What do you need to know about a California employer’s payroll audit risk and trust fund penalties?
Many California business owners find themselves in an Employment Development Department (EDD) or IRS payroll audit. The California EDD is authorized to conduct audits of business payroll taxes. This includes Unemployment Insurance (UI), State Disability Insurance (SDI), and Employment Training Tax (ETT). The IRS also conducts payroll audits searching for Payroll Income Tax (PIT) violations that result in trust fund penalties and other tax revenue.
California employers are required to deduct these various taxes from their employee payroll. These are to be kept in your company trust fund, often managed through the EDD’s e-Services for Business, while federal employment taxes are usually collected through the Electronic Federal Tax Payment System (EFTPS).
The EDD audits all California businesses regularly (usually on a 3 to 5 year cycle) to ensure that all taxes associated with payroll and the business itself have been paid. The EDD will also look for misclassification of employees as independent contractors.
An EDD payroll audit may be the result of an unemployment claim from a misclassified “independent contractor, incomplete or late payroll tax filings, wage claims with the California Labor Commissioner, or “pattern-based sweeps” based on common behaviors for employers within specific industries. It may also result from the failure to fully and accurately report commissions, tips or other forms of a bonus.
In addition, the California Department of Industrial Relations (DIR) is tasked with monitoring and investigating wage and hour compliance. A DIR audit is focused on wage and hour violations, regulations associated with minimum wage, meal and rest breaks and overtime rules, as well as payroll-related record keeping. The failure to properly, completely and accurately report payroll records or work-related classifications in order to reduce Workers’ Compensation Premiums can trigger not only an audit, but criminal fraud charges.
California business owners face substantial payroll audit risks and trust fund penalties if they do not carefully manage, document and report associated data. The most concerning news for all business owners is that the IRS and the EDD compare notes. If one agency discovers a discrepancy, a knock on your door from the other is soon to follow.
The experienced California and IRS tax attorneys at Allen Barron are uniquely positioned to counsel San Diego and California business owners regarding payroll, taxes and all operational aspects of your company including the proper classification of employees or independent contractors. Our unique combination of integrated tax, accounting and legal representation ensures that your company remains in compliance with all Federal, State and Local tax and employment laws to avoid audit complications resulting in trust fund penalties and additional tax exposure. If you have been contacted by the California EDD or the IRS for a business tax audit we invite to contact us immediately or call today for a free consultation at 866-631-3470.
Payroll audit risk and trust fund penalties have become a greater concern for California business owners simply due to the nature of information sharing between the IRS, EDD, DIR, Franchise Tax Board (FTB) and even programs such as the CalSavers program. Our experienced audit attorneys protect your interests at each step of the process, carefully managing all communications with each tax authority.
We provide proven and sound counsel and advice regarding the strategy of the auditing agency and your potential exposure for additional taxes and penalties. Payroll audit risk and trust fund penalties can result in substantial financial exposure for any California business or employer. It is important to ensure that you have expert representation.
The tax attorneys at Allen Barron represent you throughout the audit process, drawing upon our legal and accounting expertise in addition to our experience in all tax scenarios. We are able to extend the protections of the attorney client privilege and reduce your exposure in these sensitive situations.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
