EDD Audit: FAQs Answered

Why Are Payroll Tax Audits Important?

Payroll tax audits help to ensure that the company:

• Acts in accordance with the CUIC
• Classifies workers rightfully
• Reports payments to workers properly
• Protects employees’ rights to obtain benefits

How Long Do EDD Audits Take?

Typically, EDD Audits take three to nine months, but these actions vary based on the nature of the company and its payroll records.

EDD audits usually cover twelve recent payroll periods or quarters. However, if the EDD learns that the California company has employees who did not provide 1099s, the EDD can broaden the audit so that it lasts up to eight years.

Therefore, most companies should expect the audit to cover three years of business operations and begin with the inspection of records for a “test” year, typically the most recent calendar year.

What is an EDD Audit Entrance Interview?

Auditors hold interviews with the head of the company or a representative before the audit occurs. The purpose of the interview is to explain why the audit occurs and what the taxpayer and company should expect from the EDD audit.

During the interview, the auditor will also collect broad information about the company, including its organization and operation. The auditor will also ask about accounting records and answer the company’s questions regarding the impending audit.

How Important is Company Record Keeping During an Audit?

Some companies’ payroll arrangements are straightforward and feature a check register and employees’ payment records. However, some systems are more complex and feature double-entry systems.

Regardless of the system they use, companies in California must keep accurate payment records of all employees, including those who:

• Are independent contractors
• Are currently employed
• Have been fired
• Have taken a leave of absence

As long as the payment system satisfies EDD requirements and suits the company, the company should pass through the audit successfully.

What Do EDD Audits Consist Of?

EDD auditors focus on books, records, and transcripts to ensure that California companies act by financial guidelines. Among other things, auditors will:

• Check the accuracy of company ownership and business structure (sole proprietorship, corporation, etc.).

• Ensure that all employees are properly classified

• Go over any dubious payments with the employer, such as payments for personal assistance and services

• Determine if employees are independent contractors or full-time workers

During complete audits, auditors:

• Test that employees’ gross and taxed pay is reported accurately

• Test that employers accurately reported income tax and withheld the correct amounts when paying workers

How Should Companies Supply Business Records to Auditors?

Both businesses and auditors want to speed up the audit process. To do so, companies should ensure that all their records are available to EDD auditors. When notified that they will be audited, many companies ask advisors and other professionals to help them prepare. Some companies find contacting an experienced business attorney helpful when they learn an audit will occur.

It is also helpful for companies to know that the EDD makes their audit information available to the IRS through an exchange agreement.

How be Long Will Company Records Available to Auditors For?

Auditors start by examining the records and files of one “test” year. This year is usually the calendar’s most recent period of 12 months. When the analysis of the test year yields discrepancies, the audit is sometimes broadened.

What Records Must Companies Supply to Auditors?

California businesses must make the following records available to the EDD:

• Canceled checks
• Check registers
• Bank statements
• Check stubs
• Ledgers and journals
• Yearly finance statements
• Records of cash payments
• Business licenses
• Tax returns
• Payroll records
• W-4s
• State tax reports

EDD auditors may also request additional materials depending on the company and their business dealings and the results found during the audit of the test year. When companies have questions about requested materials, they should ask a skilled business lawyer.

What is an EDD Exit Interview?

As the audit closes, the EDD auditor requests an exit interview. This interview, taken on the phone or in person, typically involves a discussion of the following:

• The EDD auditor’s findings
• Disputed issues between the auditor and the company
• Other relevant information

If the business and the auditor cannot agree on any given issue, the taxpayer can request to meet with the auditor’s supervisor.

What Typically Results From an EDD Audit?

Businesses that undergo EDD audits usually see similar results. These results vary based on the nature of the company’s records and the auditor’s findings. Audits generally close with the following:

• An underpayment for the company
• An overpayment for the company
• An audit registering no change
• Both an overpayment and an underpayment

Depending on the result, the company may have to pay or receive a credit from the auditor.

What Happens When Companies Seek to Appeal an EDD Audit?

When companies seek to appeal, the auditor first sends them information about their appeal rights. Then, they may file a petition for reappraisal with a third party before a judge.

Contact Nakase Wade for Questions About EDD Audits

When companies first hear that an audit is on the horizon, they often do not know what to expect and possess many questions.

At Nakase Wade, our California business attorneys and corporate lawyers will answer your questions about the impending audit and help your company get through the process easily and successfully. Contact our legal team for a free consultation today.