What Happens When You Get Audited EDD

Gain clarity on the EDD audit process with our comprehensive guide, detailing what happens when you get audited by the Employment Development Department, including steps to prepare and respond effectively. Navigate the complexities of an EDD audit smoothly with our expert insights, exploring the implications, documentation requirements, and key strategies to manage the auditing process efficiently and confidently.

By Douglas Wade, Attorney

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Have a quick question? We answered nearly 2000 FAQs.

Table of Contents

1. How do you respond to an EDD Audit?

2. Step-by-step guide on how to respond to an EDD Audit?

3. How can I prove that the self-employed person I hired is not an employee?

4. What are the penalty and fines for an EDD audit?

5. What happens if I disagree with the EDD’s assessment?

How do you respond to an EDD Audit?

If you’re a taxpayer in California who owns a business, you may have recently heard about an EDD audit. Or maybe you’ve already dealt with this tax audit directly.

In case you are unfamiliar with the phrase, an EDD audit is when the California Employment Development Department (EDD) looks into the payroll tax records of a company to see if any employees have been misclassified as independent contractors.

Why does this matter? Since the EDD has decided that they think these workers are genuinely employees, they are able to individually charge the business owner for “unpaid” payroll taxes. Additionally, you can be subject to this tax audit if you have ever employed an independent contractor.

So, an EDD audit notice was just sent to you. How should you proceed?

Making contact with an EDD audit attorney for employers should be your first move. Your lawyer needs to give you advice on organizing your records and other pertinent paperwork. Keeping these records in order will greatly aid your defense.

It will be simpler for you to pass the audit procedure if you can provide more documents during your defense.

What kind of documentation ought I to compile? Which documents should I provide to the EDD?

Payroll records, general employment questionnaires, bank statements, federal income tax returns, wage information for specific time periods, and employee registers are the most frequently requested records by the EDD during an audit. The actual audit starts after these documents are requested, and the EDD could ask for more documents after that.

Step-by-step guide on how to respond to an EDD Audit?

Here is a step-by-step guide on how to respond to an unemployment insurance (UI) audit from the California Employment Development Department (EDD):

Don’t panic. EDD audits are a routine procedure to ensure proper payment of the benefits. Receiving an audit notice doesn’t necessarily mean that you did something wrong.
Read the audit notice carefully. It will explain exactly what information EDD needs from you and also by when. Make sure you understand what they are asking for.
Gather the requested documentation. This may include pay stubs, W-2s, 1099s, separation notices from prior employers, work search logs, etc. Organize everything neatly so it’s very easy for EDD to review.
Respond by the deadline. If you need more time, contact EDD right away to request an extension. But don’t ignore the audit deadline or your benefits may be in a very big jeopardy.
Submit photocopies, not originals. Make copies of all the documents you provide for your records in case anything gets lost.
Include a letter explaining the materials. In order to outline what is enclosed and why it addresses what EDD asked for. This avoids confusion.
Send materials by certified mail. Get the tracking and delivery confirmation so you have proof EDD received your audit package.
Keep your mailing receipt and also tracking number. Having proof that you responded on time protects you if any issues arise later.
Call EDD if you have any questions! Reach out so that you can understand exactly what is required and can provide complete responses.

Following these steps helps the audit go so smoothly. Let me know if you need any other tips for responding to an EDD benefits audit notice.

How can I prove that the self-employed person I hired is not an employee?

Numerous aspects, such as your industry, the kind of job you do, and how you treat your employees, will determine the answer to this question. The EDD will check for things like whether you signed contractors, if you forced them to attend meetings or training, if you didn’t want them working for other companies, and whether you asked the contractor to work on specific days and times.

What are the penalty and fines for an EDD audit?

You may be subject to a variety of fines that could put you under a great deal of financial hardship, depending on the reason for your EDD audit.

Here is an outline of the main types of fines and penalties that can result from an Employment Development Department (EDD) audit in California:

Financial Penalties
- Failure to File Penalty: Up to 30% of the amount not reported if the late filing a wage report
- Failure to Pay Penalty: Up to 15% of the amount not paid if late paying employer taxes.
Interest Charges
- Interest accrues on the unpaid amounts from the date the amounts were due until they are fully paid in full.
- Interest rate is adjusted annually
Tax Deposit Penalties
10% penalty for the underpayment of tax deposits.
25% penalty if the payment is over 15 days late
Fraud Penalties
50% penalty for the intent to evade payment
100% penalty for the willful failure to file a tax return or supply the information.
Criminal Penalties
- Misdemeanor charges for willful failures
- Felony charges for false statements/returns over $500.
Disqualification Penalties
- Disqualified from the approved voluntary plans for 5 years if 2 delinquencies in a row
- The business is disqualified if it closes with any unpaid liabilities.

The severity of the fines and penalties depends on the nature of the violation, previous history, and also other circumstances. Maintaining compliance is very essential to avoid the significant EDD penalties.

What happens if I disagree with the EDD’s assessment?

Your EDD attorney for business can assist you in appealing the assessment if you disagree with the suggested evaluation that the EDD provides you following the completion of their audit.

Payroll tax audits in California can be frightening. particularly for taxpayers and small business owners in San Francisco who are facing serious financial risks. Don’t think you have to bear this load by yourself. Speak with a tax lawyer who can guide you through the complex EDD audit process.

Have a quick question? We answered nearly 2000 FAQs.

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