Warning for Illinois Accountants: Significant Change in IDES Audit Policy!

October 2013

Starting in early 2013, the Illinois Department of Employment Security (IDES) "increased the pain" on Illinois businesses using independent contractors. The IDES audit division modified their audit policy guidelines to be much more likely to result in multi-year audits.

Now, IDES auditors will audit an Illinois company for a second year if the first year being audited results in an assessment of only $2,000 or more.

In other words, if an Illinois company is audited by the IDES and the auditor finds that (for that initial audit year) the company has made enough "mistakes" to result in money owed to the IDES in the amount of $2,000 or more, then the IDES auditor will proceed to audit that company for another year. There used to be a much more forgiving $5,000 threshold, so now there is a much greater danger of multi-year audits.

In my opinion as an attorney who has handled many IDES audits over twenty-four years, this new audit policy is misguided in many ways. It is very damaging financially to small Illinois businesses that use independent contractors (if those independent contractors are found to be employees by the IDES auditor under the brutal test for independent contractor status). Keep in mind that the interest rate that the IDES inflicts on these harsh assessments is 24% per year (2% per month).

Accountants and others advising their Illinois clients should take immediate action when they find out that one of their clients is going to be audited by the Illinois Department of Employment Security. The best advice to clients and their advisors is to first "say nothing whatsoever" to the IDES auditor until experienced legal counsel is obtained (and the Company can understand its legal position/vulnerability and then can effectively plan its defense strategy).

The independent contractor test used by the IDES--Section 212 (A), (B), and (C)--must be thoroughly understood and discussed with the client before any conversation takes place between the company/accountant and the IDES auditor. Seemingly innocuous questions by the IDES auditor such as "what does the company do" and "what does the independent contractor do" are frighteningly important in terms of an accurate legal analysis under Section 212 (A), (B), and (C).

Much harm or much good can be done right at the beginning of an IDES audit, so immediate legal advice should be sought. A strategy for defending independent contractor status should be developed right at the beginning of the audit process, to avoid a multi-year IDES audit and to reduce potential reclassification liability.

If any readers of this e-mail would like a free copy of Section 212 (A), (B), and (C) of the Illinois Unemployment Insurance Act and its Regulations to better understand the severity of the IDES test for independent contractor status, please contact Legal Assistant Tammy Nelson at 630-377-1554 or via email at tanelson@wesselssherman.com.

Questions about lowering your clients' risk in the use of independent contractors or how best to handle an IDES audit? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.