What Happens if You Fail an Unemployment Audit?

In you fail an unemployment audit, the commission adds a 15% penalty to the tax. If you fail to defend yourself the EDD will impose a significant fine.

Unemployment insurance (UI) benefits exist to help workers when they need a helping hand. When a worker in California is terminated, it can be stressful to be forced to immediately find a new job, especially with a family to feed or loved ones to care for. When a company fires an employee and struggles to find a new job, they often rely on UI benefits to keep them afloat.

Typically, unemployment claims rise and fall with the economy. During a recession, more people are out of work and must file for unemployment. Companies can hire more employees when the economy rebounds or improves and unemployment rates fall.

However, amid all this, some workers try dishonest means to support themselves. For example, some workers deceive their state’s unemployment offices and falsely claim monetary benefits they do not deserve.

False unemployment claims are a consistent problem in the United States, and California is no different. Unfortunately, some workers believe it is acceptable to defraud the system and misrepresent themselves or their occupations to collect monthly checks.

When an individual provides false information to the UI benefits office, misrepresents their work history or status, or does not correctly report their circumstances to receive UI benefits, they commit a serious offense: fraud.

All California workers are lawfully required to follow the state’s unemployment requirements. When they do not, their actions can range from providing wrongful data to failing to admit that they have worked to acting criminally.

For example, a California business terminates an employee for contract violations. The employee applies for UI benefits and begins to receive them in the months following their layoff. Then, the worker applies for a new job, and the company hires them. However, the new employee does not report their job status and continues to collect UI benefits, more than doubling their “paycheck.” This violation is fraudulent and against the law.

Typically in this situation, the system will detect that the person has returned to the workforce. When the state’s unemployment department ultimately “flags” their claim, an unemployment audit could begin. If the person is guilty, they will fail the audit. Depending on many extenuating factors, they will face multiple fines, penalties, and possible criminal charges.

This brief article will outline what happens when the unemployment department audits certain individuals and what consequences the workers face if they fail the audit. Understanding how unemployment audits work is necessary for California’s workers and the state’s business owners, so let’s dive right in.

What is Unemployment Insurance Fraud?

When California workers create false unemployment claims, they commit unemployment fraud. However, choosing to do this is risky since individuals whom the UI department finds have acted deceptively are subject to serious consequences, including monetary penalties and prison time. In some situations, “penalty weeks” of unemployment mean that the person must pay back what they owe the state each week.

Here are the most common consequences individuals face when attempting to manipulate their unemployment records or file a false claim.

What is Benefits Repayment?

First, the amount of money the unemployment department and state paid the person must be repaid to the state’s unemployment office.

This repayment is mandatory even if the person made a mistake unintentionally or the issue is the department’s fault.

First, the office will send the person an overpayment notice. This overpayment notice will also show up when the individual logs into the online system. The notice will detail how much the person needs to pay back to the state and, more precisely, to the state’s unemployment department. The notice also includes suggestions for how the person can pay their debt; for example, they may be able to write a check. For larger amounts, the department will sometimes allow payment plans, depending on the offense.

Different states have unique repayment policies, but one thing usually holds regardless of where the person lives: the person must pay the amount back before a specified deadline. The department transfers the debt to a collection agency if they do not. The individual’s credit report may also register the debt and payment or lack of payment.

If Individuals Commit Unemployment Fraud, Can They Go to Prison?

Some instances of UI fraud are extreme and involve large sums of money, extensive deception, fraud, or both. When this occurs, the state often decides that financial penalties are not enough, and the individual may go to prison if found guilty of fraud.

Often, the individuals who serve prison time for UI fraud are those who committed multiple offenses or stole a lot of money from the state. Some people have run extensive schemes resulting in the disappearance of large amounts of cash, and when the stakes are higher, the penalties are also more involved.

Many wonder how long of a prison sentence they may face. However, the length of time that individuals may serve depends on the laws of the state and the judge’s decision. Generally, prison time can be from 1-5 years, but the sentence could be longer or shorter, depending on the circumstances of the case.

What Are Unemployment Penalty Weeks?

Penalty weeks are the benefits weeks that individuals may qualify for in the future, but the UI department will not pay because of misdeeds. For example, if the department overpays a person and discovers evidence of that overpayment, the person must pay back the sum they collected over weeks. We call these weeks “penalty weeks” because they are technically part of the person’s benefits package, but the reverse occurs instead of the state paying the person.

Are People Fined When They Commit Unemployment Fraud?

One of the most common outcomes when people commit unemployment fraud, is the state fines them.

When the state labor department finds out that the individual intentionally committed UI fraud, they may also face a criminal case, and the state may prosecute them. In this case, the person will go to criminal court, and a judge will decide if they are guilty.

Often, if the judge finds the crime grave but not worthy of a prison sentence, the judge will serve a fine or a series of fines. Notably, the state collects a monetary fine in addition to the sum the person must pay to the court.

The severity of the fine and the penalties rely on the judge’s decision. For example, a person found overwhelmingly guilty of knowingly attempting to extort money from the state unemployment department will carry a much tougher sentence than someone unaware of what they were doing and was only responsible for taking a small sum.

How Does the Unemployment Department Catch Offenders?

The unemployment department identifies cases of fraud in a variety of ways, including:

Referrals from Claim Centers
New hire reports from workers
Public tips via mail, phone, or the web
Quality Control Audits
Cross-matching records with government documents
Additional investigative efforts

How Can Individuals Avoid Committing Unemployment Fraud?

When people commit unemployment fraud and fail the resulting unemployment audit, their offenses can have grave implications. The situation is worse when individuals commit unemployment fraud accidentally and are unaware they are stealing money from the state.

Awareness is an effective tool for preventing both conscious unemployment fraud and unemployment offenses that people commit while unaware. Here are some tips regarding how to avoid unemployment offenses.

Even if the person is trying to be helpful, they should not help another individual file a fraudulent insurance claim. If a friend or loved one needs help, they can get it professionally instead of complicating the situation and compromising personal information.

Before making a claim, people need to report all unemployment details. Employment includes all jobs worked for cash, self-employment, commissions, 1099s, and more.

Individuals cannot make false statements to the UI department, especially if it is intended to increase or create more UI benefits.

Report all refusals to work and all other pertinent job search information.

Many people fabricate job searches and the necessary details. Instead, do the research, interview for positions, and continue to search for work at all times.

Always report a work separation. For example, a short semester break for a teacher or a brief seasonal break. Work separations can quickly grow complex and depend on the job and details regarding work history, so individuals should speak with a representative if they have questions.

People should never use a name other than their own to file for benefits, or any other information, such as a social security or license number, that is not theirs.

Individuals must remember to report all reimbursements; for example, Worker’s Compensation payments.

Workers must tell the UI department if they are unable to work (for example, sick, injured, or living overseas) or incapable of working.

What Can Individuals Do If They Unknowingly Commit Unemployment Fraud?

Sometimes, people commit unemployment fraud by accident. When this occurs, the person may not harbor bad intentions, but the state must treat the case seriously.

The first thing that the person can do to show that their actions were unintentional and begin to draw themselves level again is to pay the money back. The person must pay back all of the fraudulent benefits in this case, and the sooner, the better. Sometimes, penalties make the payments higher than they were initially, but that is part of the consequences that people face. For example, some payments increase by 50% of the initial sum, forcing people to pay the money back more slowly if they cannot afford it.

Individuals must also accept that even if they did not intend to take money unlawfully, their mistake might cost them future benefits. Additionally, when the monetary amount is too high for people to pay back, the state may increase the fines or add prison time to the penalty. However, if the person accidentally took a small amount of money and paid it back immediately, the chances of them going to prison or paying extreme fines is relatively low.

When individuals realize that they collected wrongful benefits, they should:

Immediately tell the state’s labor department that they made a mistake
Immediately pay back the funds
Ask if there will be other penalties and what else they can do to rectify the situation

Some people think that the short times and small sums will go unnoticed if they collect 2-3 extra months of benefits, for example, at $500 per month.

However, it is very rare for UI fraud to slip through the cracks and go unnoticed. Instead, most departments catch offenders quickly because their actions or payments trigger “red flags” in the system, and then department representatives aggressively follow up on the suspicious activity.

The policies governing unemployment insurance fraud vary by state, and everyone should be aware that unemployment fraud is a serious offense. However, this article and these stern warnings should not dissuade people from collecting UI benefits. The system works when individuals apply for and collect benefits fairly and abide by all the rules. State unemployment departments are there for a reason: to help people pay their bills, support their families, and survive while earnestly trying to find work. When individuals complete the process faithfully and honestly, fraud should not enter the picture.

Whom Should People Contact if they Commit Unemployment Fraud?

At Nakase Wade, our business lawyers and corporate attorneys are well-versed in California’s unemployment laws. We understand that while some people choose to break the law, others commit unemployment fraud accidentally.

Our goal is to protect our clients and ensure they can move on from adversity. In addition, by helping businesses and clients work within the parameters of the law, we ensure that California’s state unemployment office and other state departments continue to run smoothly.

Sometimes, individuals make mistakes and fail their unemployment audits. When this happens, they are usually worried about what will happen. Having a skilled lawyer to help answer questions, devise strategies, and help them move forward is a step in the right direction.

Contact Nakase Wade for a free consultation today. Whatever the problem is, we will help you move forward, one step at a time.

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