Sam Brotman, JD, LLM, MBA August 24, 2014 6 min read

California Payroll Tax Audit - Record Required

Minimum Required Records During EDD Tax Audit

Sections 1085 and 1092 of the CUIC require all employing units to make business records available to the EDD during normal business hours. These records include:

  • Check Registers, Check Stubs, Canceled Checks, and Bank Statements
  • General Ledger and General Journal
  • Annual Financial Statements (Income & Expense statements, Balance Sheet, etc.)
  • Cash Payments Records (pay out slips and vouchers)
  • Ownership Verification
  • City Business License
  • Board of Equalization Sales Tax License
  • Any license required to operate business, such as a liquor license, California State contractor’s license, etc.
  • Written Agreements (for example, Partnership Agreement or Articles of Incorporation)
  • Federal/State Income Tax Returns
  • Form 1099 Series, Federal Information Returns and Worksheets

Additional Records Required For Verification or Acknowledged Payroll

• Payroll records such as Payroll Journal, Individual Earnings Records, Payroll Summaries, etc.

• Federal Employment Tax Reports

Form W-2, Wage and Tax Statement

Form W-4, Employee’s Withholding Allowance Certificate

Form 941, Employer’s Quarterly Federal Tax Return

Form 940, Employer’s Annual Federal Unemployment Tax Return

• State Employment Tax Reports

DE 9, Quarterly Contribution Return and Report of Wages

DE 9C, Quarterly Contribution Return and Report of Wages (Continuation)

DE 9ADJ, Quarterly Contribution and Wage Adjustment Form

DE 6, Quarterly Wage and Withholding Report

DE 7, Annual Reconciliation Statement

DE 678, Tax and Wage Adjustment Form

DE 4, Employee’s Withholding Allowance Certificate

As part of the audit, the auditor will arrange for an exit interview, either in person or by phone, to review the audit findings, identify any other information that should be considered, and attempt to resolve disputed issues, if any. If employer does not reach an agreement with the auditor, he or she may request a pre-assessment conference with the supervisor of the auditor. The audit will result in one of the following outcomes:

• A no change audit, where no differences are found.

• An overpayment, where a credit or refund will be issued.

• An underpayment, where the differences will be assessed.

• Both an underpayment and overpayment.

If an assessment is issued, employer will receive information about appeal rights. Employer may petition for reassessment with an independent third party, the California Unemployment Insurance Appeals Board, for a hearing before an Administrative Law Judge.

What EDD Auditor is Looking for?

Generally, EDD requires its auditors to maintain good relationship with employer and staff, and answer all employer's questions. Below is general categorized list of what EDD Auditor is set to accomplish during an audit. Auditor will:

  • Determine and verify by calendar quarter the amount of taxable wages paid or payable and the amount of contributions, interest, and penalties required under the CUIC.
  • Determine if the employing unit (business entity, individual employer, or other) has made the proper withholding for State personal income tax as required by the CUIC and has accurately reported the withholding to EDD.
  • Resolve obstructed benefit claims.
  • Resolve wage-earner claims for refund under CUIC Section 1176 or proof of credit
  • variances.
  • Establish liability under bankruptcy, probate, and assignment for benefit of creditors
  • actions.
  • Assist other states in resolving discrepancies in reporting to their state.
  • Enforce correct reporting in industries known to be incorrectly reporting or not
  • reporting specific wages or services.
  • Follow up leads furnished by other Area Audit Offices, the public, or other offices
  • within EDD.
  • Follow-up audits furnished by UEO.
  • Assist compliance staff in reconciling Tax Automated System (TAS) generated estimated assessments issued for failure of the employing unit to file returns.
  • A worker furnishes a form DE 230 as a potential employment tax audit lead and it is forwarded by Audit Section to the appropriate AAO, ETCSO, or in certain situations to UEO.

Please note that effective with the 3rd quarter 2014, late filing will incur a penalty of 15% (10% for periods prior to the 3rd quarter 2014) plus interest. Late deposit will lead to a penalty of 15% (10% for periods prior to the 3rd quarter 2014) plus interest. Wage Item Penalty - A wage item penalty of $20 ($10 for periods prior to the 3rd quarter 2014) per employee will be charged for late reporting or unreported employee wages.



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