What Documents Do I Need in a Payroll Tax Audit?

What usually happens is that the auditor will send you a laundry list of documents that they're looking for and of the different types of audits, payroll tax audits are usually the ones that have the most flexibility because in a payroll tax audit they're basically reading through tests. They're running a test on payroll that was paid, taxable wages tax that was paid, payroll tax expenses that are on the general ledger and then independent contractors that basically payroll tax in a box. So if you're running an audit, what they're going to ask for is they're going to ask for three years of records and they'll ask for tax returns and they're going to ask for payroll tax returns and they're going to ask for internal accounting and this and that mail, so before you go and tackle that big laundry list of documents, the best thing to do is to talk to the auditor. Because at the beginning of the payroll tax audit, you have the best opportunity to limit the scope of the documents requested. For some people providing payroll records for three years isn't that big a deal but for other companies, particularly companies that utilize a large workforce or large amount of independent contractors, it can be a huge deal to have to come up with all the 1099s and w-2s and everything that gets filed. So the best opportunity you have with respect to documents is really to limit the scope. Most EDD auditors will limit the scope of the records of their request, at least for the first audit meeting, to the last three years of tax returns. They may ask for three years' bank statements but to limit the other documents to a year, which is the best thing to do because if you can go through a limited testing period, establish that there's no error and the auditor has a chance to complete their process and check the box, problem solved. So when going through a payroll tax audit don't just accept the initial document request. Work with the auditors - it's actually needed so that you're not having to produce records and digging yourself into a big challenge that is going to take you a lot of time to get out.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law