UI Tax Module
In the UI program, benefit payments are financed through the collection of taxes from employers. While no one likes to pay taxes, everyone is expected to do their fair share, and most employers abide by the rules and regulations. However, some will inevitably try to beat the system. The Aware-UI Tax module enables state workforce agency staff to identify instances of employers underpaying or not filing UI taxes and helps keep the UI system in check.
UI tax system success depends on voluntary compliance
Voluntary compliance is the cornerstone of the UI tax system, as is the case with all taxes in the United States—be they national, state or local. State workforce agencies administer this program and collect the taxes to pay benefits to workers who are unemployed through no fault of their own. In order to foster this voluntary approach to UI tax, these agencies attempt to create and maintain a system that keeps tax rates as low as possible; is fair to all taxpayers and requires everyone to pay their fair share; makes compliance convenient and easy to accomplish; and provides appropriate penalties to those who don't comply.
Another key feature of the UI tax program is experience rating, where the tax rate any individual employer pays relates directly to the amount of benefits paid to workers who are temporarily or permanently separated from their jobs. Employers who initiate more separations leading to benefit payments pay proportionately higher UI taxes than those who initiate fewer separations. However, this works only when every employer registers with the state, properly reports employment and pays the requisite taxes. They don't fail to register, file returns or pay taxes, and they don't file false or misleading returns. Otherwise the system fails to accomplish its desired ends.
Historically, state workforce agencies have relied on desk and on-site audits to secure the proper payment of taxes. However, audits are limited by the number and types of staff available, and involve a very labor-intensive approach. Targeting those industries with a track record for non-filing and underpaying has helped to optimize the impact of auditing, but is only a partial solution. Very often the audit doesn't occur until a claim for benefits is filed against an employer who hasn't registered or paid taxes. A study conducted by the General Accounting Office in June 2003 reported that many state UI administrators "cited poor detection methods and inadequate funding for investigation and enforcement efforts as obstacles to addressing these [non-filing and underpaying] practices." In recent months, several states have attempted to improve compliance efforts by increasing penalties, but the results are yet to be seen.
Detecting tax avoidance schemes with Aware's new UI Tax module
While SUTA dumping schemes, which allow employers to illegally avoid taxes by shifting employees from high tax rate installations to lower ones, have recently garnered significant attention, other tax avoidance schemes are likely to account for a greater loss of UI tax revenues. These approaches include:
- failing to register as an employer,
- incorrectly reporting wages (under-reporting),
- misclassifying employees as "independent contractors,"
- failing to provide required information,
- moving employees to professional employment organizations (PEOs) and leasing them back,
- inhibiting inspection by state workforce agency auditors, and
- paying employees "off the books."
The new Aware-UI Tax module enables state workforce agencies to identify instances of employers underpaying or not filing UI taxes. The module consists of 24 "one-click" audits, which were created with input from several state UI tax auditors. The audits focus on specific patterns that would isolate situations appearing to suggest that the employer has either failed to register with the state or is underreporting employment and wages. On Point Technology anticipates that this list will be refined and expanded as the Aware module is deployed and used by state workforce staff who are assigned the responsibility of identifying UI tax defrauders.
View the list of 24 "one-click" audits for the Aware-UI Tax module.