Posted on October 15th, 2018
Are you preparing for an EDD audit of your business and need some pointers?
In this article we spell out how to survive an EDD audit of your California business.
Are you getting ready for an EDD audit?
EDD audits can be scary, but there are many ways to protect yourself and prepare for the audit. The Employment Development Department, or EDD, are doing more and more audits on California business owners to try to find costly violations.
If you didn’t knowingly do something wrong, you may not face serious consequences from the audit. But still, you’ll feel way more confident and secure if you know what you’re going into.
In this guide, we’ll walk you through what to expect, and how to survive an EDD audit.
Keep reading to learn what you need to survive an EDD audit of your business!
Why Is My Company Getting Audited?
You might be wondering why you were chosen for an audit.
You think you are following every legal requirement, so what is the reason for this audit?
To know how to handle the situation, you first need to figure out the type of audit that’s getting performed.
There are two types of EDD audits.
Knowing which one you’re looking at will affect how you get ready for yours.
1. Verification Audit
Verification audits get initiated randomly. If you follow all the rules, you can still get flagged for this kind of audit, since they happen at random.
There’s no assumption of problems or wrongdoing in this audit type.
The selection criteria for a random verification audit includes your payroll size and number of employees.
Your industry type, geographic location, and any combination of these factors can also raise or lower your chances of getting a verification audit.
2. Request Audit
Facing a request audit is a bit more serious.
In this case, your business was deliberately targeted for an audit because EDD investigators gathered information on it, or because information about your business and suspected violations was provided to the EDD and triggered an audit.
Usually, the people who provide this information are current or former employees. They may have a legit grip against how you are running your business or they may be purposely looking for ways to exploit the situation and cash in on your dime.
What Happens After You’re Audited
So, you’ve been notified of the audit, and you’ve found out what kind of audit it is. What next?
First, the auditor will send you a package.
This package will contain the audit notice, a questionnaire to fill out before the audit, and a standardized request for your records covering the period that’s being audited.
Sometimes, the auditor will also send a request to extend the statute of limitations. You need to make sure to share every correspondence that the EDD sends to you with a trusted legal representative.
An audit doesn’t automatically spell disaster, but it’s not something you should face alone.
Make sure to have your legal representative sign the EDD Power of Attorney. The EDD likely hasn’t looped your attorney in on their correspondences, so it’s up to you to notify them.
Even when the audit is finished and the EDD sends its findings, your attorney probably won’t be kept in the loop.
It’s up to you to let them know the outcome, too.
Preparing for an Audit
After you’ve gotten the audit notification, it’s time to get ready.
You’ll need to get your records together. It’s crucial to be organized and well-prepared, which can help keep the fines and penalties to a minimum.
Here are a few of the things to focus on as you get organized to prepare for the audit.
Go Over Independent Contractor Agreements
If you keep independent contractors as part of your business, one of the critical steps now is to go over the terms and conditions of any business agreements you made with them.
If your business doesn’t have any written agreements with its contractors, this is a good time to start.
One thing the EDD will consider during the audit is what the parties believe the nature of the working relationship is.
The EDD’s goal is to figure out whether the individual’s relationship with the employer is that of employee or independent contractor.
That’s why it’s so important to have everyone on the same page – and a written agreement helps you get there.
You’ll need to make sure certain provisions are in the agreements (or not in the agreements) to confirm that both parties have the same intentions for the working relationship.
Certain terms are red flags for the EDD.
For example, if you require contractors to work during a certain time of day, require that they attend company training’s or meetings, ask them to send in a time sheet, or keep them from working with other companies, this doesn’t point to a contractor relationship.
TAKE NOTE: Almost nothing is considered an independent contractor by the State of California anymore! You will have a hard time proving Independent contractor status in most situations by this states standards of what it is.
Get the Right Documentation
During an EDD audit, it helps if you can prove that every contractor owns their own individual business.
For this evidence, you’ll need copies of things like invoices, business cards, letterheads, or business licenses.
Get one of these documents for every contractor who works with your business.
Sometimes, you’ll be able to get these documents once the audit process has already started. However, it looks better to the auditor if you already have them beforehand.
Plus, if you’re no longer working with those contractors, it will take you longer to get the documentation you need.
File Tax Returns On Time
Another way to stay prepared for an audit is to file your quarterly employment tax returns in a timely manner. Make sure to work to get those tax returns in before the due date arrives.
If you fail to meet those tax deadlines, it’s a sign of poor organization, which doesn’t look good in the eyes of an auditor. And you might end up with a tax liability that you weren’t expecting.
Be Prepared For an EDD Audit
The final step in an EDD audit is actually meeting with the auditor.
After you’ve gotten your records together and talked with your attorney, you’ll be ready for the audit. If you got your records in order and went over things with a legal representative, the audit itself could be relatively painless.
But if they do claim violations you may find yourself on the hook for costly penalties, lots of stress and uncertainty about the future of your business.
If you have been notified of a California EDD Audit remember you don’t have to face it alone!
We have top level attorneys who protect and defend California business owners like you every day.
Give us a call for a FREE CONSULTATION.
