All You Need To Know About The EDD Audit Process

EDD Audit

If you happen to run a business in the state of California, you are likely to be familiar with the Employment Development Department (EDD). This taxing agency is responsible for administering the collection, accounting and enforcement processes of the state’s basic employment taxes.

What is an EDD Audit?

The biggest take-away here is that when it comes to the EDD and EDD tax audits, the auditor’s assumption from the get-go is that you are out of compliance; therefore, his/her ultimate goal is to uncover wrong doings and then collect fines, interest, tax penalties, and back taxes from you.

It is generally agreed upon that the EDD is far more aggressive when it conducts audits than the IRS. Therefore, if you are a business owner the last thing you want to be is complacent when it comes to your employment practices. Specifically, in the long run, it pays to routinely reevaluate how you classify your workers and determine if you are indeed reporting and paying the correct amounts of payroll taxes.

Throughout the state of California there are thirty-one employment tax district offices where field operations, including audits, are conducted. The EDD is the third largest taxing agency and increasingly it works in cooperation with the IRS. Because of its broad powers to investigate and the length of time it could take to undergo an audit, most who find themselves under investigation will find it prudent to hire an EDD lawyer to handle the process and ensure the best and most efficient outcome.

Which Payroll Taxes Are Administered By The EDD?

The Employment Development Department (EDD) is one of the largest California state departments and is responsible for administering the payroll tax regulations for California businesses and individuals. The income derived from payroll taxes goes to a wide array of public services that enable the state to run in an efficient and orderly manner. Areas that directly benefit include schools, public parks, roads, and health and human resources. Therefore, there remains little wonder as to why the EDD is relentless in ensuring that California businesses and individuals are paying their proper share of taxes. Administration and collection of these payroll taxes include the following:

Unemployment Insurance (UI)

An employer-paid tax intended to cover the costs of California’s unemployment benefits program.

State Disability Insurance (SDI)

An employee-paid tax that covers the cost of California disability benefits for employees who get injured or fall ill.

Employment Training Tax (ETT)

An employer-paid tax that funds a state training program for workers in certain industries.

Personal Income Tax (PIT)

An employee-paid tax on earned income.

What Triggers an EDD Benefit Audit?

Payroll tax revenue means serious business for the EDD and the state of California. As you can imagine, the state budget would fall apart without the right funding for it, and the negative impact would manifest to so many areas. Therefore, the EDD’s number one priority is to collect these payroll taxes, as well as enforce collection and conduct payroll tax audits of individual businesses. Through these processes, the following areas are examined by the state auditor:

Random Audits

The EDD conducts some of its audits based on a random selection of employers. While the chance of this happening to you is low, there is always the possibility of being part of a random audit.

Contractor Unemployment Filing (Obstructed Claims)

An independent contractor is not eligible for unemployment benefits from their contractor. So if the contractor happens to file for it down the road, it will automatically cause a red flag to go up, alerting the EDD to possible misclassification and will likely trigger an audit.

Worker’s Compensation Insurance/CA Dept. of Insurance

Audits of your worker’s compensation or investigations by the CA Department of insurance can lead the EDD to follow suit and conduct an audit of their own to reclassify workers or payments.

EDD Task Force

Sometimes the EDD will send inspectors to various employers to interview the employees about their current employment and the employer’s practices. The EDD does this to see if there are any inconsistencies that it may want to audit.

What to Expect with an EDD Audit

The first step that commences an EDD tax audit is the receipt of an audit letter which will specifically list required information from the business owner. Some common requests for records could include:

  • General employment questionnaire
  • Payroll registers
  • General ledger registers
  • Wage information for particular time frames
  • Employee registers

Once the audit letter goes out, responses are typically expected within ten days of the notice.

The next step is the actual audit. During this time the auditor may require further clarifications in areas such as characterization of workers, payroll tax including the proper tracking and reporting of it, and employee records and details for termination or misconduct. During this time, there can be a lot of back and forth with follow-ups and requests for more details.

After that, the auditor will at some point make a decision on his/her findings and compile a proposed notice of assessment (PNA), which is reviewed by the business owner. If the business owner does not agree with the PNA, more information can be provided to attempt a change. Ultimately, the auditor will likely stand firm and the PNA will turn into a notice of assessment (NA) which is most often the case.

The last step in the EDD audit process is the appeal with the California Unemployment Insurance Appeals Board and can be brought forth if the business owner does not accept the NA. The time frame to commence this action is tight and many miss the deadline which then makes payments to the agency inevitable. Failure to make timely payments could include severe penalties and interest and in some cases liens and personal liability risks.

Representation for an EDD Audit

As mentioned earlier, an EDD audit is rather time-consuming and can reasonably be expected to last from several months to two years before all is said and done. During the process, many mishaps could occur that often stem from simple semantic confusions or subjective interpretations. In order to mitigate these situations, your safest path is to hire a tax attorney who understands EDD procedures.

Our EDD audit attorneys at Dallo Law Group have a strong knowledge of California employment tax laws as well as the information needed and the details required when it comes to audits. We can handle the process for you right at the start upon the receipt of your notice or at a later stage such as during the appeal. Your representation and defense will be strategized around the unique particulars that make up your circumstances.

Receiving a notice from the EDD can have you feeling helpless and stressed, but in reality, you do not need to go through this difficult situation alone. Contact Dallo Law Group to help you navigate through the audit process and avoid unknown pitfalls that could expose you to severe financial hardships and personal liability.

EDD Audit FAQs

Following are some brief answers to common questions.

What happens if I get audited by EDD?
If you get an EDD audit, you could be liable to face penalties and interest on taxes that you owe. These sorts of fines include a percentage of unpaid taxes, set dollar amounts for each case of unreported employees or independent contractors, among others.

How long does an EDD audit take?
EDD audits should not take any longer than six months in most cases.

How do I avoid an EDD audit?
There are several ways you can avoid an EDD audit and among them they include proper classifications of employees, pay wages and file taxes accurately, be fair with workers, and do not be dishonest with the government. However, sometimes they are simply unavoidable due to some audits generated by random selection.

How far back does the EDD audit?
Generally, the EDD will start with a 3 year period that ends with a recent quarter. If you did not file a payroll return for a period or the EDD asserts fraud, then this period can be extended up to 8 years or indefinitely.

Does the EDD check with the IRS?
The EDD works with the IRS, the State of California Franchise Tax Board, the California State Lottery, and the California State Controller to collect any debt you owe from an Unemployment Insurance (UI) or State Disability Insurance (SDI) benefit overpayment.