Getting Audited By The Employment Development Department

At Coggins Law Office, I help employers prepare for EDD audits. With the help of a lawyer, your audit can pass quickly and painlessly.

Among other things, EDD will check for accuracy in:

  • Payroll records
  • Timekeeping records
  • Records related to independent contractors

What Is The EDD?

The Employment Development Department (EDD) is one of the largest state departments in California.

It offers a wide variety of services to millions of Californians under the Job Service, Unemployment Insurance (UI), State Disability Insurance (SDI), Workforce Investment Act and Labor Market Information programs.

As California’s largest tax collection agency, EDD also handles the audit and collection of payroll taxes and maintains employment records for more than 18 million California workers.

EDD provides many important services to millions of Californians, including:

  • Assisting California employers with their labor needs
  • Helping California job seekers obtain employment
  • Administering the federally funded workforce investment programs for adults, dislocated workers and youth
  • Assisting disadvantaged recipients in becoming self-sufficient
  • Helping unemployed and disabled workers through the administration of the UI and SDI programs
  • Supporting state activities and benefit programs by collecting and administering employment-related taxes (UI, SDI, Employment Training Tax, and Personal Income Tax withholding)

Common Reasons for an EDD Employment Tax Audit

The EDD may audit a business for a variety of reasons, but some of the most common include:

  • Failing to file required reports or pay taxes owed. All businesses must file certain information with the EDD, such as quarterly wage reports and annual unemployment tax returns. If a company fails to do so, it may be subject to an audit. Additionally, the agency may initiate an audit to collect the unpaid taxes if a business owes taxes to the EDD.
  • Not maintaining proper records. The EDD may audit a business if it does not maintain adequate records. For example, businesses are required to keep records of their employees’ wages and hours worked, as well as other information related to employment taxes. If the EDD finds that a business does not have proper records, it may assume the business is not paying its required employment taxes and initiate an audit.
  • Misclassifying workers. The EDD may audit a business if it suspects they are misclassifying workers as independent contractors rather than employees. Workers who are misclassified might be entitled to back wages, unemployment benefits, and other benefits they would have been entitled to if they had been properly classified as employees.
  • Fraud. Another reason the EDD may conduct an audit is if it suspects a business is committing fraud, such as by failing to report all of its employees’ wages or by claiming false deductions on its employment tax returns. Special investigators usually conduct these audits, and if the business is found to be committing fraud, it can result in criminal charges.
  • Inability to pay. An inability to pay employment taxes may be another trigger for an EDD audit. This is usually because the company owes a large amount of taxes and has been flagged by the EDD. The audit may be conducted to determine why the business cannot pay its taxes and whether the business is eligible for a payment plan or other relief.

It is important to note that the EDD may also audit businesses randomly, even if there is no specific reason to believe that the business has not complied with employment tax laws. This is to ensure all companies are complying with the law and paying employment taxes correctly.

What to Expect During an EDD Employment Tax Audit

If the EDD is going to audit your business, understanding what to expect can help you prepare and avoid common mistakes. Some things you should know about EDD employment tax audits include:

  • You will be notified in writing. The EDD will notify you in writing that your business is being audited. This notice will include the specific tax periods being audited and the reason for the audit. This can give you an idea of what documents and records the EDD will request during the audit.
  • You will be asked to provide documents and information. The EDD will request that you provide certain documents related to your business’s employment taxes. This may include payroll records, tax returns, and bank statements. The EDD may also request information from your employees, such as W-2 forms or pay stubs.
  • You may be asked to provide a written statement. The EDD may ask you to provide a written statement explaining your business’s employment tax practices. This statement can be used against you in court, so it is important to be careful what you say. You should consult with an attorney before providing any statement to the EDD.
  • You will be given a chance to appeal. If the EDD finds that your business owes taxes, you will be given a chance to appeal the decision. This appeal must be filed within 30 days of the notice of determination. An experienced tax attorney can help you navigate the appeals process and give you the best chance of success.

Getting Help With an EDD Employment Tax Audit

If you are being audited by the EDD, it is important to seek professional help. An experienced tax attorney can help you:

  • Understand the audit process. Because this is likely the first time you are being audited, it is important to have someone on your side who understands the process and can help you navigate it. Curve balls and being unprepared can dramatically increase your tax liability and exposure to criminal charges. Proactively managing the audit process can help minimize these risks.
  • Gather and prepare required documents. The EDD will request a lot of documents during an audit. An experienced tax attorney can help you gather the required documents and prepare them for submission to the EDD. This gives the EDD all the information it needs to make a fair determination using legally acquired information that will not put you at a disadvantage.
  • Represent you during the audit. An experienced tax attorney can represent you during the audit process and can be your advocate with the EDD. This can help to protect your rights and make sure you are treated fairly throughout the process.
  • Negotiate a resolution. If the EDD finds that your business owes taxes, an experienced tax attorney can help you negotiate a resolution. This may include payment of the taxes owed, as well as penalties and interest. An attorney can also help you negotiate an affordable payment plan if necessary.
  • Appeal the EDD’s decision. If you disagree with the EDD’s determination, you have the right to file an appeal. An experienced tax attorney can help you create a lawful appeal without just repeating what was said in your initial defense.

The EDD audit process can be confusing, stressful, and time-consuming. However, an experienced tax attorney can help you navigate the process and give you the best chance of success.

I Will Protect Your Business During an Audit

If you are being audited by the EDD or have reason to believe that you may be audited in the future, it is time to get in touch with Coggins Law. We can help you understand your rights and options and protect your interests throughout the audit process by providing experienced and knowledgeable representation.

As a California tax attorney based in Roseville, I represent clients in state and federal tax law resolution and litigation matters in the Sacramento area and throughout Northern California. Call 916-270-2895 or contact my office by email to arrange a free initial consultation and evaluation of your tax problem.