How are companies selected for audit by the EDD? Why have I been selected for audit by the EDD? So there’s a variety of factors that get you in the crosshairs of a payroll tax audit. Some of those are innocent factors and some of those are not so innocent factors. The EDD operates on what they call a lead system. So In order for a payroll tax audit to happen, a lead needs to get generated from somewhere. So what that can be is if you’re going through a workers’ compensation audit with the EDD or a wage-an-hour audit with the EDD, sometimes those will trigger a referral. The EDD gets referrals from what they call their underground economy unit, which is for taxpayers that are not filing or reporting properly. And the EDD also gets leads from a variety of other things, like if you file more 1099s than W2s, or if they see a huge change in payroll from you to year, or so on and so forth.
So there’s a variety of factors that can get you triggered, and it’s important to understand the outset what probably got you triggered, because That’s the area that the auditor’s likely going to focus on. The auditor is still going to go through their process. They’re still going to go through the tests involved in an ADD audit, but they’re going to be focused on the area that’s the biggest cause for concern. So by understanding what that area is and how it relates to you as a company, then you can work to mitigate that issue and increase your likelihood success that you’ll pass the EDD audit with flying colors.