EDD Audits California

What Triggers an EDD Audit?

The EDD often audits a company if a worker a company classified as an independent contractor applies for unemployment benefits.  The EDD audit aims to find inconsistencies and determine if the employer has fully paid the owed payroll taxes under California law.

What Can Businesses Do to Prevent EDD Audits?

California business owners must be vigilant when it comes to their employment routines. They must ensure that every worker follows the state’s rules and regulations and that the company pays and classifies each worker correctly. In addition, companies should run checks on their financial records, payment practices, and tax payments routinely. While some of these activities may seem overwrought and time-consuming, when trying to run a successful business, they can prevent an audit from occurring.

Companies should ask themselves: are we classifying employees correctly? Are we paying the proper amount of payroll tax? These questions will help keep the business running smoothly.

When an audit is impending, we suggest that all companies contact an experienced EDD attorney for counsel. Before the EDD begins asking questions and requesting records, it makes sense to have a professional lawyer examine the company’s documents and ensure that there will be no further problems.

What Taxes Do Companies Pay to the EDD?

One of California’s largest state departments, the EDD, has many important responsibilities that all business owners should be aware of. The EDD’s main focus is to ensure that companies in the state correctly follow payroll tax regulations.

Payroll taxes support public services in California, allowing the state to run in a productive, organized, and systematic manner. From maintaining public schools to building roads to supporting public parks, payroll taxes are an important part of the state’s finances and infrastructure. These taxes even help fund health services in California.

Based on the purposes of these import taxes, the EDD is tenacious when confronting businesses that may not pay the correct share of taxes. The EDD’s main purpose is to make sure that businesses are up to date with their payroll taxes, and the agency collects and administrates the following tax categories:

• Personal Income Tax (PIT)

Personal income tax is the tax that workers pay on their incomes. For example, if an employee makes X amount per month, they must pay the correct amount in taxes each month based on the amount they collect from their employer.

• Unemployment Insurance (UI)

California’s UI benefits program includes tax employers must pay. When a company pays its UI taxes, they fund the state’s UI program, meaning that they help support people who are out of work and searching for a job. However, when a company does not pay this tax or does not pay the correct amount, it may be in trouble with the EDD and the IRS.

• State Disability Insurance (SDI)

Workers must pay SDI out of their paychecks. This tax covers disability benefits in the state for workers injured on the job. For example, a worker might pay into SDI for years but then fall at work and be unable to perform their duties. At this point, it becomes clear why they have been paying SDI since this tax supports them during the difficult time.

• Employment Training Tax (ETT)

Companies, not workers, pay the ETT tax. This tax funds a training program for employees in certain fields in California.

All of these taxes, whether paid by employees or employers, are mandatory. Therefore, when companies ignore them or do not pay them correctly, the EDD has just cause to investigate and audit the business.

When Do EDD Benefit Audits Occur?

The Employment Development Department of California (EDD) focuses much of its efforts on payroll taxes. The importance of these taxes to the state cannot be disputed since California’s budget relies on taxes for funding. The EDD, then, takes its mission very seriously and aims to collect the right amount of taxes from all companies.

Specifically, the EDD focuses on enforcing the collection of payroll taxes and auditing companies that the agency suspects are not paying their fair share. In addition, the EDD dutifully oversees California’s companies and their tax payments to keep the entire state running smoothly.

Many business owners are unsure exactly what areas state auditors look at. Here are the main categories that the EDD’s auditors focus on:

What Are Chance Audits?

Many companies do not understand what conditions create an EDD benefit audit and see them as “random.” In some cases, they are correct. Sometimes, the EDD randomly selects a taxpayer and then begins an audit. This “surprise” tactic means companies committing fraud do not have time to hide or prevent illicit acts.

This strategy also means that the chances of your company facing a chance EDD benefit audit are not very high. However, it is best to be prepared at all times and ensure that all payment policies and on the level and that the company follows all unemployment benefit regulations and rules for independent contractors.

In short, the EDD conducts some audits based on selection by chance. This means that companies have only a slight chance of being selected, so they should be on the alert. However, random selections mean that the EDD can ostensibly choose any company to audit at any given time.

Why Does the EDD Have a Task Force?

A task force is a special group that comes together for a uniform purpose. For example, the EDD commission uses its task force to search out problematic employer practices. If an EDD task force notices inconsistent company payments to employees, they might initiate an audit. If the EDD task force notices some questionable benefits payments, they might also trigger an audit.

When the EDD initiates the audit, they send their task force agents to the company to interview workers regarding the company’s actions and their role in the business. Then, based on the employees’ responses and the company’s etiquette, the EDD will decide how to proceed with the audit.

When the EDD activates its task force, the agency does so to check on a company’s inconsistencies. Often, the task force recommends that the entire company be audited.

What is a Worker’s Compensation Insurance Audit?

In some cases, the insurance department reviews workers’ compensation payments made by the company. If a problem is evident, the next step is that the EDD notifies the company regarding a forthcoming audit.

In this case, the EDD benefit audit’s purpose is to reorganize payments and reclassify workers into their rightful roles so they receive just payment.

What Are Obstructed Claims Audits?

Independent contract workers are not able to collect UI benefits from their contractors. Therefore, a red flag goes up if the EDD sees that a contractor files for UI benefits. The EDD spots this evidence of a possible misclassification; sometimes, an audit is forthcoming.

This category is also known as contractor unemployment filing.

What Should California Companies Expect from an EDD Audit?

Many companies panic when they find out that the EDD is planning to audit them. However, when companies are prepared and well-informed, they do not need to panic. When the EDD first contacts a company, we recommend that the business retain legal counsel to properly deal with the impending audit.

Let’s look at the steps that the EDD initiates as a company audit begins.

Initially, the company receives an “audit letter.” This letter outlines the specific documents and information the EDD seeks from the business. What does the EDD commonly ask for?

• A general employment questionnaire form
• Worker register forms
• Payroll register forms
• General ledger register forms
• Wage information for specific timelines

Following the letter, the EDD expects the company to respond within ten days.

Next, the action of the audit begins. At this point, the EDD auditor asks for more information. For example, the auditor may ask the business to clarify its position and actions in terms of:

• Paying payroll taxes
• Tracking and reporting payroll taxes
• Maintaining employee records
• Classifying workers
• Terminating workers

Businesses should expect a significant amount of back-and-forth with the auditor at this juncture. The EDD auditor seeks a clear picture of the companies’ payments to tax agencies, workers, and more. So expect requests for more details, more documents, and so on.

Next, the auditor makes a crucial decision regarding the company’s behavior and methods. Finally, the EDD sends the proposed notice of assessment (PNA) to the business, and the owner can review it.

If the company’s owner does not agree with the auditor’s findings and the statements in the PNA, it is their turn to ask for more information. The business owner can also provide more documentation to show the EDD that their findings are inaccurate.

However, at this point, the EDD auditor has typically done a careful review of the company and its tax policies and history, and the auditor usually defends their decision. As a result, it is rare that EDD auditors change their minds, back down, or come to question their own decisions at this point.

The next step occurs when the auditor makes a notice of assessment (NA) and shares it with the company.

Lastly, the company has one more chance to defend itself. The business owner can appeal with California’s Unemployment Insurance Appeals Board. However, the timeline for this appeal is narrow, and it is easy to miss the deadline and negate this last chance.

Many business owners wonder what the audit means if the EDD finds that they have not paid payroll taxes correctly. The company often must make payments to the EDD to replace the missing funds. The company must pay the EDD promptly, or the EDD will enact more costly penalties, including liens and interest. Sometimes, the company risks its overall liability.

Commonly Asked EDD Audit Questions

What Happens When The EDD audits Businesses?

When the EDD audits a company, the company may face the following:

• Penalties
• Interest on owed
• Fines based on unpaid taxes, unreported or wrongfully classified workers, and more

While these penalties are serious, an EDD audit does not always result in fines. However, it is prudent to contact an experienced attorney for help with an ED audit.

How Long Do EED Audits Last For?

The payroll tax audit process takes six months when completed effectively, but it is wrong to think that your audit will be over in exactly six months. Audit times vary based on the company’s sense of cooperation, offenses or clean record, and the time it takes to locate necessary information. We have seen companies face audits lasting over a year when they fail to adhere to the EDD’s requests and rules. The general rule is to complete every request honestly and promptly and hopes for the best.

How far back do EDD Audits Extend?

Typically, the EDD begins the audit within three years, ending with the most recent business quarter. However, if the company fails to file a return for a period or the EDD discovers that fraud occurred, it can lengthen its audit period up to eight years. In some cases, the EDD can extend the audit period as far as they want.

Does the EDD Communicate With the IRS?

Yes, the EDD works in conjunction with the IRS, as well as this list of agencies and entities:

• The State of California Franchise Tax Board
• The California State Lottery
• The California State Controller

Per usual, the goal of the EDD is to pinpoint whether the company owes debts to the state’s UI program, SDI Program, or any other person or entity.

Does The EDD Audit All Companies?

The EDD does not have the time or ability to audit every company, nor does it need to. When the EDD evaluates a company, it does so based on its ability to pay its employees properly, pay their taxes, and classify its workers correctly. Failure to abide by these rules leads to an eventual audit, precipitated by an audit notice sent by the EDD.

Can Businesses choose to Ignore an EDD Audit?

Ignoring an EDD audit is not a good idea for many reasons. First, penalties will soon follow, and the EDD will not forget about the audit request or the documents they send. Ignoring an audit in California results in penalties such as fines and more. Taxpayers who care about their companies should never ignore an audit. The company should contact a skilled business attorney if it is concerned about the impending audit.

For Help with an EDD Audit, Contact Nakase Wade

Nakase Wade Can Help

At Nakase Wade, we understand how difficult it is to learn that your company is being audited. Our legal team will quickly help you figure out the best way to deal with the audit so that the company’s operations can continue.

Unfortunately, EDD audits can last a few months to a few years. During the audit, some businesses make mistakes or try to rush the process, which often worsens things. As a result, business owners often grow stressed and confused, sometimes failing to provide information by accident.

At Nakase Wade, our EDD lawyers have helped numerous California businesses make it through the auditing process. We understand what the EDD wants, and we know the lengths they will go to to obtain information. The EDD is an aggressive state agency, but our attorneys know how to deal with EDD auditors.

Our goal in advising our clients is to help to lessen their anxiety. We will clearly and calmly explain the reasons for California’s EDD audits and tell you what to expect. We will also help your company collect all the necessary documents for a successful audit, so you can move smoothly through the process and continue running a successful business.

When taxpayers deal with EDD auditors without the help of an attorney, they often struggle to understand the terms, concepts, and different phases of the audit while continuing to do business successfully. Our skilled, experienced attorneys will help your company through the audit, so you can continue to succeed.