The California Employment Development Department (EDD) regularly audits corporations with operations within the state. You need an experienced California EDD business audit attorney to protect you during an EDD audit, especially if you have 1099 workers.
Key Takeaways About the Need for an Experienced California EDD Audit Attorney:
- A business owner usually learns about the California Employment Development Department when a letter requesting records arrives in the mail.
- The California Employment Development Department (EDD) is responsible for administering and enforcing several employment-related tax programs.
- An adverse finding can trigger back payroll taxes, penalties, interest, and assessments for employment-related benefits that were never funded.
- It is also important to understand that California tax agencies communicate with each other. When the EDD completes an audit, its findings are often shared with the California Franchise Tax Board, as well as the Internal Revenue Service.
An EDD Audit Often Begins With a Letter in the Mail
A business owner usually learns about the California Employment Development Department when a letter requesting records arrives in the mail. It may look routine, but it rarely is. The involvement of an experienced California EDD audit attorney is needed at that moment, before any assumptions are made and before documents are handed over without understanding, context, and strategy.
The California Employment Development Department (EDD) is responsible for administering and enforcing several employment-related tax programs. From the employer’s perspective, an audit typically focuses on whether you have properly:
- Classified workers as employees or independent contractors
- Reported payroll accurately
- Withheld and remitted state income tax
- Paid unemployment insurance (UI) contributions
- Paid employment training tax (ETT)
- Paid state disability insurance (SDI) contributions
An Adverse Finding Can Result In Substantial Business and Financial Consequences
An adverse finding can trigger back payroll taxes, penalties, interest, and assessments for employment-related benefits that were never funded.
This is where the exposure becomes serious. If the EDD concludes that a worker or group of workers was misclassified, the consequences may include:
- Retroactive unemployment insurance and disability contributions
- Failure-to-withhold penalties
- Interest on unpaid amounts
- Wage claims exposure
- Potential civil penalties under California labor law
For many companies, the total assessment is not limited to a single year. Audits frequently examine multiple tax periods. What begins as a document request can evolve into a multi-year investigation and a challenging (and sometimes business-threatening) financial event.
Even if your company does not have independent contractors, the EDD still reviews all payroll-related practices. EDD auditors may examine officer compensation, shareholder distributions, fringe benefits, reimbursement policies, and whether certain payments were improperly excluded from taxable wages. Closely held corporations are common audit targets because of the flexibility owners have in structuring compensation.
It is also important to understand that California tax agencies communicate with each other. When the EDD completes an audit, its findings are often shared with the California Franchise Tax Board, as well as the Internal Revenue Service. An adverse determination can lead to parallel inquiries at the state and federal levels. If prior returns have not been reconciled or amended appropriately, the financial impact can multiply.
Many business owners respond to an EDD inquiry by attempting to cooperate informally. They provide records, answer questions, and assume that transparency alone will resolve the issue. Cooperation is important. Unstructured cooperation is not a strategy, and can actually compound an already risk-laden situation.
This is Why You Need an Experienced California Tax Attorney When Contacted for an EDD Audit
An experienced California EDD audit attorney provides value from the moment you receive any notification from the EDD, such as:
- Establishing appropriate boundaries for document production
- Managing communications with the auditor
- Analyzing worker classification before positions are taken
- Identifying weaknesses in the agency’s assumptions
- Review and update tax and accounting responses to protect your company’s interests
Early intervention matters. Statements made during an initial audit interview will shape how any interaction with the EDD develops. Payroll records, contracts, and internal emails are often interpreted in ways business owners do not anticipate. A knowledgeable attorney ensures that explanations are accurate, measured, and aligned with the governing legal standards.
There is also a strategic dimension. An attorney can assess whether to contest a proposed assessment, negotiate adjustments, or pursue an administrative appeal. In some cases, it may be prudent to immediately consider restructuring existing practices immediately can reduce ongoing exposure while the audit is still in progress.
The most significant benefit, however, is control. Audits create uncertainty. Uncertainty affects operations, vendor relationships, and access to capital. With structured representation, the process becomes organized, deliberate, and defensible.
Any Letter from the EDD or Potential Audit Notice Should Be Taken Seriously
If you receive notice of an EDD audit, take it seriously from the outset. Do not assume that a “transparent, well-intentioned response, or paying an initial assessment, will end the matter. Do not assume that any issue in the initial letter or subsequent communications is isolated. It is also important to understand that results from the EDD audit will most likely be communicated to other tax agencies. They are likely to be the next knock on the door.
A California EDD audit attorney serves as both advocate and guide. The objective is not confrontation. The objective is protection at every step of the process, including your financial position, your compliance, and your business’s ability to continue operating without unnecessary disruption.
Most audits can be managed effectively when addressed early and strategically. The key is to act before positions harden and before penalties escalate. Careful preparation, disciplined communication, and experienced representation provide stability at a time when stability is essential.
Janathan Allen is an experienced EDD audit and California Tax attorney. With the support of Allen Barron’s integrated accounting and business advisory services we are able to protect your interests before, during, and after an EDD audit.
We also understand the findings in the present audit will have an even larger affect on your business down the road. We work to limit the impact of the EDD audit. We anticipate the impact any EDD findings will have upon your FTB or IRS tax returns and whether they need to be proactively modified. You have peace of mind knowing your are receiving valuable integrated representation across multiple disciplines while leveraging economies of scale to reduce the financial impact to your business. 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.
