The Employment Development Department (EDD) is responsible for payroll tax audits in California. Any business with operations in California could find themselves the subject of an EDD audit. This state organization is aggressive and will doggedly look for violations. Three things the EDD will look for during these audits include:
- Compliance with the CUIC. The auditor will review the business to see if its operations are in line with the California Unemployment Insurance Code (CUIC).
- Worker classification. The auditor will check to see that the business does not wrongly classifying employees as independent contractors.
- Proper reporting of payment to employees. The CUIC requires employers keep payroll records. Manual or computerized systems are allowed, depending on the needs of the business. The audit will dig into reporting to make sure it meets the state’s requirements.
The auditor will also likely look into whether the business provides workers with benefits as required by law.
What is the process?
The process generally begins with an entrance interview. During this time, an auditor will explain the purpose of the audit and gather some basic information about the business. The auditor should also provide an opportunity to ask questions.
The auditor will then begin an audit, generally examining a test year. The test year is often the most recent calendar year. Depending on the results, the auditor may expand or conclude the audit.
Upon conclusion of the audit, the EDD auditor will discuss their findings. This can happen in person or over the phone. You do not have to accept the findings of the auditor. You can push back. The first option is generally to request a pre-assessment conference with a supervisor. The second is to request a formal appeal.
You do not need to go through this process on your own. You have the right to legal representation during the audit and, if needed, during an appeal.
Is there anything else I should know?
An audit by the EDD is often just the beginning. This state organization has an agreement to share findings with the Internal Revenue Service (IRS). As such, this state audit could also trigger a federal tax audit.