his article covers the general process and important issues that we see come up in the course of California’s Employment Development Department tax audits, with a focus on the employment misclassification audits of businesses that utilise the services of independent contractors. Substantive legal analysis of California’s independent contractor laws is not part of this content. A General Overview of an Audit by the EDD in California The EDD audit process will always begin with a notice from the EDD. Oftentimes, this notice will come along with a list of documents or information being requested, a questionnaire, and a general description of the audit process. Following this initial communication, the EDD will set up a visit or a phone call to discuss the documents produced and ask follow-up questions. Once the auditor reviews the available records, the auditor will provide you with a Proposed Notice of Assessment either verbally or in writing, followed by the Notice of Assessment setting forth the findings and your liability assessment. If you are assessed back taxes or penalties, you will also be notified of your right to appeal the EDD’s determinations and assessments. The Joint Enforcement Strike Force (JESF) is the Major Source of Audits Random audits are rare. Occasionally, audits are triggered when a former 1099 contractor applies for unemployment benefits with the Employment Development Department (EDD) or by the late payment of payroll taxes. Notably, the most significant source of audits is the Joint Enforcement Strike Force (JESF). Led by the EDD, the JESF is a coalition of California state government enforcement agencies, including the Franchise Tax Board (FTB) and the Division of Labor Standards Enforcement (DLSE), that work together and share information to combat what is known as the “underground economy.” The JESF has procedures for reporting underground operations to the EDD for investigation, often resulting in EDD audits. Preparing for an Employment Tax Audit in California The lead-up to an employment tax audit can be one of the most stressful times for a business owner. To avoid legal missteps, it is important to gain a thorough understanding of what such an audit entails. In this feature, experienced employment lawyer Elnaz Masoom provides an outline of the process involved in an employment tax audit by California’s EDD, what business owners should expect, and what steps should be taken in the aftermath. T EXPERT INSIGHT Elnaz Masoom Managing Attorney Masoom Law Firm PC 1625 The Alameda, Suite 700, San Jose, CA 95126 Tel: +1 408-599-3191 E: emasoom@masoomlaw.com www.masoomlaw.com
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