Receiving a notice from the California Employment Development Department (EDD) can be stressful and worrisome. What did you do wrong with your payroll filing? Were the issues actual mistakes, or did fraud occur somewhere down the line? You might not be able to get the answers you want immediately, but you should consult an EDD audit attorney to discuss the process and ensure you are represented by an experienced firm.
Consulting with an experienced EDD audit lawyer can benefit your company in two ways: help to limit the penalties placed on your business and prevent the auditor from reviewing your documents unchecked. An attorney will fight to reduce or eliminate penalties while also making sure the auditor does not go through your documents without being questioned.
The EDD audits employers because its primary responsibilities are to administer the state payroll tax laws and collect payroll taxes from all of the employers in California. These taxes include two that are paid directly by California employers and two that are collected from employees and then paid by employers on behalf of their employees. The four taxes include the following:
As you can imagine, an audit conducted by the EDD is done in order to determine whether or not a company has paid the correct amount of taxes according to California tax law. The audit will review the direct liability of the employer and if it has withheld the proper amount of taxes from its employees.
An EDD audit can be triggered for any of the following reasons:
The EDD has two types of audits: the verification audit and the request audit. The verification audit is much less stressful than the request audit. If your company has been sent notice of a verification audit it simply means that the company was randomly selected for this audit and there is no assumption of wrongdoing. The selection guidelines for a verification audit include the following:
A request audit is the more serious of the two audits conducted by the EDD. When a request audit is initiated it means that there has been an assumption of wrongdoing by your company. The EDD has information triggering the audit that was obtained by an investigator or provided by a former employee.
When a company is targeted for an EDD audit, the EDD will send a package that includes the following:
The minimum request for documents by the auditor will ask for the following items:
Records required for verification of payroll include the following federal employment tax reports:
State employment tax reports required for verification of payroll include:
The package might also include a request by the auditor to extend the EDD audit statute of limitations period, which is typically for a period of three years. It is in your best interest to show all of these documents to your EDD audit attorney as soon as possible. The EDD likely won’t notify your attorney with copies of these documents. Your tax attorney will also need to sign the EDD Power of Attorney.
Once you have been notified of an EDD employment tax audit, you should begin preparing immediately. The auditor will want to receive the requested documents as soon as possible so they can begin the audit without much delay. You should do the following in preparation for an EDD audit:
EDD auditors will be looking for four issues during the EDD audit process, including the following:
After the notice of an audit is sent, an entrance interview will be scheduled. At the entrance interview, the auditor will meet with you and your lawyer. This meeting happens before any review of financial documents occurs. The auditor will explain the reason for the audit, explain the process, obtain information about the business and its records, and answer any questions you have.
Once the entrance interview is complete the auditor will then begin the actual audit of your company’s records. The auditor might require additional clarifications from you regarding tracking payroll, reporting payroll, classifying workers, and employee records that document how misconduct or termination are handled.
The EDD auditor will attempt to verify the following during the audit:
It’s important to note that the information gleaned by the EDD in the audit will be shared with the IRS due to an exchange agreement. The IRS can then use the shared information in its own tax program.
After the auditor has all of the documents and information needed, they will issue a proposed notice of assessment (PNA). You will be able to review the PNA and request changes made to it, however, the auditor is likely to keep the PNA as-is and then issue a notice of assessment (NA).
This is a difficult question to answer because the audit process doesn’t always play out the same with each business being audited. The length of the audit depends on your level of cooperation, how quickly you submit the requested documents to the auditor, and your ability to find the information the auditor needs. But, for the most part, the audit should not last longer than six months to complete.
Once the audit has been completed, the auditor will discuss the findings of the audit with you and your lawyer. An EDD audit will have one of four outcomes, including the following:
The Employer’s Bill of Rights provides you the opportunity to appeal the decision of an EDD audit. You can file a petition with the California Unemployment Insurance Appeals
Board for reassessment of the audit findings. A hearing will then be scheduled with an Administrative Law Judge.
Once an audit is finalized and the appeals process is complete, the EDD will demand that all penalties, interest, back taxes, and fees are paid within 30 days. The EDD will assess a 10-percent penalty if the amount cannot be paid in full within 30 days. In most audits, the penalties will be more than the taxes owed by the business.
You have the option to propose a settlement with the EDD, but it is recommended you do so with the help of a tax attorney. A settlement should be a significant offer so that the EDD settlement officer considers accepting it. The officer’s job is to consider the consequences of litigation and how the case can avoid going to court. If your settlement offer is accepted, you will be able to skip the appeals process. Acceptance of the settlement does not mean you are free of liability in the case either, so be prepared to face some penalties from the EDD.
You are not required to have an attorney represent you when being audited by the EDD, but with any tax issue, it is in your best interest to have legal representation. A tax attorney from Abajian Law will be able to review the case, help you provide the correct documents, and ensure that your rights are protected throughout the EDD tax audit process. Call our office at 818-396-5059 today to schedule an appointment with an experienced tax attorney.