What Happens After an EDD Audit?

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Potential EDD Payroll Tax Audit Results

An audit can result in one of four outcomes:

  • No change, meaning no differences were found
  • Overpayment, in which a refund or credit is issued
  • Underpayment, meaning the difference will be assessed and charged to you
  • Both underpayment and overpayment

Demand for payment of penalties, interest, and back taxes within 30 days is usually made. If you cannot pay this in full within the time allotted, a 10 percent penalty will be added.

Penalties often drive EDD audits because the penalties can exceed the taxes owed in certain conditions.

As you can see, an adverse audit decision can cause substantial payroll tax liabilities for your business. To add to the issue, the IRS generally adopts the conclusion of the EDD auditor and assesses federal payroll taxes, interest, and penalties. Filing for bankruptcy will not resolve the problem with the EDD.

You may not avoid all audits, but you can greatly minimize the chances of a payroll tax audit by the EDD by classifying all your workers correctly, especially those you treat as independent contractors.

If you are unsure how to apply the legal statutes and factors, or if you receive notification of an audit, contact a tax attorney experienced in California payroll tax law to help you do the right thing and to protect your rights as an employer.

 

If You Disagree With the Final Audit Report

After the audit, there is a report. If you agree with the report, and you agree with the liability, then you are done. You sign off on the report. Whatever you owe, you either pay it or it goes to collections.

If you do not agree with the report, then you have some options.

Option one is you can continue to go back and forth with the auditor and get the auditor's manager involved or get the head of the audit unit for the local office involved, depending on how far up the ladder you want to take that. Depending on the facts of the case, depending on who the auditor is and the personalities, you may or may not want to do that.

if you ultimately get to the point where you just decide to stop working with the audit unit, then you will file an appeal. The auditor will issue you an assessment, you will file an appeal and you will go through the EDD appeals process.

EDD appeals are handled by an organization called CUIAB. That stands for the California Unemployment Insurance Appeals Board. You can go through the formal appeals process, in which case you will get your "day in court." Or, you can go through the EDD settlement department and try and settle your liability. Depending on the facts, depending on the circumstances, and depending on the people involved, there are a variety of different avenues.

We have found success at each of the different levels. Generally speaking, that is what you are looking at, and those are the three choices if you do not agree with the results of your audit.

 

Is it Possible to Settle With the EDD Auditor?

We have clients who ask if it is possible to settle and what they mean is, if they can just throw a number at the auditor and make everything go away?

The answer is no. You cannot throw a number out at the EDD auditor and say, “Hey, I am going to give you 20 grand, will you get lost?” It just does not work like that. We can negotiate with your auditor if they are motivated to try and close the case. Agreed. They want you to agree to the results of the audit because if the audit goes into appeals, they have to do more work.

The auditor will negotiate, particularly on the penalty portions of the liability, which as I explained earlier, can get really, really high. Another area for negotiation is independent contractor status. There are people who clearly are independent contractors, there are people who clearly are employees and there are people who are in the middle.

With the people who are in the middle, you can negotiate with the auditor, particularly, if you think you are going to have an agreed audit. The trick is, is you want to be very active in the negotiations with the EDD.

You do not want to just hand everything over to the auditor and have them write a report. You want to go through and do their work for them. At least it gives you an avenue for presenting information with some level of superiority.

That is the best way to negotiate or to settle with the EDD auditor. That is where you are really going to have the best results in reducing your liability and minimizing your risk.

 

The EDD Settlement Process

Before you get into the appeals process, you have the option of going to EDD settlement. You, or more likely your attorney, is going to draft a written settlement request, and they are going to state your case and why they believe that the EDD should settle this issue.

You want to do the best job you can in putting together the biggest package you can because the EDD settlement officer is going to take the audit report and they are going to your settlement offer, and they are going to look at it. They are going to compare the two, and then they will probably come back to you with questions or dialogue in presenting that offer.

The EDD settlement officer is allowed to consider the risk of litigation. They are trying to get cases out of the appeals process. Usually, particularly if there is a favorable resolution, they are willing to settle.

In most cases with the EDD regarding payroll tax liabilities, particularly with independent contractor classification, there will be an omission and a requirement that any errors that were uncovered during the audit get corrected for the future.

Just know in advance that might be a condition of the EDD settlement. The settlement is not going to eliminate your liability entirely. A settlement is a settlement and oftentimes, particularly in the context of a legal settlement, both sides do not get exactly what they want.

If you understand that and keep that framework in mind during the process, a settlement can be a very good tool at the EDD level in order to dismiss cases.

 

The EDD Appeals Process

The EDD appeals process operates as a little mini-trial but it is not as formal as a courtroom setting. It would involve you and your representative, the EDD auditor, the EDD representative, who usually is an attorney, and an administrative judge.

What happens is a formal mediation process. The EDD will go first and they will present their case. You get to ask questions, you get to cross-examine. You get to go back and forth on this, and then you present your case. The EDD will ask you questions; they will flush out your case, and then the judge in the case will make a decision.

The rules of evidence are fairly loose, although they let you present your evidence ahead of time, so that everybody can review them. You just go back and forth and you build the best case that you can. The judge is not going to make a decision on the spot. They generally write their opinions in about 90 days.

EDD appeals can take up a lot of time. It usually takes a while to get in front of the CUIAB. Secondly, you are spending basically a full day in court. You have to have a certain level of preparation because obviously, you want to do the best you can on the appeal in order to reduce your liability.