If you’re a business owner in California and you’re not familiar with the EDD audit, you need to familiarize yourself with the concept. 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.
This is important for business owners because the EDD can personally assess you for “unpaid” payroll taxes because the EDD has determined that they believe these workers are actually employees. And if you’ve ever hired an independent contractor, you could be facing this tax audit.
I’m often asked how long an EDD audit takes. The answer depends on the situation, but the audit process is very similar. The first step of an EDD audit is when you receive an Inquiry Regarding Records notice from the EDD. This means your business has been selected for an audit.
At that point, you’ll need to gather all the necessary documents for the audit, which may include bank and financial statements from the business for a specific time and period. It may also include copies of checks, check registers, ledgers, journals, pay records, 1099s, W-2s, and EDD’s Quarterly Contribution Return and Report of Wages (Forms DE-9 and DE-9C). The questions are written 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. This is why it’s critical to work with an experienced tax attorney with experience with EDD audits.
Once you receive the Notice of Assessment (NOA), you have 30 days to pay the penalty in full or submit a written appeal of the audit. To do this, 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. If you do not submit the appeal within the 30 days, a 15% penalty will be applied to taxes in the assessment.
When the audit is finished, you will receive a notice from the EDD as to whether they responded in your favor or not. You may still receive a bill from the EDD with taxes and penalties owed, especially if it’s determined that you there was underpayment of payroll taxes.
The statute of limitations for an EDD audit
I’m often asked how long the EDD has to audit a business. Generally, a Notice of Assessment must be issued within three years after the day of the month following the close of the calendar quarter during which the liability occurred.
It’s always wise to consult with a tax attorney, preferably one who has experience with EDD audits, before completing the EDD audit questionnaire or appealing the audit decision. 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.