EDD CSLB CFTB Audits

The California Employment Development Department (EDD) conducts audits to determine if businesses are:

  • Correctly classifying their contractors and employees, and
  • Paying the full taxes due under California law

It’s important to note that EDD is actively targeting independent contractor misclassification, which could result in a six-figure penalty per employee for business owners.

Let’s discuss independent contractor classification as well as review some common misconceptions about 1099 workers that can lead to misclassification. Additionally, we’ll cover what to do in the event of an EDD audit.

What is an Independent Contractor?

A 1099 independent contractor is a worker who provides skills and services outside of the hiring business’s usual services. They maintain control of their work and performance, such as:

  • Setting their rates
  • Working with multiple clients
  • Choosing when and where they work
  • Providing their own resources (i.e. tools)

Examples of independent contractors might include electricians, plumbers, carpenters, bricklayers, painters, hair stylists, wedding planners, auto mechanics, florists, and more.

Further, business owners should familiarize themselves with AB-5 law to correctly classify independent contractors and W-2 employees.

What is AB-5 Law?

Assembly Bill 5, commonly referred to as AB-5, is legislation that extends employee classification status to some independent contractors. AB-5 requires that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC test.

What is the ABC Test?

The ABC test is a set of requirements a worker must meet to be classified as a 1099 independent contractor instead of a W-2 employee.

The worker must meet all three criteria of the ABC test to be correctly classified as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
  • The worker performs work that is outside the usual course of the hiring entity’s business.
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the employee fails to meet any of the criteria in the ABC test, they are automatically classified as a W-2 employee instead.

Read our Ultimate Guide to Assembly Bill 5 (AB-5) for more information.

Common Misconceptions About Independent Contractors

Misconceptions about independent contractors are common, especially with the addition of the stricter guidelines of AB-5 Law and the ABC test.

Below are some of the most common misconceptions:

  1. Hiring workers as independent contractors are less expensive than hiring them as employees.
  2. If the worker performs similar work for other businesses, they are an independent contractor.
  3. You can hire a worker as an independent contractor on a trial basis before hiring them as a W-2 employee.
  4. Your company can sign a written contract to make the worker an independent contractor.
  5. Your worker has a license so they must be an independent contractor.

Business owners should understand why these misconceptions are inaccurate to correctly classify independent contractors and avoid penalties following an EDD audit.

Read on to learn more about these independent contractor misconceptions.

Which Industries Are More Likely to Misclassify Employees?

According to EDD, industries that run a higher risk of misclassifying workers include: 

  • Construction
  • Hospitality
  • Technology
  • Healthcare, and
  • Seasonal Industries

Business owners in these industries should be aware of the risks associated with employee misclassification and take the time to fully understand AB-5.

How Do Business Owners Correctly Classify Independent Contractors?

Business owners can avoid employee misclassification by reviewing the arrangement they have with the worker concerning the guidelines described in the ABC test and AB-5 law.

What Happens During an EDD Audit?

The EDD conducts tax audits to determine if business owners are meeting their state tax obligations. Typically, they cover the 12 most-recent calendar quarters. Audits, however, may extend further if necessary.

EDD will examine the relationship between the employer and their 1099 worker to determine if the worker is correctly classified.

EDD will ask questions such as:

  • Does the independent contractor have their own business?
  • How does the independent contractor provide services for your company?
  • How much control does the contractor have over providing these services?

As previously discussed, several factors weigh into employee classification. Employers can turn to the ABC test to ensure they are complying with AB-5.

What To Do If You’re Under EDD Investigation

Here are some steps to take if you find out your business is being audited by EDD.

Understand the Type of Audit

Don’t panic – some forms of audits occur with no assumption of wrongdoing or are triggered by random sweeps. The first step you should take when your business is under EDD investigation is to determine the form of the audit.

Verification Audits

Verification audits are not based on an assumption of wrongdoing but are random checks based on factors such as:

  • Business size
  • Size of payroll, or
  • Other factors determined by EDD

Request Audits

Request audits are based upon evidence collected by California EDD from former employees or people closely associated with your business.  

Organize Your Information

Whether you are undergoing a verification audit or request audit, you will need to have specific information prepared for EDD.

Prepare for an audit by organizing the following documents:

  • Cash payment records
  • Verification of ownership
  • Any applicable licenses or written agreements
  • Federal and state tax returns
  • Any 1099 forms
  • General ledger
  • Bank statements for the past three years
  • Check registers
  • Any check stubs or canceled checks
  • Annual financial statements (i.e. balance sheets and expense statements)

To verify payroll, you will also need to prepare payroll records, as well as federal and state tax reports, inclusive of quarterly tax reports, unemployment insurance withholding, and employee withholding.

Read on for a full list of forms you need to prepare for an audit.

Consider Milikowsky Tax Law

Once you are aware your business is being investigated, it’s important to contact a qualified tax attorney to represent you.

At Milikowsky Tax Law, our tax attorneys are former business owners and managers, which gives us incredible insight and experience to understand your business from the inside out and provide relentless, effective representation in all tax matters.

All employers in California have certain state tax requirements on top of their federal tax obligations.

Read on to understand your EDD obligations as a California employer or to learn more about California EDD audits.

CSLB Site Sweeps

CSLB site sweeps and EDD audits can cost business owners delays, fines, stop-work orders and even potential jail time.

In 2019 and 2020, CSLB’s Statewide Investigative Fraud Team (SWIFT) responded to 855 leads, conducted 52 sting operations and 216 sweep days. These efforts led to the issuance of 260 Notices to Appear in criminal court.  In total, 368 cases resulted in administrative action and 634 cases were referred for criminal prosecution.

However, there are steps business owners can take to mitigate these risks. Let’s dive in.

What is a CSLB Site Sweep?

According to CSLB, construction site inspections, or sweeps, are “among the most effective ways that CSLB ensures contractor compliance with California’s licensing and workers’ compensation (WC) insurance requirements.”

How Do CSLB Site Sweeps Work?

A site sweep occurs when several government agencies, including CSLB, Employment Development Department (EDD), and the California Labor Commissioner target a specific local area. Teams belonging to these government agencies physically visit active sites and conduct a site inspection. These inspections are random and can occur at any time.

During a site inspection, workers are interviewed by CSLB to verify whether they are properly licensed.

What Does CSLB Look For in a Site Sweep?

CSLB will look for:

  • Appropriate licenses
  • Permits
  • Workers’ compensation insurance for employees
  • Adherence to safety rules

What Risks Do General Contractors Face in CSLB Site Sweeps?

If the agency uncovers misclassifications or unlicensed contracted workers, general contractors will be subject to heavy fines and penalties.

Additionally, general contractors who hire unlicensed workers and unlicensed subcontractors put themselves at risk for potential criminal action by the local District Attorney (DA). They risk receiving a stop-work order from CSLB.

Even a legitimate subcontractor who is licensed can run into issues if their license becomes suspended. 

How Can General Contractors Prepare for CSLB Site Sweeps?

General contractors can protect themselves by regularly checking and confirming that all workers’ licenses are current and legitimate. We recommend checking licenses at least on a monthly basis.

CSLB Refers Cases to EDD to Audit

CSLB refers their cases to EDD to audit the company. Let’s take a look at what EDD audits are and the difference between CSLB audits and EDD audits.

What is the Difference Between CSLB Audits and EDD Audits?

Both CSLB and EDD can conduct audits and site sweeps of your business. However, the difference lies in what these agencies are looking for; CSLB focuses on licensing, EDD reviews payroll tax compliance.

To learn more about the difference between these agencies, read our article, here.

What Does EDD Look For in an Audit?

 In an audit,  EDD determines if the employer has paid the full and correct amount of taxes due under California law. Further, EDD identifies whether the independent contractors are correctly classified as 1099 workers or if they should be classified as W-2 employees.

If you are found to have misclassified your workers as 1099s as opposed to wage-earning W-2s, your company is obligated to pay back payroll taxes and will be charged back penalties.

EDD Audits and Employee Misclassification

Employee misclassification can expose your business to fines, penalties, and potential jail time. 

According to EDD, industries that run a higher risk of misclassifying workers include: 

  • Construction 
  • Hospitality 
  • Technology
  • Healthcare
  • Seasonal Industries

Learn more about EDD audits, here.

Facing an EDD Audit?

Once you are aware your business is being investigated, it’s important to reach out to a qualified Tax Attorney to represent you. Crafting the narrative around the “why” and “how” of your contractors’ classification can make the difference between your case being dismissed or your company owing back payroll taxes and fines.

Call Milikowsky Tax Law as soon as you discover your business is facing an audit by CA EDD.

Right of Control: Who has it and How Does EDD Determine 1099 Status?

When determining whether your workers should be classified as employees or independent contractors, it’s critical to ensure that you are closely following the Employment Development Department’s (EDD) strict guidelines. 

On the simplest level, proper classification is determined by whether or not the principal, or employer, holds the “right of control.”

What is “Right of Control?”

Right of control is determined by who holds the “right to control the manner and means” by which work is performed. 

A corporate administrative assistant, for example, reports directly to an executive who manages their work. Likely they work a classic Monday through Friday, 9 to 5 schedule. When they want to go on vacation, they have to request time off or let their manager know in advance. 

Now consider an app-based rideshare driver. When they’re available to work, they log into the app and begin work. Perhaps after a couple of hours, they decide they need a break, they disable the app and log off for a break. While they are required to abide by the rules and regulations set in place by the company that they work for, their hours and responsibilities are not deliberately determined by the company overall. 

How does EDD determine 1099 status?

EDD utilizes the right of control as an initial way to classify workers. They take things one step further by providing a worksheet that employers can utilize to help clarify discrepancies. 

Since January 2020 the new ABCs of worker classification has been implemented to try to simplify the process of determining worker classification.  Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Since the passing of the AB_5 gig worker bill, there have been multiple rounds of exceptions, exclusions, and widespread confusion about how the rules affect real-life business scenarios.  In cases of confusion, the original 13 point Borello test is still the fallback. 

The questions posed in the EDD Borello criteria include the following 13 elements to provide additional support in determining workers’ proper classification. They include the following: 

  1. Do you instruct or supervise the person while he or she is working? 
  2. Can the worker quit or be discharged (fired) at any time?
  3. Is the work being performed part of your regular business?
  4. Does the worker have a separately established business?
  5. Is the worker free to make business decisions that affect his or her ability to profit from the work?
  6. Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
  7. Do you have employees who do the same type of work?
  8. Do you furnish the tools, equipment, or supplies used to perform the work?
  9. Is the work considered unskilled or semi-skilled labor?
  10. Do you provide training for the worker?
  11. Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
  12. Did the worker previously perform the same or similar services for you as an employee?
  13. Does the worker believe that he or she is an employee?

Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 may indicate important factors to be considered. While answering “yes” to any one of them may indicate that a worker should be classified as an employee, no single factor is enough to determine so independently. 

The full worksheet provided by EDD provides further clarification on certain factors and circumstances. If completing the provided worksheet does not provide sufficient clarification for employers, EDD offers the ability to request a written ruling by completing a Determination of Employment Work Status

In cases where EDD initiates a worker classification audit, employers can be required to retroactively prove that their workers were correctly classified at 1099 contractors vs W-2 employees.  At  Milikowsky Tax Law we are experts in EDD audit defense.  Our team works with you to ensure that your audit does not spread to other areas, that EDD understands the scope and function of your unique business and that you are only liable for back fines and fees on those workers who are indisputably misclassified.  

We have represented hundreds of businesses and individuals audited by EDD, CSLB, CFTB, and IRS. Our team is dedicated to ensuring you get the best result and that your audit does not permanently negatively impact your business or your life. Reach out to our team for more information. 

what is the process of an edd audit

If your business is experiencing an EDD audit, it’s important to know what to expect. Founder and managing attorney at Milikowsky Tax Law, John Milikowsky, breaks down the EDD audit process and the frequently asked questions that come with an EDD audit. 

What you can expect from us, whether you have a balance owed to the IRS or the State of California, an EDD audit, or a criminal matter, is a dedicated and passionate team of people who have a lot of expertise to help resolve your issues. Our process is very simple, but it’s very different from many other law firms.”

What is the EDD audit case process at Milikowsky Tax Law?

“We don’t simply submit records to the government. We analyze everything. We use a lot of data analytics to really understand your business. A lot of us, including myself, have run companies before, so we understand what you’re going through. 

We have a lot of business experience. We know exactly what to look for, and we can anticipate the questions the government’s going to ask and we’ll build strategies and defenses in advance.

Once we’ve looked at all your records and identified potential issues, we identify strategies to navigate around them. At that point, we execute on our findings and work toward a resolution for your case.

EDD Audit Step by Step Guide

If you are being audited by EDD, you will receive a letter of inquiry.  Upon receiving this letter, the clock starts counting down.  You have a limited about of time in which to respond.

Our process begins with an interview, in person or over Zoom in which we get a good understanding of your business.

We gather documents to begin to analyze everything.

  • Your accounting records
  • Your transactional documents
  • Interviewing your workers, 
  • Interviewing other business associates

After our internal analysis, we give you a debrief and provide a roadmap of how the case will likely proceed. 

Once we collect and analyze your information, build the narrative around why your contractors are correctly classified and how your business is structured, we begin to communicate with the government. 

Are All Audits the Same?

Whenever an audit is initiated, the audited party will receive a letter from the government requesting records for a “routine investigation”. In the case of EDD audits, the process is usually initiated by a red flag that you have misclassified your workers. Some of the ways the agency can be alerted to this are:

  • A 1099 contractor filed for unemployment
  • A competitor raised a complaint
  • You were subject to a random site sweep by EDD or Contractors State Licensing Board (CSLB)
  • Your payroll records did not match your IRS filings and the agencies communicated.

How is an EDD audit case resolved?

Edd audits require a lot of negotiation and communication because each business is structured differently, workers perform different jobs and the rules from classification have changed even within the 12 quarter audit period as it stands in Q4 of 2021. 

The final resolution comes in the form of a letter from the government that say either there is nothing owed, you owe fees penalties and back taxes or, there was an error in your favor. 

The Difference Between EDD and CSLB audits

Employment Development Department (EDD) and California Contractors State License Board (CSLB) audits both expose your business to fines and penalties if the agency finds you noncompliant with the strict regulations and policies they have in place for classifying 1099 independent contractors. 

Both CSLB and EDD perform site sweeps that can initiate an audit of your construction business.  CSLB is focused on (as their name suggests) licensing, whereas EDD is focused on payroll tax compliance.  The effect of an audit from either CA EDD or CSLB is the same: the stoppage of work and potential penalties and back taxes. 

EDD Audits 

EDD audits focus on payroll taxes. When an agency, EDD, CSLB, etc. audits a business, a common audit finding is the misclassification of employees. Employers can hire W-2 employees or independent contractors (1099). 

The difference between 1099 and W2 employees lies in the scope of work and which tax form each receives. Full-time and Part-time employees receive W-2 tax forms. They have a schedule set by the employer and report to their employer for daily tasks. These employees pay their employment taxes on their wages earned usually through the payroll provider who issues their checks. On the other hand, independent contractors receive 1099 forms, are not taxed on income, and have more work freedom as they are self-employed.  Contractors (1099 workers) set their own hours, submit proposals and have multiple “gigs” for different companies. 

The most common triggers of an EDD audit are:

  • An independent contractor filing for unemployment
  • Employee complaint of misclassification
  • Late or inconsistent filing of taxes 
  • Randomized verification audit 

EDD provides an in-depth checklist to guide employers on how to classify employees correctly. 

Worker misclassification 1099 vs W-2

An audit by EDD can lead to criminal exposure because incorrect classification means that  federal and state taxes were incorrectly filed and insurance was not provided when mandated by law. EDD identifying incorrectly classified independent contractors as W-2 employees or vice versa can open your business to fines, penalties, and potential jail time.

According to EDD, industries that run a higher risk of misclassifying workers include: 

  • Construction 
  • Hospitality 
  • Seasonal Industries
  • Technology
  • Healthcare

While you can hire unlicensed workers, they can only perform work under your license.  To work under your license requires they are classified as W-2 wage-earning employees. Correctly classifying employees from the beginning of the hiring process keeps your business compliant and ready for an EDD audit if one should occur. 

CSLB Audits 

CSLB is a government agency that regulates the construction industry and creates policies to maintain health, safety, and general welfare for the public. They provide licenses for independent contractors that stay in compliance with regulations and rules within the state of California. 

Contractors licensed in other states but working in California must apply for a CSLB license to remain compliant. Independent contractors hired and working in California must have a current and valid California license from CSLB to remain compliant with rules and regulations. 

Licenses are not required by the State of California only if the independent contractor is not advertised as a licensed contractor or if the job value including labor and material does not exceed $500. 

Audits performed by CSLB occur without any notification. Anyone can file a complaint or report unlicensed activity with CSLB to audit your business if they suspect suspicious activity of your worksite (including a competitor). Their statewide investigation teams conduct undercover sting operations for construction site sweeps. Agency will appear on the site itself and interview each worker to check for correct employee classification, licensing, and status.  

If you are caught hiring an independent contractor without a license, with an out-of-state license, or are incorrectly classified, you will be open to the fines and penalties of an audit.

The penalties of hiring an unlicensed contractor are hefty. If you are a business and you hire a non-licensed contractor, you may be putting yourself and your business at additional risk. These risks often include lawsuits in the event of injury, fines, and potential jail time.

This year alone, CSLB conducted site sweeps across California that cited 74 people for unlicensed contracting.  

To find out if your current or future independent contractors are licensed, use CSLB’s license check here. The site allows you to verify an independent contractor’s license status by entering a provided license number, or a Home Improvement Salesperson (HIS) registration number. 

How Do I Make Sure My Employees are Correctly Classified?

Is your company hiring independent contractors and subcontractors? Make sure each individual has a valid license during the entire time they are working for you. Sometimes, licenses can expire or be suspended during an active job. 

If EDD or CSLB audits your business and finds unlicensed independent contractors or independent contractors with an expired license, it will result in high fines and penalties. 

Learn more about how got1099 can correctly verify your employees, and send you alerts notifying you if employees’ licenses have expired by clicking the link in bio. 

Get the facts, order a got1099 report for your contractors to accurately assess the status of a worker you want to hire. The report includes verification of license along with notifications for license expiration so you don’t have to keep track of each individual’s license. 

Check this list of industries who are exempt from AB-5 to make sure your business is in compliance here

 

The Difference Between EDD and CSLB audits

Recent Construction Site Sweeps Explained

General contractors who hire unlicensed workers and unlicensed subcontractors put themselves at risk for potential criminal action by the local District Attorney (DA) and they risk receiving a stop work order from California Contractor State Licensing Board (CSLB) if and when that agency performs a site sweep.

 

A site sweep occurs when and one of several government agencies, including CSLB, Employment Development Department (EDD), and the California Labor Commissioner, target a specific local area in which construction is being performed and physically show up on the active site to conduct a site inspection. 

 

During a site inspection, workers are interviewed and EDD or CSLB verify whether they are properly licensed. 

 

These site inspections are random and can occur at any time, there is no forewarning.

 

Even a legitimate subcontractor who is licensed can run into issues if their license becomes suspended. As a general contractor, best practice is to regularly check to confirm all of your workers’ licenses are current. We recommend verifying your workers’ licenses monthly, if not more often.

 

CSLB typically refers their cases to EDD to audit the company and identify whether the 1099 independent contractors should be converted to employees. If you are found to have misclassified your workers as 1099s as opposed to wage-earning W-2s, your company is obligated to pay back payroll taxes and will be charged back penalties.

 

Employee misclassification is a serious issue because certain audit cases can be referred to the local DA for prosecution for insurance (worker’s compensation) fraud. Ensure your independent contractors are classified correctly and updated on their correct licensing requirements to avoid the penalties and fines from a random site sweep. 

 

According to the California Contractors State Licensing Board (CSLB), this year alone, 74 people were cited for unlicensed contracting. CSLB’s article highlights the risk for general contractors who hire unlicensed contractors. This number only considers those cited under a CSLB site sweep, not those caught up in an EDD site sweep.

 

Article below was originally posted on CSLB’s website – to see the original article click here: CSLB article:

Contractors Face 130 Legal Actions After Series of Statewide Stings and Sweeps.

 

Contractors State License Board enforcement operation part of national effort to warn consumers about dangers of hiring unlicensed or uninsured contractors. 

 

SACRAMENTO, Calif. – A series of statewide stings and sweeps conducted by the Contractors State License Board (CSLB) has revealed that unlicensed activity was not slowed by the pandemic. 

 

During the operation, 74 people were cited for unlicensed contracting. One of the many ways unlicensed contractors put homeowners at risk is because they do not carry workers’ compensation insurance, making consumers liable if someone is injured on the job. 

 

“Licensed contractors have proven experience, qualifications and verifiable business credentials to do the job right,” said David Fogt, CSLB Registrar. “This enforcement effort shows that even in an industry thriving after the pandemic there are still unlicensed contractors looking to take advantage of consumers,” Fogt said. 

 

From June 7 to 25, 2021, CSLB partnered with local law enforcement to conduct four undercover sting operations in El Cajon, San Diego County; Montclair, San Bernardino County; St. Helena, Napa County; and in Visalia, Tulare County. Undercover stings target unlicensed contractors, with investigators contacting the suspects through their advertisements. 

 

The suspected unlicensed operators came to the sting locations to place bids on projects including concrete, electrical, flooring, kitchen and bathroom remodeling, landscaping, painting, plumbing, roofing, and tree services. As a result, a total of 56 legal actions were filed and 49 people are accused of contracting without a license. Unlicensed contractors can face penalties of up to six months in jail and/or a fine of up to $15,000 if they bid or contract for work valued at more than $500. 

 

Twenty-four sweep operations of construction sites were also conducted in Fresno, Kern, Kings, Los Angeles, Merced, Monterey, San Benito, San Bernardino, San Diego, San Mateo, Santa Clara, Santa Cruz, and Ventura counties that resulted in 74 legal actions against licensed and unlicensed contractors. Twenty-five of the 74 legal actions were for unlicensed contracting and 30 Stop Orders were issued which halted all employee labor at active job sites where contractors did not have workers’ compensation insurance for their employees. 

 

The enforcement actions were part of a nationwide effort coordinated by the National Association of State Contractors Licensing Agencies designed to make consumers aware of the importance of hiring licensed contractors and the risks of using unlicensed operators. 

 

“Many homeowners are not aware of the financial risks when they hire unlicensed contractors,” Fogt said. “Saving a few dollars by hiring an unlicensed contractor can end up costing a consumer thousands of dollars when the work is not completed or in need of correction.” 

 

During the stings and sweeps, 13 individuals were also cited for requesting an excessive down payment. In California, a home improvement project down payment can’t exceed 10-percent of the contract total or $1,000, whichever is less. This misdemeanor charge carries a maximum penalty of six months in jail and/or a fine of up to $5,000. 

 

During operations, unlicensed individuals were given information on getting licensed and were invited to attend one of CSLB’s Licensed to Build workshops. CSLB also created a new B-2 licensing classification for home remodeling with the goal of promoting the growth of small businesses and increasing consumer protection. 

 

For their protection, CSLB recommends that consumers get at least three bids and check references before hiring someone for a construction job. Consumers can quickly check if a contractor is licensed on CSLB’s online Instant License Check. 

 

From the License Check, consumers can also view the contractor’s individual license page, which indicates if the contractor is carrying workers’ compensation insurance for employees. Contractors without workers’ compensation insurance should not have workers on the jobsite. Consumers can find a list of licensed contractors in their area by using CSLB’s Find My Licensed Contractor. 

 

edd crim investigation

In short, yes. If you are paying workers who are not reported on a 1099 or W2 (for instance you are paying workers in cash and have no record of their payroll or payments), EDD may assess a fraud penalty and could open a criminal investigation. If your contractors are misclassified and should be employees, then you likely do not have WC insurance, which is insurance fraud.

What is more common are investigations of construction contractors who hire unlicensed works.

This investigation will then involve the Contractors State License Board (CSLB). A case can start with CSLB or EDD and the two generally work together. If CSLB or EDD find misclassified and unlicensed workers, the cases will then be referred to the District Attorneys Office in your City for possible criminal prosecution. These cases include workers’ compensation insurance fraud because your company did not have workers’ compensation insurance to cover these workers.

If you find yourself in this situation, contact a qualified tax attorney before providing any information to an investigator.

Our office has significant experience and has represented contractors who were under investigation. These investigations involve a detailed factual and legal analysis of tax law and a deep understanding of how to navigate an EDD and CSLB investigation.

Working Men smiling

When The California Employment Development Department, EDD did a site sweep, Ryan Brown found himself facing an audit.  As he did research on his own as to what the ramifications of an EDD audit might be, he saw steep fines, jail time and high conviction rates reported time and time again.

Ryan was afraid he would lose his business.

Ryan called Milikowsky Tax Law and set an initial meeting.  Before we signed any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

” I felt so much better coming out of the office that day.  John just starting helping me immediately”.

John and the Milikowsky Tax Law team got to work communicating with the EDD and CSLB agencies, clarifying the circumstances of Ryan’s unique situation and providing the documents the agencies asked for in a way that helped them understand his business.

After less than a month, EDD sent a final letter indicating that while minor fines were due, the case was closed.  For Ryan, the results were life-changing.  To go from the fear of losing everything to knowing his business was going to be fine was a tremendous sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client.  And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance, the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB and IRS audit.

When you review your contractors, ensure that all of your workers are correctly classified by running a Verify1099 report.  The Verify1099 report checks for valid business license, EIN, web presence and professional licensing to build a strong case for defending your classification of certain workers as 1099s. Visit https://verify1099.com to learn more and get started. EDD audits are fast-paced and have serious consequences. Be sure you are classifying your workers correctly.
If your business is currently in an EDD audit, contact the attorneys at MIlikowsky Tax Law immediately.
How to resolve an IRS tax balance

Owing Back Taxes: How to resolve an IRS tax balance:

Does your business owe taxes to IRS – payroll taxes, income taxes?
Did IRS file a federal tax lien against your business that is preventing you from getting a loan?

Founder, John Milikowsky discusses your options:

You may have options to resolve your balance:

1. Payment Plans

IRS generally has 10 years to collect taxes once a return is filed. The time can be extended for numerous reasons such as when you file for bankruptcy or when the IRS is legally prevented from collecting. In cases where a payment plan is an option, it is generally spread out over 72 months unless the IRS has less than 6 years to collect.

2. Offers in Compromise (OIC)

An Offer in Compromise is essentially asking IRS to settle for a lower amount based on financial hardship or based on a legal challenge. For an OIC based on a financial hardship, you will have to provide financial records (bank statements, W2s wage statements, business income tax returns if you own a business as well as proof of your expenses that are being paid such as mortgage statements and utility bills). Then, based on the information given, IRS will determine if you are financially unable to full pay your taxes within the remaining years IRS has to collect from you.

At Milikowsky Tax Law, we are former business owners and key managers and understand where to find crucial information to clearly describe to IRS your financial hardship or circumstances to support your request for a payment plan or OIC. We perform a detailed review of your accounting information and use data analytics to establish financial records that explain why your business may not be able to pay its taxes in full.

We have represented hundreds of businesses in tax law controversies with IRS, EDD and CSLB and have depth of experience and a long history of positive outcomes in working with businesses to resolve tax law issues.

Tax Calculation

Millions of dollars in penalties are doled out by the Internal Revenue Service (IRS) each year. With the majority of which are attributed to businesses that failed to file taxes or pay payroll taxes. It’s important to understand compliance to ensure your company steers clear of costly violations. 

There are unforeseen circumstances that could trigger an IRS penalty to your business, as well as instances like borrowing against payroll taxes owed to make up a payroll or service debt and missed deadlines.

Not paying business taxes will cause serious consequences for your business. Read on to learn about the many penalties that could happen to you and your business if you don’t pay your business taxes.

IRS Notices

If you don’t pay your business taxes on time, the IRS will send a notice in the mail with an outline of a due date (typically 30 to 60 days) for you to respond to the notice. Ignoring these warnings could result in additional penalties, fees, or even a knock on your door from an IRS agent.

Do these steps if you receive a letter from IRS  

  • Read the letter in its entirety for details and specific instructions. 
  • Retain a copy of your letter or notice in the event the documentation needs to be referenced later.
  • If you can, and if the amount due is correct, pay the IRS. If you are unable to pay the balance in full, IRS may offer options to apply for an online payment agreement or a compromise.
  • If you disagree with the notice or want to dispute the claim, contact a tax professional who can give you expert advice.

Do NOT do the following: 

  • Do not ignore or discard the notice
  • Do not miss an IRS deadline
  • Do not send IRS records they did not request (you may inadvertently expand the scope of your audit).
  • Do not hire a litigation or other attorney other than a qualified tax attorney (government audits are complex and highly specialized)

Late Penalties and Fees

If your company does not file taxes or does not pay the full amount, then you may be subject to a 10-15% penalty, which applies to every month the payment is delinquent, up to a maximum of 25%. An additional penalty of $135 and interest equal to the federal short-term rate plus an additional 3% may apply. Even paying late by one business week or less could result in your business incurring a 2% penalty.

Errors on tax returns found by IRS can result in an accuracy related penalty of 20% of the amount owed in total. They are charged post audit conclusion if you or your business were found guilty of failing to report income or proving small business tax deductions. You must pay interest on the penalty until it is paid in full. 

Federal Levies, Seizures and Tax Liens

The Federal Payment Levy Program enforces the right to suspend certain benefits from business owners, including Medicare provider and supplier payments, military retirement benefits, select federal salaries and certain individual earnings from Social Security.

One of the more impactful actions of the IRS is property seizure. In the case of unpaid business taxes, the IRS is permitted to levy the assets of businesses. If you fail to pay on time or pay in full, the IRS may seize company equipment, cars, and even your business property itself.

If you neglect your tax bill, the federal government may choose to place a tax lien or levy against your business. This means that the IRS is superior over your debtors in the event that you become insolvent. If you try to sell your assets, the IRS will collect the funds before you can receive them.

Criminal Charges

If the IRS determines that your business attempted to evade payment through fraudulent means, including filing false tax returns or falsifying deductions on those returns, not reporting cash receipts accurately, creating fraudulent invoices, and hiding income you may have criminal exposure. These actions are considered intentional acts, and should not be confused with unintentional neglect.

Willfully failing to pay taxes, considered tax evasion or tax fraud, is a considered a felony charge that is punishable by a fine of $10,000, five years in prison, or both. IRS created The Tax Crimes Handbook explaining details, fines and jail time associated with various tax crimes. These charges are often reserved for egregious cases where the business owner diverted money for personal use instead of taxes.

Some IRS, EDD or CSLB audits start with misclassification audits, payroll tax audits or Income tax audits and expand to criminal charges either because some insurance fraud comes to light in the form of worker’s compensation insurance fraud or other criminal fraud charge.  Having a qualified attorney communicate with the auditing agency is always the best choice as that attorney has attorney-client privilege and cannot have their records summonsed (unlike a CPA). 

Avoid These Penalties to Keep Your Business Safe

It is best practice to pay your business taxes on time to prevent any penalties or legal action from the IRS. If you do not have money to pay the entire amount, paying at least a part of the deposit could reduce the amount of penalties owed. Here are some resources to get started.

There are benefits to hiring a professional tax attorney. They can explain to you the options you have in greater detail, like installment plans and extensions. Talk to our professionals at Milikowsky Tax Law about how to manage your unpaid business taxes.