Are you preparing for an EDD audit of your California business? These audits can be frightening and confusing, but there are ways to prepare and protect yourself. The EDD, or Employment Development Department, is stepping up its auditing of the state’s businesses to find more violations.
If you have done nothing wrong, you’ll likely face no serious consequences from an EDD audit. However, you’ll feel more secure and confident if you’re sure of what to expect. In this guide, we’ll explain the EDD auditing process and how to get through it.
Why Companies Get Audited
Many times, California’s business owners wonder why they’re chosen for audits. If you’ve followed every requirement, why are you being audited? To address the situation, the team at Brotman Law must first determine which type of audit is being done. There are two EDD audit types, including:
- The verification audit, which is randomly generated. Business owners who abide by the state’s rules can still get picked for this type of audit, because they’re completely random in nature. These audits carry no assumption of wrongdoing or problems, and if your company’s payroll and employee roster are of a certain size, you may be more likely to be selected. Geographic location, industrial sector, and other factors may also increase or decrease your chances of being audited.
- The request audit is a little more problematic. In these cases, businesses are targeted because of EDD investigations or because someone provided them with relevant information. Typically, those providing the information are former or current employees who may have legitimate complaints about the business. In some circumstances, however, informants are simply looking for an easy payday.
No matter which type of EDD audit you are facing, we can defend you and protect your rights. Visit our firm’s website for more information or call today to request a consultation.
What’s Next
After you’ve been informed of the audit and determined what type you’re facing, what comes next? The auditor will send a package containing an audit notice, a pre-audit questionnaire to fill and submit, and a records request that covers the period to be audited.
Sometimes, auditors will also request an extension of the state’s statute of limitations. You’ll need to save copies of each piece of correspondence the EDD sends, as the information within will help your attorney form an adequate defense. An EDD audit doesn’t mean disaster, but you shouldn’t face it alone.
Be sure to ask your lawyer to sign an EDD power of attorney form. Even after the audit has concluded and the Employment Development Department has made its findings, you’ll need to notify the attorney of the case’s outcome. Most times, the EDD doesn’t keep lawyers in the loop, so it’s up to you to get them there.
Getting Ready for an EDD Audit
After receiving notification of an EDD audit, it’s time to prepare. Start by gathering your business’ important records. It’s important to be prepared and organized, as it will minimize the risk of steep fines and other penalties. Here are a few things to work on as you’re preparing for an EDD audit.
A Review of Independent Contractor Agreements
If you use independent contractors during the course of business, you’ll need to review any agreements you’ve made. The EDD will evaluate the nature of the working relationship between the business owner and contractors, in efforts to determine whether those contractors are really employees. That’s why written agreements are so important; they keep all parties on the same page. For businesses with no written agreements, this is a good time to create them.
You’ll have to include certain provisions in these agreements, and leave others out, to confirm that both sides have the same view of and intentions for the business relationship. Certain terminology is likely to catch the EDD’s eye. For instance, if contractors are required to work at certain times, attend corporate meetings or training sessions, submit time sheets, or they’re prohibited from working with others in the same industry, it’s not indicative of an independent contractor relationship.
The state of California has tightened its requirements, and few arrangements are considered independent contracting anymore. As a business owner, you may find it hard to document an independent contractor relationship, but we might be able to help.
Gather Important Documentation
During the auditing process, it may help to prove that each contractor runs his or her own business. Copies of things such as business cards, stationery, business licenses, and invoices can serve as documentation of this fact. Gather these documents for each contractor who serves your company. In some circumstances, it may be possible to obtain these documents after the audit has started but having them beforehand will make you look better to the EDD auditor. Additionally, if you no longer work with certain contractors, it may take a bit longer to obtain the necessary documentation.
File Your Taxes on Time
Another way to get ready for an EDD audit is to promptly file quarterly employment taxes. Try to file these returns before the deadline. If you don’t do so, it indicates poor organizational skills, which may not look good to the EDD auditor. Furthermore, it may create additional, unexpected tax liabilities.
The Final Step
The last step in the EDD auditing process is a face-to-face meeting with an auditor. After you’ve assembled the necessary documentation and consulted your attorney, you will be prepared for an audit. If you’ve gathered the right paperwork and sought legal counsel, the audit itself should be quick and painless.
However, if the Employment Development Department claims violations have occurred, you may end up being on the hook for steep penalties, not to mention the stress and uncertainty such allegations create. If you’ve been informed of an EDD audit in the state of California, you do not have to go through the process alone. Our firm has skilled, experienced attorneys who defend and protect the state’s business owners every day. Let us put our abilities to work for you! Fill out our online contact form to request additional information or call today to book a consultation.