Secrets to the EDD Audit

Facing an EDD audit can be a nerve-wracking experience for any business owner. With potential assessments and disputes looming, it’s crucial to approach the process with preparation and strategic insight. 

John Milikowsky,  CEO and Founder of Milikowsky Tax Law, dives into the secrets of EDD audit strategies and triggers below:

During an audit, EDD auditors review payroll records, employee classifications, and other relevant documents to assess compliance with state employment tax laws.

Secrets to EDD Audit Success

Now, let’s explore some insider secrets and strategies to help you navigate EDD audits with confidence and achieve favorable outcomes:

Requesting Essential Audit Reports

One secret often overlooked by business owners is the importance of requesting crucial audit reports from the EDD. These reports, including the EDD audit report and the OB Claim Report, contain vital information about the audit process and its origins. By actively advocating for access to these reports, you gain valuable insights to support your defense during the audit.

Maintaining Detailed Records

 Thorough record-keeping is paramount during an EDD audit. By maintaining detailed records of employee classifications, payroll information, and correspondence with the EDD, you provide evidence to support your position and refute any erroneous claims made by auditors.

Understanding Audit Triggers

 Identifying potential audit triggers can help you proactively address compliance issues before they escalate into full-fledged audits. Common triggers include discrepancies in reported wages and misclassification of employees. By understanding these triggers, you can take corrective action to minimize audit risks.

Engaging in Early Resolution

 Pursuing early resolution or settlement with the EDD can be advantageous in certain cases. By collaborating with auditors to address discrepancies and reach a mutually acceptable resolution, you can avoid prolonged audit proceedings and mitigate potential penalties.

Leveraging Legal Protections

Business owners have legal rights and protections during the audit process. Understanding these rights, such as the right to representation and confidentiality of audit information, empowers you to assertively advocate for your interests while interacting with EDD auditors.

Implementing Compliance Measures

Proactive compliance measures, such as regular training for staff involved in payroll functions and conducting periodic audits of employment practices, can help prevent audit issues. By staying informed about changes in labor laws and tax regulations, you can maintain compliance and minimize audit risks.

By delving into common triggers that prompt EDD audits, business owners can better prepare and preemptively address compliance issues. Let’s explore some of the key triggers that may initiate an EDD audit and learn how to navigate them effectively.

Understanding EDD Audit Triggers

In navigating an EDD audit, it’s essential to understand the common triggers that may prompt the EDD to initiate an audit of your business. By identifying these triggers, business owners can take proactive measures to address compliance issues and minimize the risk of facing an audit. Here are some common EDD audit triggers to be aware of:

Discrepancies in Reported Wages

Discrepancies between reported wages and the information provided by employees or third-party sources can raise red flags for the EDD. Discrepancies may arise from errors in payroll processing, underreporting of wages, or misclassification of employees as independent contractors.

Employee Misclassification

Misclassifying employees as independent contractors is a common trigger for EDD audits. The misclassification of workers can result in significant tax liabilities, as independent contractors are not subject to payroll taxes, unemployment insurance, or other employment taxes. The EDD closely scrutinizes worker classifications to ensure compliance with state employment tax laws.

High Turnover Rates

High turnover rates or frequent layoffs within a business may attract the attention of the EDD. Rapid changes in staffing levels can indicate potential issues with employment practices, such as improper termination procedures or violations of employee rights. Employers with high turnover rates may be subject to audits to ensure compliance with state labor laws.

Anonymous Tips or Complaints

The EDD may initiate audits based on anonymous tips or complaints received from current or former employees, competitors, or other parties. Allegations of wage theft, unpaid overtime, or other labor violations may prompt the EDD to investigate further. It’s essential for employers to address any complaints promptly and thoroughly to avoid potential audit repercussions.

Industry-Specific Factors

Certain industries may be more prone to EDD audits due to their unique characteristics or regulatory requirements. Industries with a high prevalence of independent contractors, seasonal employment patterns, or historically high rates of non-compliance may face increased scrutiny from the EDD. Business owners should stay informed about industry-specific regulations and compliance standards to mitigate audit risks.

Past Audit History

 A history of past audits or compliance issues with the EDD may increase the likelihood of future audits. Businesses that have previously faced penalties or fines for employment tax violations may be subject to heightened scrutiny by the EDD. Employers with a history of non-compliance should take proactive steps to rectify past issues and demonstrate a commitment to compliance to avoid further audit scrutiny.

By understanding these common EDD audit triggers, business owners can take proactive measures to address compliance issues and minimize the risk of facing an audit. Implementing sound employment practices, conducting regular internal audits, and seeking professional guidance can help mitigate audit risks and ensure compliance with state employment tax laws.

Final Notes

Navigating an EDD audit requires careful planning, proactive measures, and strategic insight. By leveraging insider secrets and proven strategies, business owners can protect their interests, minimize audit risks, and achieve favorable outcomes. Remember, seeking professional guidance from experienced tax attorneys can provide invaluable support and guidance throughout the audit process. With the right approach and preparation, you can navigate EDD audits with confidence and safeguard your business’s financial well-being.

Facing an EDD Audit? Our Southern California Tax Attorneys Are Here to Help.

In summary, if your business is undergoing an EDD audit, our tax attorneys can provide expert guidance in dealing with the Employment Development Department. 

To learn what to expect in a California EDD audit, read our article, here.