Business Audits and Investigations

Business Audits and Investigations by Federal and State Agencies

 Arizona businesses must cooperate with agencies that have the right to conduct business audits and investigations for employment compliance procedures and to investigate employee-related complaints and other issues.

These are the agencies that may calling on your company:

  • The Department of Labor (DOL) usually looks for overtime wage issues
  • Arizona’s Industrial Commission  examines workers comp benefits and unpaid premiums
  • The Arizona Department of Economic Security (DES) investigates unemployment insurance matters, particularly if you misclassify workers as independent contractors instead of employees
  • The IRS can also investigate and audit you for misclassifying workers 

Penalties, particularly from the IRS, can be harsh. Luckily, investing in a few ounces of prevention will help employers avoid the proverbial pound cure and minimize the stress and disruption business audits and inspections often bring.

Different agencies like the IRS and Labor Department conduct onsite business audits.

Is your company prepared for business audits from state or federal agencies?

Is your Arizona business ready for an audit or investigation?

 What Are These Agencies Looking For? 

 These agencies are looking for violations of employment law. If you’re cynical, you may also believe they are looking for opportunities to fine businesses to fund their own operations.

Sometimes it’s merely a routine business audit by that particular agency. But honestly, many are initiated by a complaint, typically by a current or former employee or an employee’s spouse.

  • A DOL investigation can come after a tip that a company isn’t paying its employees for overtime or all hours worked.
  • A DES audit might find a company isn’t paying unemployment insurance for its workers.
  • The Industrial Commission Workers’ Compensation Department might want to determine why a business isn’t paying workers comp insurance. 
  • If the IRS asks about how you pay and classify your workers (1099s vs. W4s), you really should contact an employment attorney ASAP to help you assess matters. 

All of these agencies have some form of authority to conduct workplace inspections, subpoena documents and witnesses, and bring enforcement actions against employers who violate the provisions of their statutes and laws.

Typically, inspectors give advance notice of an onsite inspection, but they can make unexpected appearances. Employers who do not feel prepared for a surprise inspection can refuse to allow the investigator onsite without a search warrant. However, it is recommended to request a 72-hour period (three business days) to comply with any investigative demand. This also gives employers time to contact an employment attorney!

Finally, don’t destroy evidence. This will only make matters worse.

What to Expect When You’re Expecting a Business Audit

Investigators know what to look for. Even if they haven’t been tipped off or are looking into a complaint, they are very familiar with business oversights and mistakes.  

Investigators may want to inspect payroll and tax records, review written policies and procedures, interview employees, and even conduct surveillance and collect evidence. Here are what an employer and experienced attorney should do when the inspectors return:

  • Ensure that interviews and inspections take place at reasonable times and do not unreasonably interfere with company business
  • Actively participate in the investigation by attending all meetings and conferences
  • Escort the inspector(s) through the facility
  • Take detailed notes

Please know that these agencies have been persistent in auditing independent contractors to determine whether they are properly classified.

If your company is being investigated or audited by any of these of these agencies, my office would be happy to advise and counsel you. contact our office for a consultation.