A Look at Employment Tax and What to Expect from an EDD Audit

EDD Audit

The California Employment Development Department is in charge of performing audits on businesses regarding questionable payroll tax practices. These investigations typically occur when employers have incorrectly reclassified independent contractors or have fallen behind on employee payroll tax deposits. Let’s take a look at what to expect from an EDD audit, and how to go about the EDD audit appeal process.

What is the EDD? Employment Development Department

What is the EDD? Employment Development Department

The EDD is a California government sub-body with the acronym standing for the “Employment Development Department.” The EDD is a part of the “Labor and Workforce Development Agency,” in the executive branch of the State of California. But what is the EDD and what are their responsibilities? The department offers an expansive variety of services and programs to Californians under the Job Service, Unemployment Insurance, State Disability Insurance, Workforce Investment, and Labor Market Information programs. The CA EDD controls the audit and collection of payroll and California employer taxes, while keeping track of employment records for over 18 million Californians in the workforce. Find more information about the EDD here.

The Tax Branch of the EDD is in charge of administering the collection, accounting, and auditing the entirety of California’s payroll tax system. According to the EDD, more than $70 billion in payroll taxes are collected each year. The Policy, Accountability, and Compliance Branch controls audits, investigations, surveys, evaluations, and reviews of entities; usually regarding federal and state regulations. The Audit and Evaluation Division has the role of deciding which entities should be audited, and to what extent. Held with a more serious regard, the Investigation Division is charged with determining if fraud or embezzlement against the EDD’s statutory and regulatory requirements has been committed.

What to expect from an EDD Audit as a business owner

Have you been audited by the EDD? While it can be stressful for the EDD to request an audit, don’t fret—a law firm specializing in tax matters can help make the process painless. There are two audit classifications. The first is a verification audit. These are randomly assigned to businesses based on payroll size, number of workers, geographic location, or industry type. Past tax or payroll problem history will not have any effect on whether your business receives a verification audit or not. A request audit is much more serious than a verification audit, however. Usually, the EDD will have information from investigators or employees, (past or present) which will trigger the request audit process. In this case, you will receive an audit notice, an EDD pre-audit questionnaire, and a period-specific records request. Check out this basic information sheet on the EDD employment tax audit process here.

Once you’ve been made aware of your audit, there are steps you can take to minimize possible damage and put your business in a secure position.

Legal tip: These steps can also be performed to prevent a request audit in the first place.

  1. Make sure your quarterly employment tax returns are filed before impending due dates. View those due dates here. This simple step should always be carried out, as it negates the risk of unnecessary tax liabilities.
  2. Review your independent contractor agreements. It is most common for EDD audits to target businesses for using independent contractors in employer-employee relationships.
  3. Ensure that your written agreement does not prohibit your contractor from working with other entities. Requiring attendance at company-centric meetings, time-sheet usage, or specific working times, should also not be present in a contractor agreement.
  4. Obtain documentation proving that your contractors own and operate their own separate businessesExamples of this documentation include business cards, invoices, business licenses, or a Form W-9.
  5. Keep detailed records of cash outflows—if you fail to provide appropriate reasoning for cash payments to an individual, the EDD will assess payroll taxes on that cash outflow.

After meeting with the EDD auditor, you will be given an opportunity to review the findings and decide if you will accept them or appeal. If you had proper EDD audit representation, you will likely be satisfied with the findings and close the case. However, you can begin an EDD audit appeal process if the need is determined.

EDD Audit Appeal Process

If you are dissatisfied with your audit results, you may petition for reassessment with the California Unemployment Insurance Appeals Board, an independent third party. A notice of assessment can contain different levels of penalties that you may wish to challenge along with the primary deficiency. Simply send a letter to the CUIAB with your notice of assessment results, requesting a hearing. If you choose to use EDD audit representation such as an EDD audit attorney, they will file a formally-structured petition that lays out your situation and defenses. If you do it yourself, keep in mind that letters are preferred over an e-mail. If you file this appeal petition, the EDD will not be able to collect from the initial assessment until the appeal is reviewed. Interest will continue to accrue on the unpaid portions of the initial assessment, however.

After filing your appeal petition, you may wish to elect a prehearing settlement. Simply submit a settlement proposal with the EDD, and you will receive instructions on attempting to resolve the appeal without a formal hearing in front of an administrative law judge. If you are not content with this outcome, you can request a full hearing with an administrative law judge. This is typically the last available measure in appealing your CA EDD audit results.

Get Help from an EDD Audit Attorney

Businesses affected by an EDD audit may have to pay past-due payroll taxes and interest, as well as penalties for failure to file payroll tax returns, failure to pay tax and failure to deposit payroll taxes. This can add up to hundreds of thousands of dollars in potential liability. Contact us to learn more about our services, and how we can help you through the EDD audit process.

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