California Payroll Tax Audits

California payroll tax audits present some major challenges for businesses. However, you have come to the right place if you are being audited by the EDD. With the help of our senior legal team, we will build you a tax action plan to pass your audit with flying colors.

Overview

Payroll tax audits are more formulaic in some senses than income tax or sales tax audits, but are no less perilous and require a good deal of preparation and strategy to be successful in.

It is the simplicity of the information being asked for that is deceptive for clients and businesses are disadvantaged when going up against auditors with years of experience. Couple that with a different appeals process (California payroll tax audits fall under the jurisdiction of the California Unemployment Insurance Appeals Board) and it is easy to see where the risks are.

The main problem with a payroll tax audit are the penalties associated with the audit. Many clients do not realize the severity of the penalty structure and they believe that they are at a low risk because they have been doing business in the same manner that others in their industry have been doing all along. In reality, the penalties associated with a California payroll tax audit can be five or six times more than the amount of tax owed.

The other major issue for clients is a difference in their definition of what they consider an independent contractor to be and the way that California defines the independent contractor relationship. Assembly Bill 5 (AB5) received alot of attention here in California for creating a new three part test for defining what an independent contract is, but the reality is that the EDD has been taking a hard line against worker classification for quite some time.

For most businesses, the classification of your independent contractors boils down to 1) the level of control you have over them and 2) whether or not they are integral to the revenue generation function of your business with a whole lot of nuance in how the state looks at those two areas.

Payroll tax audits focus on four main areas:

1) That the correct amount of wages were reported.

2) The correct amount of tax was paid.

3) That there is no additional tax owed (through an examination of the general ledger and bank statements).

4) That there are no independent contractors who need to be classified as employees with additional tax due.

The largest complaint from clients is the lack of uniformity of enforcement in this area. People generally want to do the right thing and pay the proper amount of payroll taxes, but California provides a lot of discretion to their payroll tax auditors and the result seems to be a haphazard approach to enforcing the law.

Luckily, our firm sees the real playing field with respect to the issues that arise in a payroll tax audit and has wide experience dealing with district offices all over California. Together we can put a plan in place for getting you through the audit and avoiding the very serious penalties associated with a California payroll tax audit.

The Best California Payroll Tax Audit Defense Starts Here.

Our senior legal team will dig deep into why you are being audited and create a tax action plan to get you out of harm's way once and for all.

Five Key Points to Understand

Payroll audits are not "random." Because California has limited resources, it tends to target businesses and industries that it is confident it can get an adjustment out of.
If you are being audited for payroll taxes and have independent contractors, your definition of an "independent contractor" is likely different than EDD's definition. The law is not in your favor.
The biggest issue in a payroll tax audit is the EDD's penalty structure. We have seen and it is common in payroll tax audits to see penalties assessed of more than 5-6X the amount of tax owed.
Everyone who is an employee of a company by definition performs some level of service and should have some measure of taxable wages.
Very few attorneys, including tax attorneys, practice state payroll tax law because it is incredibly nuanced and requires a working knowledge of California tax procedure.

Your Payroll Tax Action Plan: Step-By-Step

1. The Initial Diagnostic
2. Meet With Our Senior Legal Team
3. Our Plan Delivered to You
4. Execution: Where the Rubber Meets the Road.

We scope you and your business to determine the best approach.

Your first step in the process is to meet with our concierge team, who is in charge of walking you through in the intake/conflicts process for our firm. Our team will collect some basic information and is trained to gather some facts that our senior legal team will use to sketch the four corners of your tax action plan. For any documents that you wish to submit to us, our team will provide you with a customized link for you to upload your documents utilizing bank level security.

The initial meeting with our team is completely complementary. It is our job to analyze your situation and to make a determination on whether or not you are a good candidate to take the next step in our process. The last thing we would want is for you to make the investment in the tax action plan process and for it not to provide maximum benefit for you.

After your initial diagnostic, our team will make an initial recommendation and connect you with our senior legal team or another resource to assist you.

Note: From the moment you speak with our team, even if you elect not to retain us, everything you tell us is completely confidential under California state bar rules.

It is called an action plan because your legal defense strategy gets built on the spot.

Let's get down to brass tacks. We start the meeting knowing that there is something about your situation that has caused the state to target you for a sales tax audit. The ultimate goal of our meeting is ascertain what put you on the radar and how to get you off it.

We usually begin our meeting by going through the basics: who you are, what you have been doing, and, based on this, what your risk exposure is in a sales tax audit. As long as we have been doing this, it always amazes us how the little things about a prospective client can really influence the audit process. As we listen to your answers, we are stress testing your business to see where the weak spots would be in an audit.

If you have submitted any documents to us, we will review them in advance of the meeting and provide feedback based on what we see. However, providing financial documents (tax returns, sales summaries) is not necessary at this point in the process.

The advantage that exists in a payroll tax audit vs. other types of audits is that the process for auditing returns is basically a straight formula.

1) Did you have the correct amount of taxable wages?

2) Did you pay the correct amount of tax?

3) Are there other items in your financials that should be reclassified as taxable wages (and thus you owe the government more tax)?

4) Do you have workers/independent contractors that should have been reclassified as employees (and thus you owe the government more tax)?

5) Based on the conduct of the business, should be the business be subject to a penalty/penalties?

So, because we have the auditor's playbook, we can put you through a rough simulation of what you are going to experience in the audit. This is the best way to avoid liability because we can take a practice run at examining areas where there might be potential risk and resolving issues before we have to put them in front of the auditor.

By the end of the meeting, we will outline a full plan for your sales tax audit defense and share our full recommendations with you.

You will receive your action in writing to take with you.

The action plan is our opportunity to deliver as much value to you as possible and for you to walk out of our office with a game plan for resolving your sales tax audit. After you sit down with Sam or our senior legal team, we work to finalize your plan in writing and deliver it to you. There is no further obligation to us at this point and your action plan comes with a full 100% money back guarantee. If we do not deliver value for you, you do not pay for your plan: plain and simple.

Our concierge team will put together and send you a summary of our notes from the meeting/call. You will have these for the benefit of your organization, you can share them with others, or we are happy to schedule a follow up meeting to discuss any points of the plan with others.

Keep in mind, our plan comes before we have an opportunity to do more than an initial examination of any supporting documentation. However, while not a substitute for full on legal representation, we have designed the plan as its own stand alone component.

We help you define the rules of engagement and sets the tone for the audit. Often, even with a base familiarity with the client's data, we can steer the direction of the audit early to our client's benefit. By having a plan, even without full representation, you will see a significant impact on the start of the audit, which will be critical in determining the outcome and maximizing your defense.

We measure twice and cut once and, with the green light, we can spring into action and put your plan in place.

With your approval, we can execute and begin implementing your customized plan by the end of your first meeting. In reality, by the end of having us deliver their plan, most clients will elect to retain us for some measure of services going forward toward implementation. We are happy to be a role player and to serve as a guide going forward, or we can take the audit completely off your plate and handle everything from start to finish. It is entirely up to you.

We like to say in the firm that we are not in the habit of making decisions for people, but rather we strive to provide enough information for organizations and business owners/officers to make their own decisions. That is not to say that we leave you to do the heavily lifting (quite the contrary, our recommendations are usually very precise and candid), but the control over the matter should always rest with the client. We strive to keep you in the loop and break things down step-by-step.

Through our experience in more than on hundred payroll tax audits and 10+ years of experience in this area of law, we have learned that every audit follows a similar path, but with a slightly different approach based on who the client is. Our focus during the entire audit process though remains on what is best for you business. It is through our business-first approach though that we are able to achieve very beneficial results for our clients because we understand the 10,000 foot view of how the process works and how to navigate through it.

Why We Designed This Service

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Our aim in the California payroll tax audit representation process, other than getting you the best possible result, is really about providing consistency and predictability to something that is highly susceptible to the whims of the individual auditor.

Managing risk for our clients in this area is about building confidence in how they are structuring their workforce and in making sure that they are paying the proper amount of tax.

Over the years, our largest grievance with the California state payroll tax audits has been their arbitrary and capricious application of harsh penalties and the way that they sometimes hide behind the CUIAB appeals process in pushing forward sloppy work.

Seeing potential penalties 5-6 in excess of the amount of tax owed and working hard at various levels of the state government to erase these penalties has caused us to rethink our approach to payroll tax audits.

We want to make sure that our clients are adequately informed about the risks associated with California payroll tax audits and adequately prepared to defend against that risk.

We have developed a system that is straightforward, easy to follow with the guidance of our team, and designed to get you out from under the audit as quickly as possible.

Features & Benefits

Our firm focuses on this area of law and frequently defend clients in audits across California.
You will receive the benefit of a firm that is knowledgable and does not have to reinvent the wheel on payroll tax audit defense.
Additionally, we maintain an excellent relationship with the EDD auditors. Because we work with many of them across multiple cases, we tend to have an easier time and a familiarity with them and their senior management.
By understanding where the biggest drivers of liability are in a payroll tax audit are and where the traps are, we can skillfully help you avoid them.
We view our role with our clients as their quarterback, naming and strategizing the next move.
Preparation and presentation are the keys to success in any audit. EDD auditors may appear to wield a lot of power, but they are often no match for an attorney with a superior legal knowledge base and a keen understanding of EDD procedure.

Give Us a Call. You Have Everything to Gain and Nothing to Lose.

Our tax action plans are the first step in making sure that you get the best payroll tax audit defense possible. They are 100% risk free with a complete money back guarantee.