the appeals process can extend the timeline.

Keep in mind that your business’s specific circumstances also affect the length of time an unemployment audit takes. 

While it’s not the end of the world, failing an unemployment audit can lead to financial penalties and consequences for employers found out of compliance. 

The severity of those consequences will depend on the seriousness of the failures. 

You can fail an audit for neglecting to file required reports, willfully submitting false or fraudulent reports, or misclassifying employees. An employer can also fail an unemployment audit if the employer or agent doesn’t respond timely or adequately to requests for information related to claims. 

A skilled tax attorney can help you navigate the appeals process and explain the possible outcomes listed below. 

The state can pursue penalties for various reasons, including: 

• Non-compliance - Penalties for not filing required reports or willfully submitting false or fraudulent ones can include premium reassessments or surcharges. 

• Delinquent payments - Falling behind on payments can result in penalties amounting to the total of the unpaid premiums or surcharges, capped at 1% of the employer’s chargeable wages from the previous year, not including interest. 

• Misclassified employees - If an employer is found to have misclassified employees with a willful disregard of the law, the state may impose fines. These fines can be steep: Up to $5,000 per misclassified employee for the first offense, and; up to $25,000 per misclassified employee for subsequent offenses.

• Repeated violations - Furthermore, repeat violations can result in an employer being prohibited from contracting with or receiving funds from the state for up to two years. 

Yes, employers who are the subject of an unemployment insurance audit in Colorado may appeal a decision based on the evidence presented during the audit. Here’s how:

You have 20 days to submit a written request for an appeal after the liability notice is issued. You cannot submit new evidence regarding your business audit.

The ICAO can accept late appeals if employers have a good excuse, such as: 

• Failure to receive timely notice

• Fraud by the state

• Extenuating circumstances beyond one’s control 

Neglecting to keep the state informed of your current address doesn’t constitute good cause. 

The ICAO will conduct an administrative appellate review based on the record made before the hearing officer, which will consider the evidence presented during the initial hearing. 

If the administrative appellate review does not return your desired outcome, you can appeal to the Industrial Claim Appeals Panel. The appeals panel will issue a decision upon reviewing the briefs from you and the auditor.

If the ICAO appeal is unsatisfactory, the next step is to take the case to the Colorado Court of Appeals. The appeal must comply with procedural requirements outlined in Colorado law. 

The Colorado Court of Appeals can only reverse ICAO decisions stemming from the following: 

• Acting without or in excess of its powers

• Procuring a decision by way of fraud

• Findings of fact were unsupported errors of law

Judicial proceedings to review ICAO decisions are given precedence over most other civil cases, thus moving your case through the appeals process quickly. 

If the Colorado Court of Appeals denies your appeal, your next step would be to file a petition for writ of certiorari with the Colorado Supreme Court. A writ of certiorari is, by definition, a written request/petition. This petition must be filed within 28 days of the Court of Appeals’ opinion, so long as there is no petition for a rehearing. If there is a petition for rehearing, the writ needs to be filed within 14 days of a petition for rehearing. 

• Legal Representation for a UI Audit – You have the right to legal representation during a UI audit. Our attorneys can attend the audit on your behalf, fill out the appropriate paperwork, review your business’s documents, and answer any questions that may come up during a UI audit. We will work with you and your business every step of the way to ensure that you are prepared for the audit.

• Help Your Business Appeal UI Audit Findings – If you are unhappy with the findings of a UI audit or believe that the auditor has made an error, you have options. Our experienced attorneys have navigated the appeals process and we can represent your business during an appeals hearing. We will work with you to draft briefs and written arguments in support of your position. If you remain unsatisfied with the findings of the hearing, we can continue to represent your business before the Industrial Claims Appeals Panel and, if necessary, the Colorado Court of Appeals.

• Identify Potential Reasons for UI Audit Findings or Other Tax Problems – A successful audit defense or audit appeal begins with reviewing the business. Our tax audit attorneys will review your business records to determine if the audit findings are defensible or determine a future course of action to avoid potential issues.

Our experienced Colorado tax audit attorneys are well-versed in tax, business, and civil litigation practices. R&H’s interdisciplinary approach ensures the best results possible for your business. We provide our clients with solutions that CPAs and tax resolution firms generally do not or cannot offer.

If your business has received a notice of a UI audit, call (303) 688-0944 as soon as possible to schedule your initial assessment to discuss your circumstances and consider your options moving forward.