One of the most common questions I receive is how can California business owners and taxpayers appeal an EDD audit assessment. It’s a great question and one that should be addressed with an experienced tax attorney.
Before I share the steps you can take to appeal the assessment, let me briefly explain the term itself. An EDD audit generally 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.
If you’ve ever paid an independent contractor, you could be facing this tax audit. And if you are being investigated by the EDD, it’s crucial you pay attention because it could result in the EDD personally assessing the individuals involved in the business for “unpaid” payroll taxes because they believe these workers are actually employees.
If you are one of the many California taxpayers faced with an EDD assessment, here’s what you can do to appeal the situation.
The first step in fighting the EDD is to file a timely petition with the California Unemployment Insurance Appeals Board (CUIAB). Once the final Notice of Assessment (NOA) has been issued, you will receive a notification to file a petition within 30 days. You should send a letter to the CUIAB with reasons as to why you disagree with the assessment, and in the letter, request a hearing. A tax attorney or EDD expert can help you file a more formal petition centered on the legal positions of your appeal. Please note, within 30 days from the mail date of the NOA, you either have to pay in full or file an appeal. Otherwise, penalty 1135 (15%) will be applied to taxes in the assessment. If you made some payments, the penalty will be applied to the remaining balance of taxes.
Whether you’re appealing with the help of an attorney or yourself, make sure you file the EDD appeal in a timely manner, as a late petition could result in your assessment being closed and fees (including interest) immediately assessed. This will affect your business and lead to steep financial losses for you.
Once you file the petition, you have two options:
1. Settle the matter or have a professional assess the issue based on the evidence provided. Going through the Settlement Office is an option to consider if the business owner believes the audit can be solved without the expense incurred from going through a formal hearing by an administrative law judge.
2. File the petition and pay the assessment. This turns your case into a refund proceeding. Fully paying your assessment will allow you to make your case an automatic claim for a refund. In California, it is your right to have your refund matter heard in the Superior Court before going through any other court.
There are advantages and disadvantages to both options. If you’re facing an EDD assessment, the best course of action is to speak with an experienced tax who can help you determine what will work best for you and your business, and who can help you minimize financial losses.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing tax problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.