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Legal Q&A on State Unemployment Agency Audits

Question – Our Company owns two newspapers in one state. Out of nowhere, we received an inquiry from the state’s Unemployment Tax Agency, indicating that it wants to do a full- scale audit of both newspapers – with particular interest in examining the status of the independent contractor status of newspaper carriers and freelance writers and photographers. The auditor has indicated that the state agency is making this inquiry due to an “anonymous complaint” and has requested that we begin to compile documents, including copies of the contracts and all 1099s issued to the independent contractors. How do we proceed?

Answer – The Unemployment Tax Agency is clearly “trolling” for additional tax dollars. Any time a state government requests documents from a Publishing Company under these circumstances, the Fourth Amendment of the Constitution of the United States is implicated. This may be an unreasonable search and seizure.

Additionally, I am sure your Publishing Company does not normally, upon request, provide confidential information it possesses with respect to outside vendors. The 1099 forms contain Social Security Numbers, as well as the names of individuals and payment information. This is clearly confidential information. Do you “cooperate” with the government and turn over the records? If you do, there is a really good chance that the auditor will merely tally the totals of the 1099s, claim the total represents payment of wages, and issue a very large tax assessment.

The facts indicate that neither newspaper has had any ruling of any kind, indicating that its independent contractors were employees. This appears to be arbitrary agency action. There is no legitimate reason for this audit to be conducted.

In this real case, the Publishing Companies decided to adopt the position that they would not provide the documents, and that they would instead provide a written position paper indicating why the individuals were independent contractors and why the audit was unnecessary. The written position paper articulated 21 reasons why the individuals at issue were independent contractors. The letter concluded by asking the agency to decide that an audit was unnecessary, in view of the irrefutable factors of independent contractor status.

The day after receiving the letter from the newspaper’s counsel, the tax agency persisted. The Company sent a follow-up letter, stating:

You have identified no facts or circumstances that would question the independent contractor status of these individuals. Under these circumstances, your request does not seem legitimate and may constitute arbitrary agency action.

The newspapers continued to decline to participate in the audit. Three days later, the state agency wrote a letter to Company’s counsel, stating that the agency was in agreement that the individuals were independent contractors.

– The independent contractor status of newspaper carriers and freelance writers and photographers is a franchise issue for any Newspaper Publishing Company. That status must be guarded vigorously. This case is an example of the success a Publisher can achieve by keeping in mind the motto, “Never, never, never, never give up,” and refusing the arbitrary request of an administrative agency.

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