California Payroll Tax Audits

The Employment Development Department is the largest tax organization in California and the California payroll tax audit process presents some major challenges for clients. Fortunately, with our help, you can overcome them and sail through 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 strategy sessions dig deep into why you are being audited and create a roadmap to getting you out of harm's way once and for all.

Who Needs This Service?

Is your business being audited for payroll taxes? Then you could probably use our help in some way, shape, or form. This is particularly true if your business depends heavily on outside labor, has employees in different states, or if you are commingling business and personal expenses.

Even if you think you have not done anything wrong or are consistent with the standards in your industry, we urge you to think differently and to get the facts associated with your situation. California has limited resources in which to audit businesses and they tend to target those that they consider to be low hanging fruit

There are no accidents with payroll tax audits – you are being audited for a reason and it is our job to decipher that reason and help you mitigate the tax and accompanying steep penalties that come with a California payroll tax audit.

Our Approach

We provide every prospective California payroll tax audit client with a 60-minute initial strategy session.

California payroll tax audit tax strategy sessions start with a deep discussion about your business, the mechanics of it, and all about your employees and other labor sources that you rely on to help it run. Sam or another member of our senior legal review will help focus on the facts and look for clues as to what may have triggered your payroll tax audit. Although it is possible that the information on your payroll tax returns was not correct, the Employment Development Department uses a variety of pieces of outside information in selecting who to audit.

Your story and the mechanics of your business will dictate the level of risk that you may face in an audit and it is our job to help you understand that risk and to help explain why California's version of the facts may be different from your own. That is not to state that California is necessarily right, but we need to determine what their opening position is going to be and how best to counteract that.

At the end of our meeting, we will have built a strategy for you and diagramed how best to approach your payroll tax audit in order to reduce your amount of risk and to mitigate any potential penalties, which are a huge concern. There is no further obligation, as this is our chance to shine and deliver value to you, although we are normally more than happy to assist with the execution of that plan. It will also give you the opportunity to further understand and ask questions about what it is like to work with us.

The Employment Development Department's pre-audit questionnaire is not what it seems.

Hopefully, you are contacting our firm prior to submitting the EDD's pre-audit questionnaire. The form itself seems harmless, but actually contains many questions and requests for information where the answers can have broad reaching consequences on your audit and beyond.

Our first action to get your audit off on the right foot is to fill out the pre-audit questionnaire with the answers that will steer the audit in the right direction. Our goal is to start by framing the California payroll tax auditor's perception of the company in a positive light, even if there is negative or damaging information about the company disclosed in the questionnaire that we cannot avoid.

We cannot necessarily control the cards that we are dealt, but we can control how we play those cards and the pre-audit questionnaire is an important step in that process.

We put you through our pre-audit process to minimize your risk and maximize your success in the audit.

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.

We attend your audit meeting and handle any necessary follow up.

The audit meeting for a California payroll tax auditor is critical because it directly affects the auditor's perception of your company and any workers associated with that company and what those people do. After the audit meeting, the auditor may try and contact 3rd parties to verify the information in the audit (do not worry, we are ready for this), so the initial meeting and the framework provided for the auditor are important in setting the tone.

We show up to represent you for your payroll tax audit and give a presentation, based on your documents and supporting materials, to the auditor. Because of our pre-audit, we are well rehearsed and able to respond to any objections that the auditor might have.

Between the audit meeting and the finalization of the auditor's report, we will handle any follow up questions or back and forth. Our pre-audits usually eliminate the need for supplemental information or document requests, although it does happen from time to time. After the auditor has concluded their work, hopefully with no additional tax due and owing, we will do what is needed to close the audit and for the auditor to include information in their report that will hopefully dissuade the state from auditing you again.

If you are unsatisfied with the audit, we have multiple options at our disposal. Depending on the issue, we can figure out the best way to challenge whether through the auditor's district managers or the California Unemployment Insurance Appeals Board.

Why We Designed This Service

Payroll Tax Audits Team

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.

Our Pricing

Payroll tax audits are tricky to project costs and tend to skew upward or downward depending on the type of industry/workers involved and the size of the workforce. Particularly, situations where there have been improper classifications or situations involving higher compensated/higher skilled independent contractors create additional work in presenting our case to the state auditor.

The bad news is that California payroll tax audits can take more preparation on the front end than income tax or sales tax audits, but the audit process itself is pretty straight forward. Furthermore, much of the information we need (payroll records, worker personnel files, etc.) are client-driven and usually easily organized. Even in industries that lack personnel files, the underlying information that we need is usually quickly assembled.

It is not unusual for a payroll tax audit to run anywhere between $7,500 and $15,000 to get you through the process, although costs are less for smaller clients. Because the process is more streamlined, there is also less variation in the cost than other types of audit, and cost can be more easily predicted after knowing a few particulars about you and your situation.

For more information, please call our office so that we may assess the particulars of your situation, the risks involved, and give you a more accurate cost estimate. Knowing which district office and potentially which auditor you have been assigned to will also help in our determination, especially for offices that we have a high frequency of cases in (all over Southern California, including Orange County and Los Angeles and San Francisco/San Jose/Oakland and the Bay Area). As a reminder, cost conservation is one of many strategic decisions that needs to be examined in the course of an audit.

Features & Benefits

Similar to what we offer in sales tax audits, our firm provides our clients with a broad-based understanding of these cases at a much higher level than even the auditor. This is because we have the expertise in defending clients in this area and when appropriate, we can project the view to our clients (and the auditor) of how things may go if we appeal.

We specialize in this area of law and have good working relationships with managers, auditors and others who conduct payroll tax audits.

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

Our tax strategy sessions 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.