How To Respond to an EDD Audit Letter or Site Visit

taxes and the edd audit

The California Employment Development Department EDD performs audits to detect and deter fraud involving employment law, including, but not limited to employment misclassification, payroll tax evasion and employment tax. If your company has received a letter initiating an investigation into your employment practices, be aware that providing EDD with the wrong information can expand your audit and lead to civil and even criminal referral as well as referrals to IRS civil and criminal departments.  

If you have received a letter, or site visit, from CA EDD, here is the process you can expect. 

The Process of an EDD Audit

Before you contact EDD and address your audit, collect all relevant records from the previous three years including: (but not limited to):

  • check registers
  • canceled checks 
  • bank statements and annual financial statements 
  • federal and state income tax returns and employment tax reports 
  • payroll records 
  • W-2 and 1099 Forms 
  • ownership verification 

Pre Audit

Gather records and statements relevant to the audit. Being prepared and organized will help you avoid unnecessary fines and penalties. Regardless of the level of simplicity you feel you are facing, do not volunteer extra information to your investigator.  If the penalties you are facing exceed $5,000, reach out to a skilled EDD attorney immediately.  An EDD attorney will  review your records and ensure that the message EDD gets is supported, researched, consistent with what they expect to hear and does not expand your audit beyond the bounds of the original review. 

During Audit 

During your EDD audit, an auditor will first conduct an entrance interview, where they  will explain the purpose of the audit and outline its proceedings. You can ask the auditor general questions as they examine your employee classifications, wage and hour records, and your bank statements.. 

After the audit is complete, the auditor will present their conclusions (known as a proposed notice of assessment, or PNA) with you, which you have a right to contest if you do not agree. You might have made overpayments, in which case you may receive either a refund or credit for next year. You might have made underpayments, in which case you may face a penalty. Or, you may have committed infractions resulting in back-payments, fines and other penalties. EDD has the authority to issue fines whether you transgressed intentionally or unintentionally. 

Post Audit

Once your PNA is complete, EDD will share information with IRS, who may or may not choose to perform additional audits or investigations.

If your business finds itself in an EDD audit, reach out to us.  Our team of experienced EDD and IRS attorneys can review your situation and assess whether your situation is best handled on your own or with our help. We have defended over 300 businesses in government audits and we’re here to help.