Receiving an EDD audit notice can be scary. An EDD audit occurs when the California Employment Development Department (EDD) launches an investigation into a business’ California state payroll tax records to determine if the business has classified a worker as an independent contractor instead of an employee. The EDD can personally assess the business owner for “unpaid” payroll taxes because they believe these workers are actually employees. If you conduct business or hire workers in California, you could be facing this type of tax audit.
If you receive documents from the EDD but did not file a claim, it may indicate someone filed a claim using your name, address, or Social Security number. Report benefits fraud immediately by visiting “Report Fraud” in Ask EDD.
It is very important not to ignore the EDD notice of audit if you receive one. If an EDD audit notice sits in a pile and no one responds to it, the EDD has been known to make a determination based upon the type of industry, the historical payroll of the company or the number of 1099s issued. The EDD will then send out a proposed assessment. If the company does not respond to that notice, contest it, or provide additional documentation by the deadline, then the balance due will eventually be sent to the collections department.
I’ve seen many business owners who ignore (intentionally or unintentionally) the EDD audit notice because they believe they are in the clear because of the statute of limitations. According to Section 1132 of the Unemployment Insurance Code, the statute of limitations for an EDD audit to occur is three years. That being said, in some circumstances, the EDD can extend the statute of limitations to eight years. Typically, the notice must be issued within three years after the day of the month following the close of the calendar quarter during which the liability occurred. Again, do not ignore the EDD audit notice, even if you think you’re beyond the statute of limitations.
The minute you receive the EDD audit notice, the first step you should take is to contact a tax attorney, preferably one who has experience with EDD audits. The attorney should advise you to gather your records and other relevant documents. The most common records the EDD requests during an audit are general employment questionnaires, payroll records, federal income tax returns, bank statements, wage information for particular time frames, and employee registers. Having these documents organized will be a big help in your defense. The more documentation you are able to present in your defense, the easier it will be to get you through the audit process successfully.
If you don’t agree with the proposed assessment the EDD gives you after their audit is complete, your tax attorney can help you appeal the assessment. Whatever you do, do not ignore the assessment or try to negotiate the settlement amount yourself. I’ve seen some very sophisticated business owners and private practitioners react in the wrong ways to the EDD notice. They try to go back to the assessment side and have an agent adjust the audit results. However, they don’t realize that the left-hand doesn’t talk to the right hand at the EDD. The agent on the assessment side may be working with you, while the collection side is still trying to collect the balance due.
California payroll tax audits can be scary, especially for small business owners and taxpayers who have a lot on the line financially. Whatever happens, do not ignore the EDD audit notice and don’t assume you have to handle this burden on your own. Contact a tax attorney who can help you navigate the murky waters of the EDD audit.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
