One of the effects of the Coronavirus (COVID-19) pandemic is that many people have lost their jobs due to business closures and decreased hours. As a result, these individuals will file for unemployment. And with unemployment claims, an increase of California state payroll tax audits (commonly referred to as an EDD audit) will follow.
EDD audits occur when a business has classified a worker as an independent contractor instead of an employee. This means the EDD can personally assess the business owner for “unpaid” payroll taxes because the EDD has determined that they believe these workers are actually employees.
What does unemployment have to do with an EDD audit? Typically, what triggers an EDD audit is an independent contractor file for unemployment. Independent contractors are not eligible for unemployment benefits; so their claim triggers the EDD to look into the business practice. That trigger is what initiates the audit process. And with rising rates of unemployment due to COVID-19, audits are surely to follow.
The EDD audit will include a review of business records for the past three years, specifically records with special interest on documentation about employees and independent contractors. If a worker is reclassified to an employee, the business will be assessed taxes, penalties and interest. Additionally, the EDD can collect from the responsible party.
The statute of limitations for an EDD audit to occur is generally three years. That being said, in some circumstances, the EDD can extend the statute of limitations to eight years when there’s evidence of fraud or faulty tax returns filed. You will know if you’re receiving an EDD audit if you receive a Inquiry of Records or a PreAudit Questionnaire in the mail. Typically, the EDD must issue a Notice of Assessment within three years after the day of the month following the close of the calendar quarter during which the liability occurred.
EDD audits can be confusing, especially when they involve a former employee or independent contractor and you’re not sure what triggers the process. So many businesses will face EDD audits with COVID-19 unemployment claims increasing daily. Don’t try to work with the EDD yourself. The best thing you can do to protect your business is to speak to a tax attorney with experience in EDD audits.
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 the IRS and state tax problems.