Ignoring a problem doesn’t make it go away, especially with the EDD. An EDD audit is a formal government investigation with the authority to impose back taxes, penalties, interest, liens, and even criminal exposure in extreme cases. Whether you are a small business owner, startup founder, or established employer, ignoring an EDD audit notice can escalate a manageable compliance issue into a long-term legal and financial problem.
Understanding what an audit means, what happens if you fail to respond, and how to protect your business is essential to avoiding irreversible damage.Keep reading to learn why you should never ignore an EDD audit. Furthermore, understand the right steps to take when you receive an audit.
The Consequences of Ignoring an EDD Audit
An EDD audit is not a courtesy inquiry. It is a legally authorized examination conducted by California Employment Development Department to verify whether an employer has properly classified workers, paid required payroll taxes, and complied with California employment laws.Without legal representation or acknowledging the paperwork, the EDD can pursue further action that affects your business’s finances. Essentially, an audit doesn’t go away, and the longer you put off legal action, the more you risk paying expensive fines.
Ignoring an EDD audit rarely makes the problem disappear. In most cases, it significantly worsens the outcome:
Automatic Tax Assessments and Estimates
When an employer fails to respond or provide requested records, the EDD is legally permitted to issue estimated assessments. These estimates are often calculated using worst-case assumptions about wages, worker classification, and tax liability. Once issued, these assessments become legally enforceable debts.
Penalties, Interest, and Compounding Liability
Unpaid payroll taxes quickly accumulate penalties and daily interest. What might have started as a small classification issue can multiply into tens or hundreds of thousands of dollars over time. These penalties are statutory and difficult to waive once finalized.
Worker Misclassification Findings
One of the most common triggers for EDD audits is suspected worker misclassification. If the audit determines that independent contractors should have been treated as employees, the employer may be liable for back unemployment insurance, disability insurance, employment training taxes, and related penalties.
Tax Liens and Bank Levies
When assessments go unpaid, the EDD can initiate aggressive collection actions. This may include recording state tax liens, levying business bank accounts, or intercepting state payments. These actions can disrupt daily operations and severely damage credit.
Increased Risk of Criminal Investigation
In cases involving intentional underreporting, falsified records, or repeated non-compliance, the matter can be referred for criminal investigation. While not every audit leads to prosecution, ignoring official notices significantly increases that risk.
The Right Steps To Take With an Audit
It’s important to understand that EDD audits are time sensitive, and you only have a short window to pursue legal action. To handle this situation, follow these critical steps:
Thoroughly read the audit document
When you first receive the audit, thoroughly read the information. Pay attention to deadlines and take note of the documents they need from you. If they need to schedule an appointment with you, call the department to set a meeting time.
Collect the requested information
It’s normal for the EDD to request various documents during the course of your audit. For instance, a DE231TA is a standard form you will receive. Prepare employee tax records, tax reports, and other files for review.
Understand your rights
As a California employer, you have rights surrounding the audit. You have the right to receive accurate information from the EDD, and they must answer your questions. Additionally, you can appeal the department’s decision on the audit.
Respond Promptly and Professionally
The first and most important step is to respond to the audit notice within the stated deadline. Even if records are incomplete or additional time is needed, acknowledging the notice demonstrates good-faith cooperation and can prevent automatic assessments.
Understand the Scope of the Audit
Not all audits are the same. Some focus narrowly on payroll tax calculations, while others examine worker classification, reimbursements, and benefits. Understanding the scope allows you to prepare only what is required and avoid unnecessary disclosures.
Organize Payroll and Classification Records
Employers should gather payroll records, contracts, invoices, time records, and tax filings before the audit meeting. Disorganized or inconsistent documentation often raises additional questions and expands the audit scope.
Avoid Volunteering Unnecessary Information
While cooperation is required, over-sharing can unintentionally expose unrelated compliance issues. Responses should be accurate, precise, and limited to what the auditor has requested.
Pursue legal assistance
If you disagree with the EDD’s actions, you can appeal the decision in court. It’s best to hire an audit lawyer to help navigate your case. Consulting with an experienced professional is beneficial!
For a deeper explanation of how employers should respond to state audits and enforcement actions, Pershing Square Law provides practical guidance on employment compliance and audit defense strategies through its resource hub at Pershing Square Law’s employment compliance section, which many California employers rely on when navigating high-risk audits.
Avoid Future EDD Audits
To avoid future audits or trouble with the department, it’s best to follow good practices. Documenting everything, producing accurate tax records, and accurately classifying employees are several ways to stay in good standing. Don’t risk future troubles that will lead to penalties and fines.
Proper Worker Classification From Day One
California’s worker classification rules are among the strictest in the country. Misclassification is one of the most common audit triggers. Employers should regularly review contractor relationships to ensure they meet legal standards under state law.
Accurate and Consistent Payroll Reporting
Discrepancies between payroll tax filings, wage statements, and bank records often prompt audits. Consistency across all reporting systems is critical.
Maintain Clean, Organized Records
Employers are legally required to retain payroll and employment records for multiple years. Missing or incomplete records often result in unfavorable assumptions during audits.
Periodic Internal Compliance Reviews
Conducting internal reviews with professional guidance can identify issues before they attract regulatory attention. Early corrections are typically far less costly than post-audit assessments.
Stay Updated on California Employment Law Changes
Employment laws in California evolve frequently. Staying informed helps ensure ongoing compliance and reduces the likelihood of red flags that lead to audits.
For employers seeking long-term risk reduction, Pershing Square Law offers educational resources on payroll compliance and worker classification that help businesses correct issues proactively rather than reactively after an audit begins.
Receiving the Right Help
An EDD audit Lawyer is there to help you battle the EDD. Pershing Square Law Firm is a team of experienced professionals who will represent you! During this troubling time, receiving the right assistance is crucial. Luckily, you can receive the best help with our team!