One of the first things I hear from California business owners and taxpayers who are facing an EDD audit is this:
“I just received an EDD audit questionnaire. How do I fill this out?”
If you find yourself saying this, you’re not alone.
If you’re not familiar with the term, an EDD audit occurs when the California Employment Development Department (EDD) launches an investigation into a business’ state payroll tax records. Generally, the EDD is trying to determine if the business has classified a worker as an independent contractor instead of an employee. If the EDD determines the worker is an employee, it can personally assess the business owner for “unpaid” payroll taxes.
The first step in this investigatory process is when you receive what’s known as an Inquiry Regarding Records notice from the EDD. Within that notice is a list of documents the EDD is requesting that you provide for the audit, including the 2-page Preaudit Questionnaire. You have 14 calendar days from the date in which it was mailed to you to return the questionnaire to the EDD.
It is crucial that you take this questionnaire very seriously because this document is what your EDD auditor uses to begin your audit. However, businesses change over time. EDD audits generally cover three years. Sometimes the questionnaire can be confusing to business owners because the questions may have different answers depending on the tax year.
The questions on an EDD Preaudit Questionnaire are written in a very specific way. They are designed to root out the payroll practices of business owners, and serve as bait for the EDD audit in knowing how to approach the main audit carried out later. As such, you want to be very careful and thoughtful about your responses to the questions.
For example, the Preaudit Questionnaire asks for a description of your business, and whether you operate full-time, year-round or seasonal. It asks how many employees you have and what services they provide. There are questions about what type of bookkeeping/accounting you use, and the employee benefits you provide. These questions themselves may seem harmless. But it’s important to remember that you don’t know exactly what answers they’re looking for, and how it will affect your audit going forward.
As much as you want to cooperate with the EDD, it may be wise to consult with a tax attorney, preferably one who has experience with EDD audits, BEFORE completing the audit questionnaire. Don’t try to navigate the EDD audit process yourself. A few extra steps at the beginning of the audit process can help you significantly in the long run.
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 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.