An Introduction To Payroll Tax Fraud: EDD Investigations
Payroll tax fraud can occur either through deliberate criminal activity or simply because an employer or employee has provided inaccurate or incomplete information. The Employment Development Department (EDD) takes payroll tax fraud extremely seriously, so it is imperative that you understand the ways in which fraud can occur and take the necessary steps to avoid committing fraud.
What is payroll tax fraud?
Although misreporting or failing to report the correct amount of wages is sometimes distinguished as tax evasion as opposed to tax fraud, there is really no distinction – tax evasion is tax fraud. If you are found to have committed tax fraud, the agency will take into consideration whether the fraud was intentional or unintentional when recommending whether to prosecute or treat the case as a civil matter.
A common form of tax fraud, commonly referred to as the ‘underground economy’, occurs where employers hire workers ‘under the table’ or ‘off the books’, paying them in cash so as to avoid liability for payroll taxes. The workers who are so employed may also fail to report their wages and therefore pay less income tax or continue to receive benefits that their income dis-entitles them to. Other instances of tax fraud occur where employers falsely classify workers as independent contractors rather than employees, under report wages or fail to file their payroll taxes in full or on time.
Can I go to jail for errors on my payroll tax returns?
Absolutely. The EDD is like any other tax organization in California. If they audit you for payroll taxes and they see evidence of criminal activity, they can refer you to the EDD Criminal Investigative Unit. That unit can make a recommendation to the district attorney.
We see this all the time in cases where there was a failure to report payroll or where there are very serious fudgings of the numbers with payroll tax returns.
If you think that there is any criminal liability at the beginning of the case, you want to work to mitigate that issue as quickly as possible. The way that you do that is to throw as much cold water as possible on the idea that your errors were willful.
If you can dampen down the willfulness, there is a good chance that you can avoid criminal liability on the payroll tax side of things, because the EDD only has limited resources to pursue cases on the criminal level.
If you are open about what the errors are and you can explain your way out of them, you can reduce the seriousness of them or at the very least, mitigate any sort of willfulness. That is your best way to avoid criminal liability.
I think it is a good idea in general to have a tax attorney retained in an EDD audit, especially if you are facing criminal liability. Get a criminal tax attorney involved and get somebody who knows what they are doing and guide you through that process.
How Fraud is Detected and Determined
The EDD may detect possible fraud in a number of ways. An employee or customer of the business may tip them off. The business’s reported operations may not match up with the amount of payroll taxes being reported, especially in cash-heavy operations like retail businesses. Audits can also be triggered by simple delays in reporting.
Where the EDD detects fraud, it will carry out an investigation. It also shares information with the IRS, leaving offending parties open to a federal audit and two sets of penalties.
An EDD investigation usually requires the business to produce comprehensive financial documents and to make their premises available for inspection by EDD agents. If the EDD considers the investigation to be a criminal matter, agents may use surveillance and search warrants to gather evidence, and may seize documents.
Individuals within the company may be interviewed, and if you are a signatory to financial or employment documents you will be under suspicion. Where there are multiple responsible people in a business which has committed fraud, the EDD may recover against all or one of those people.
These measures can be time-consuming, costly and distressing for employers, who may wish to appoint a tax attorney to help them navigate the process.