EDD Audit Notice

Receiving an EDD audit notice can be unsettling for a California business owner. An audit by the California Employment Development Department (EDD) can involve payroll taxes, worker classification, wages, independent contractors, as well as other employment tax issues — and the potential financial consequences can be significant.

If your company has received an EDD audit notice, the most important thing is not to ignore it and not to respond without first understanding what is being examined.

An EDD audit does not automatically mean your business did something wrong. However, the decisions you make at the beginning of the audit can affect how efficiently the examination proceeds and how potential issues are addressed.

At RJS LAW, our tax attorneys represent California employers in EDD audits, worker classification disputes, employment tax assessments, and appeals.

Here is what employers should consider doing after receiving an EDD audit notice.

1. Read the EDD Audit Notice Carefully

Start by determining exactly what the EDD is requesting.

Review the notice for the audit period, response deadlines, assigned auditor, records requested, and any scheduled appointments.

EDD employment tax audits generally examine whether workers were properly classified and whether payments made to employees were correctly reported.

Do not assume the audit is limited to a single issue simply because one particular question initially attracted the EDD’s attention.

2. Contact an EDD Audit Attorney Early

When should you contact an attorney after receiving an EDD audit notice?

Ideally, before providing substantive responses or producing extensive records — especially if the business uses independent contractors, has inconsistent payroll records, has unpaid employment taxes, or knows of potential reporting problems.

An experienced California EDD audit attorney can evaluate the notice, identify potential areas of exposure, communicate with the auditor when appropriate, and help the business develop an organized response.

Early preparation may also prevent an employer from unnecessarily creating confusion by providing incomplete or poorly explained information.

3. Preserve and Organize Payroll Records

EDD auditors may request extensive documentation.

Depending on the audit, relevant records can include:

• Payroll journals and registers;
• General ledgers;
• Bank statements and canceled checks;
• Forms W-2 and 1099;
• Federal and state tax returns;
• Employment tax returns;
• Independent contractor agreements;
• Invoices;
• Check registers; and,
• Records showing payments to workers.

Employers should preserve relevant records and organize them carefully.

Do not alter, recreate, backdate, or destroy records after receiving an audit notice.

4. Review Independent Contractor Classifications

Worker classification can become a major issue in California employment tax audits.

California generally uses the  ABC Test for determining whether a worker is an employee or independent contractor, although exceptions can cause another legal standard, such as the Borello test, to apply.

A written agreement calling someone an “independent contractor” does not necessarily establish that person’s legal classification.

Before an audit progresses, employers using contractors should review how those individuals actually perform their work.

5. Reconcile Payroll Before Giving Records to the EDD

One of the most useful preparation steps is reconciling the company’s records.

Compare payroll reports with Forms W-2 and 1099, EDD filings, general ledger accounts, bank transactions, and other relevant records.

Look for discrepancies.

For example, are there individuals receiving recurring payments who do not appear on payroll? Do contractor payments match Forms 1099? Are there unexplained differences between accounting records and reported wages?

Identifying an issue internally before an auditor asks about it gives the business an opportunity to understand what happened and obtain appropriate advice.

6. Understand How Far Back the EDD May Look

EDD guidance states an employment tax audit generally covers a three-year statutory period consisting of the 12 most recently completed calendar quarters.

However, employers should not assume every audit will necessarily remain within that timeframe. Depending on the circumstances, an examination can extend beyond the standard audit period.

Businesses should therefore preserve older records that could become relevant rather than prematurely discarding them.

7. Be Careful and Accurate When Responding to the Auditor

Cooperation is important, but so is accuracy.

Employers should answer questions truthfully and avoid guessing when they do not know an answer.

If a question requires reviewing records, it may be appropriate to confirm the facts before responding rather than providing an immediate answer that later proves inaccurate.

Likewise, employers should understand what documents are being requested and produce responsive records in an organized manner.

What Happens After an EDD Audit?

At the conclusion of an audit, the EDD may determine that no changes are necessary, or it may identify additional employment tax liability.

When the EDD determines additional taxes are owed, an employer may receive a Notice of Assessment.

Employers have procedural rights to challenge certain EDD determinations. Deadlines are critical. For example, EDD guidance provides that a petition for review of an assessment generally must be filed with the California Unemployment Insurance Appeals Board within 30 days of the assessment date, subject to applicable rules and procedures.

Ignoring an assessment can therefore eliminate valuable opportunities to dispute it.

How RJS LAW Helps Employers Facing EDD Audits

An EDD audit can develop into much more than a routine examination — particularly when it involves years of contractor payments, worker classification disputes, payroll discrepancies, or substantial potential assessments.

RJS LAW represents California employers throughout the EDD audit process.

Our tax attorneys can evaluate potential exposure, review worker classifications, analyze payroll records, communicate with the EDD, respond to disputed findings, and represent employers in assessment and appeal matters.

The earlier potential problems are identified, the more opportunity a business may have to develop an informed response strategy.

If your business has received an EDD audit notice, contact RJS LAW to discuss the notice and determine the appropriate next steps before responding to the EDD. Serving San Diego and Southern California.

Frequently Asked Questions (FAQ’s)

What should I do first after receiving an EDD audit notice?

Read the notice carefully, identify the deadlines and records requested, preserve relevant business documents, and consider consulting an experienced EDD audit attorney before providing substantive responses — particularly if worker classification or payroll reporting could be disputed.

What records does the EDD review during an audit?

Depending on the audit, the EDD may examine payroll records, general ledgers, bank statements, check registers, tax returns, Forms W-2 and 1099, contracts, invoices, and other documents related to workers and payments.

Can I challenge an EDD assessment after an audit?

Yes, employers may have administrative appeal rights. Deadlines are important. A petition challenging an assessment generally must be filed within the applicable deadline, which is commonly 30 days from the assessment date. Employers should review the specific notice and applicable procedures immediately.

Written by Joseph Cole, Esq., LL.M.