If you’re a business owner, there are few things more frustrating than a notice you’re being audited. You have enough to worry about already without the detailed requirements an audit presents.
Here in California, that audit notice will often come from the state’s Employment Development Department. The EDD, as it is often referred to, oversees compliance with employment tax requirements. While an audit notice may be nerve-wracking, it does not mean you have done anything wrong. Here are a few things you should know about EDD audits.
There are different types of audits
The EDD can initiate essentially two types of audits: verification or request.
A verification audit is when the EDD has no specific knowledge of an employer, but chooses to start an audit at random based on the size of the employer’s payroll, where it is located, the industry it is in, or one of a few other factors.
A request audit comes when the EDD has identified a reason to look into a specific aspect of an employer.
An audit can be initiated for a number of reasons, including:
- Verifying the amount of taxable wages paid
- Determining if an employer withheld and reported the proper taxes
- Ensuring compliance with reporting requirements
- Looking into discrepancies with Underemployment Insurance or State Disability Insurance
- Determining whether a worker-employment relationship is correctly classified
What to expect from the audit process
There are many steps within an audit after the EDD sends a notice to the business.
A business’ books and records will be examined, though what exactly the auditor looks through will depend on the audit’s purpose. It may be contractor agreements, payroll records, the general ledger, wage and tax statements, withholding allowance certificates, or any of the many other related employer documents.
There is an entrance interview, a process for examining different books and records, the possibility of an administrative subpoena and a fact-gathering period. Then the EDD will make a determination, potentially including a penalty, with a closing interview helping to complete the audit process. You may also have the option to appeal a determination.
The above is a generalized, surface-level explanation of what to expect. In reality, the audit process can have very specific needs based on a variety of factors. Providing the proper information – in the right form, at the right time and to the right people – requires time and effort. That often comes with help from an attorney that is able to offer custom representation tailored to the precise needs of the business and the audit. While a lawyer navigates the audit process, you can keep your eyes on what is important: running the business.