Tax Audit & Collections FAQ
Dealing with the IRS, California EDD, or CDTFA can be stressful and overwhelming. Each agency has its own rules, deadlines, and procedures — and mistakes can be costly. Below are answers to some of the most common questions we hear from clients.
IRS – Audits & Penalties
What is the likelihood of being audited by the IRS?
Audit rates are low (under 1% for individuals), but increase with higher income, self-employment, complex deductions, or unreported income.
What is the statute of limitations for IRS audits?
- Standard: 3 years from filing
- Substantial understatement (25%+ income omitted): 6 years
- Fraud or no return: No limit
What are negligence and civil fraud penalties?
- Negligence: 20% of underpayment for careless errors
- Civil Fraud: 75% of underpayment if the IRS proves intent to defraud
How should I deal with an IRS Revenue Agent?
Be professional and respectful. Provide only what’s requested, ideally through your representative. Avoid informal conversations.
What if I get a document request?
Provide only the documents asked for, well-organized. Don’t volunteer extra records.
What if the IRS asks for unreasonable documents?
Your representative can negotiate to limit the request or escalate to a manager or Appeals.
Do I have to attend an IRS interview?
No. Your representative can appear on your behalf. This helps prevent misstatements.
What happens at IRS Appeals?
Appeals Officers aim to resolve disputes without trial, weighing the “hazards of litigation.” Many cases settle here.
What if my case goes to U.S. Tax Court?
You have 90 days from a Notice of Deficiency to file. Payment is not required before filing. Many cases settle before trial.
IRS – Collections & Debt
How does IRS debt work?
Unpaid taxes accrue interest and penalties. The IRS can file liens and issue levies.
How much interest and penalties does the IRS charge?
- Interest: federal short-term rate + 3%, compounded daily
- Penalties: up to 25% for late filing; 0.5% per month for late payment
How long can the IRS collect?
Generally 10 years from assessment, but extended by bankruptcy, Offers in Compromise, or appeals.
What is a tax lien?
A lien is a public notice of the IRS’s claim against all current and future property until the debt is resolved.
What is a levy?
A levy is the IRS’s seizure of property, such as wages, bank accounts, or assets.
Can the IRS levy wages?
Yes. Employers must send most of your paycheck to the IRS, leaving only a small exempt amount.
Does the IRS give notice before levying?
Yes. A Final Notice of Intent to Levy is sent at least 30 days before action.
What is a Collection Due Process (CDP) appeal?
A CDP hearing lets you challenge a lien or levy and propose alternatives such as installment agreements or Offers in Compromise.
What options do I have for paying IRS debt?
- Installment agreements (monthly payments)
- Offer in Compromise (settle for less)
- Bankruptcy (some income taxes dischargeable if strict rules are met)
EDD – California Employment Tax Audits
What triggers an EDD audit?
Often when a worker classified as an independent contractor files for unemployment. Other triggers include IRS referrals or industry sweeps.
What is the EDD pre-audit questionnaire?
A detailed form about your workers and business. Answers should be reviewed with counsel before submission.
What is the statute of limitations for an EDD audit?
- Standard: 3 years from the return due date
- Fraud or no return: No limit
The EDD auditor is very friendly — can I trust them?
No. They may be polite, but their duty is to assess liability. Always work through your representative.
What happens during an EDD audit interview?
The auditor may ask questions about workers and operations. Your representative should handle this whenever possible.
What documents does the EDD request?
Payroll records, 1099s, W-2s, bank statements, and contractor agreements. Overbroad requests can be challenged.
Who is an independent contractor?
EDD applies the strict “ABC Test”:
- A: Free from control
- B: Work outside the usual course of business
- C: Independent trade/business
Failing any one part usually means employee status.
Am I personally liable if my corporation doesn’t pay?
Yes. Corporate officers and responsible persons may be personally assessed for unpaid payroll taxes.
What is the statute of limitations for personal responsibility?
3 years from the due date, unless fraud — then unlimited.
How long can EDD collect from me personally?
10 years after assessment.
Does EDD have a settlement program?
Yes. EDD may settle disputed assessments for less than the full amount based on litigation hazards.
What if I disagree with an EDD assessment?
You can appeal to the California Unemployment Insurance Appeals Board for a hearing before an administrative law judge.
CDTFA – California Sales & Use Tax Audits
What is the statute of limitations for CDTFA audits?
- Standard: 3 years from the return due date
- Fraud or no return: No limit
What documents does CDTFA request?
Sales records, purchase invoices, bank statements, tax returns, and supporting schedules. Requests should be carefully reviewed and limited to what’s relevant.
Can I be personally liable if my corporation doesn’t pay CDTFA taxes?
Yes. Responsible persons (owners, officers, managers) can be personally assessed for unpaid sales tax.
What is the statute of limitations to make a personal assessment?
Generally 3 years, unless fraud — then no limit.
How should I deal with a CDTFA auditor?
Be cooperative but cautious. Provide only what’s requested, and route communication through your representative.
What happens if I go to CDTFA Appeals?
You can present legal and factual arguments to the CDTFA Appeals Bureau. Many cases resolve at this stage.
What if I have to go to an administrative hearing?
Cases not resolved at Appeals can be heard before the Office of Tax Appeals (OTA), an independent tribunal.
What penalties and interest does CDTFA impose?
- Interest accrues on unpaid taxes
- Penalties may apply for late filing, late payment, or negligence
Can I submit an Offer in Compromise to CDTFA?
Yes. CDTFA allows Offers in Compromise when you cannot pay in full and meet eligibility requirements.
Next Steps
If you’ve been contacted by the IRS, EDD, or CDTFA, it’s important to act quickly and strategically. Each agency has strict deadlines and broad enforcement powers — but you also have rights and options.
👉 Contact Robert Leonard, Tax Attorney, for a confidential consultation:
📞 818-587-3333
🌐 www.LeonardTaxLAW.com