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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD AUDITS IN 2025– WHAT YOU NEED TO KNOW – PART 2

By Robert S. Schriebman

2024

Introduction

This is Part 2 of a 2 Part series.

The Employment Development Department (EDD) is often referred to as the “unknown tax agency.” We are all familiar with the Franchise Tax Board and the Sales and Use Tax Agency. Most of us come into contact with the EDD when we find ourselves out of a job. We apply to the EDD for Unemployment Benefits. The EDD is a low-profile agency. Indeed, most of the work done by the EDD, from the COVID outbreak onward, has concerned itself with providing unemployment benefits and going after those who have received benefits while working under cover. These are known as overpayment cases.

EDD also has a very important function. It conducts audits of employers who improperly treat their workers as independent contractors or who pay workers in cash and file fraudulent payroll tax returns and issue inaccurate W2s or 1099s. This article will focus upon worker status audits. The laws involving these audits are found in California Unemployment Insurance Code (CUIC).

Part 2 will discuss the EDD’s demand for specific “required records.” I will also discuss the following topics:

  • The importance of the ABC Test
  • The Exit Interview
  • Notice of Assessment
  • Petition to the CUIAB
  • The Settlement Process
  • Judge Hearing on the Merits

Minimum Required Documents

In the initial EDD package, there is a full page of “required” documentation for the audit. The list contains many items that the EDD is not legally entitled to receive. The EDD’s motto is, “if you don’t ask – you don’t get.” In my practice I have found that the minimum required documentation is as follows:

  • 1096s and 1099s for 3 years (provide the address and telephone numbers of 1099 recipients.)
  • W-3s and W-2s for 3 years
  • General Ledgers pertaining to outside services (1099s) and W2 wage earners for 3 years or 12 calendar quarters
  • Chart of Accounts
  • A sample copy of an independent contractor agreement
  • Copy of your current business license

The Importance of the ABC Test

There are many articles on this website that discuss the ABC Test set forth in both AB-5 and AB-2257. The ABC Test has been the law since January 2020. In 2025, EDD audits will initially focus on the years 2022 forward. The ABC Test will have been the law of the land for 4 years. EDD auditors place great emphasis on the ABC Test to determine worker status. They will go through the three elements of this test and will find that virtually all those workers you have treated as independent contractors should have been W2 wage earners. There are many exceptions to the ABC Test that are set forth in AB-2257, but most auditors will ignore the exceptions and leave it to the employer to raise them. Most arguments fall on deaf ears. You will most likely have to argue the exceptions in the settlement process or before a CUIAB judge.

The Exit Interview

At the conclusion of the audit, the auditor will want to set up a conference to discuss the audit findings. According to the latest EDD “Information Sheet” the audit will result in one of the following outcomes:

  • A no change audit, where no assessment will be made. This is rare.
  • An overpayment, where a credit or refund will be issued. This is rare.
  • An assessment. This is the usual result of an EDD audit.

Many auditors will want to use the exit interview as a ruse to obtain additional reasons for the assessment. I try to avoid these interviews as I find that rarely, if ever, do they help the employer.

The Notice of Assessment

The EDD assessment is a two-part process. First you will receive a Proposed Notice of Assessment (PNA). This will be followed a few weeks later by the receipt of the final Notice of Assessment (NA). The NA will be sent by certified mail. It is your responsibility to make certain that you receive the final NA. Don’t ignore it.

Petition to the CUIAB

Upon receipt of the final NA, you have 30 days from the date of mailing to file a petition with the CUIAB. I cannot overemphasize the importance of timely filing a petition to protect your rights. If you file a timely petition, you do not have to pay the assessment until your matter is finally resolved. If you fail to timely file a petition, the assessment will become final after thirty days. A collector will be assigned to your matter and a Notice of State Tax Lien will be filed against you with all the negative credit rating issues.

There are Articles on this website that take you by the hand and show you not only the importance of filing a petition, but the elements involved in the petition as well.

The Settlement Process

When the EDD issues an NA, you have three options:

  1. Pay the assessment and be done with it.
  2. File a petition and take advantage of the settlement process.
  3. File a petition and have a judge hearing on the merits.

Within the EDD there is a Settlement Unit. Their job is to work with you in obtaining an “out-of-court” resolution. The settlement process removes your matter from the CUIAB hearing calendar. The primary advantages of a settlement are the payment of an amount lower than the assessment and no potential involvement by the IRS issuing a “me too” assessment. A settlement means that you will have to pay a portion of the assessment. There are no settlements where you pay zero.

Settlements may be paid in a lump sum or may be payable in installments over an 18-month period with interest accruing on the unpaid balance. Pursuant to California law, there is a 15% late payment penalty on the unpaid balance.

Judge Hearing on the Merits

A judge hearing on the merits is a formal trial on the issues. Even though this is an administrative process, it is not to be taken lightly. It is essential to prepare for the hearing in exactly the same way one would prepare for a trial in the Superior Court.

It is advisable that you attempt the settlement process before rushing into a judge hearing. The settlement process does not mean that you are precluded from a judge hearing if you do not like the settlement offer from the EDD.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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