What Do I Do If There Is a Serious Error on My Payroll Tax Returns and I Get Audited by the EDD?

So the first thing you need to do is you need to understand your risk. How big is the error? How bad is the error? Was the error willful or was it not willful and how much damage is it going to be caused? By understanding that you'll know what the best case scenario and the worst case scenario is. The next thing you have to determine is whether or not the auditor's going to catch it. A lot of things with payroll taxes are black and white so if the auditor is going through their testing, chances are they're going to catch something but if you can somehow limit the auditor's focus into a test year or you can steer them away from the issue, then you may be able to avoid liability and you may not have to disclose the issue. If you are forced to disclose the issue, you need to decide whether you're going to come out of the gate and disclose it or whether you're going to make the auditor catch you. In our experience it's far better to get in front of issues that you know are going to be a problem. If you do that the biggest focus that we have is on penalties and by getting out in front of the issues, that's the best chance that you have to really mitigate the penalties. The penalties oftentimes can be well in excess of the tax - like four or five times the amount of the tax, so mitigating those penalties in the context of the audit is really critically important. I mean I've seen clients' liability be cut in half or more by just mitigating the penalties, so it's important to go into the audit when you have an error with a strategy for handling that error and then present it to the auditor in the way that's going to minimize the damage as the result of that error.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law