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What Happens If I am Audited by the EDD?

The Employment Development Department (EDD) conducts payroll tax audits of businesses operating in California. As part of a payroll tax audit, the EDD will examine taxpayers regarding their state employment tax obligations and examine whether the proper benefit coverage is provided for workers. The EDD will also focus on whether there are any misclassified employees. If you or your business are under an EDD audit, contact a tax attorney at Disparte Tax Law for a free consultation.


The EDD will generally cover a three-year period during an employment tax audits. The three-year period will generally comprise of the 12 most recently completed calendar quarters. However, in some situations, such as when no returns were filed, the audit period may be longer. Your audit notice will state the exact years covered in your audit.


The EDD auditor will conduct an examination and review your books and records to:

  1. Verify the business ownership and type of entity (sole proprietorship, partnership, corporation, other).
  2. Verify that all individuals paid for services have been properly classified as either employees or independent contractors in accordance with the provisions of the CUIC and the common law test as applied by the State Supreme Court. The auditor could attempt to contact workers to ask them about their job duties to determine whether the worker is misclassified.
  3. Check to see if there are any unreported payments to individuals for services performed to the business.
  4. Verify that your acknowledged gross wages and taxable wages have been properly reported.
  5. Verify that you have correctly withheld and reported personal income tax for wages paid to your employees. If you have not issued 1099s, the EDD could assess a penalty for failure to file 1099s.

The EDD employs what is called the ABC test to determine whether a worker should be classified as an employee or independent contractor. The EDD treats all workers as employees unless the the business passes the EDD ABC Test.

What Records Will the EDD Request?

The EDD auditor will begin an EDD audit by requesting and examining the business records for a test year. The test year is generally the most recent completed calendar year. Additionally, if the EDD finds differences in the test year, then the EDD can expand the examination to include the records for the entire period covered by the audit. The auditor may request: check registers, the general ledger, financial statements, federal income tax returns, bank statements, and cash payment records. Generally the EDD auditor will review the tax return to determine if the business has deducted outside services.


After the EDD auditor has finished conducting the audit, the auditor will discuss the findings with you. The auditor can recommend tax and EDD penalties. Moreover, if the auditor proposes adjustments, you will receive a notice of assessment outlining the changes that the auditor proposes and any penalties that the auditor has proposed. Additionally, the notice of determination will contain information about the EDD appeal process.

Contact A Tax Attorney if You or Your Business have Received an Audit Letter from the EDD

If you have been contacted by the EDD, you need someone on your side. Contact a Los Angeles EDD audit attorney at Disparte Tax Law today for a free consultation. See also our EDD Tax Matters for more information.