What Are the Risks in an EDD Payroll Tax Audit?

So the biggest risk by far in a payroll tax audit is the penalties. The EDD has some really nasty penalties. We've had situations in the firm sometimes where the amount of tax would be one number and the penalties would be four or five times what the amount of taxes actually is. That's insane but the biggest risk that we see is that the penalties really amplify the amount of the liability. So when we're looking at a payroll tax audit our focus is really on penalties and what we can do to eliminate them or at the very least mitigate them. Number two, the risk in an EDD audit is it turns into a fishing expedition audit if left unchecked. We'll ask for all sorts of things and we'll go through them with a fine-tooth comb and this creates a lot of back and forth. All of this can be really mitigated if you pre-audit the situation and if you come into the audit with a very well-defined plan and a very well-defined presentation and you're leading the auditor through the audit kind of with breadcrumbs to make sure that we're checking the boxes on the avenues that need to be checked and you're controlling the flow of information. Controlling the flow of information in a payroll tax audit is the best thing that you can do. It's difficult once you get into the independent contractor part of this and the reason for that is when you're dealing with situations with independent contractors, the auditor is going to go out and try and interview those people. The problem and the risk to the client is you don't know exactly what those people are going to say a lot of times. What will be found is that the auditors will lead them through some of the factors that will make them employees. They shouldn't be doing that but it is a practical purpose that's sometimes what happens and in other cases they're disregarding the information in order to help them build their case. Ultimately the auditor is writing a report so the content of that report

is very very important because it affects the outcome of the payroll tax audit but those are the biggest risks that the client needs to be aware of walking in. Payroll tax audits get very very convoluted and you need to do the best you can to streamline them and mitigate any risk associated with them to make them go away.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law