EMPLOYMENT TAX AUDIT PROCESS
INTRODUCTION
The California Unemployment Insurance Code (CUIC)
and the Government Code authorize the Employment
Development Department (EDD) to conduct pa
yroll tax
audits of businesses operating in California. The payroll tax
audit verifies compliance with the CUIC, ensures workers
are properly classified, payments made to employees are
properly reported, and protects workers’ rights to receive
benefits.
PERIOD COVERED BY THE AUDIT
Generally, the EDD employment tax audits cover a
three-y
ear statutory period, comprising the 12 most recently
completed calendar quarters. An audit begins with the
examination of records for a test year which is generally
the most recent completed calendar year. However, the
examination may be expanded to include the records
for the entire period covered by the audit and in some
situations may extend beyond the three-year statutory
period.
ENTRANCE INTERVIEW
Before reviewing your records, the auditor will conduct
an entrance interview with y
ou or your designated
representative to explain the purpose of the audit and
the audit process, gather general information about
the operation and organization of your business and
accounting records, and answer any of your questions.
RECORDKEEPING
Payroll systems can be as basic as a manual system with
only a chec
k register and individual earnings records or
as complex as a computerized double entry system on an
accrual basis. Provisions of the CUIC require employers to
keep payroll records providing a true and accurate account
of all workers (employed, laid off, on a leave of absence, or
an independent contractor) and all payments made. The type
of system you use should meet the needs of your business
and EDD requirements. Requirements are further explained
in the EDD’s California Employer’s Guide, DE 44.
SCOPE OF THE AUDIT
The auditor will review your books and records to:
• Verify the business ownership and type of entity (sole
proprietorship, partnership, corporation, etc.).
• Verify that all individuals paid for services hav
e 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.
• Discuss any questionable payments made for
personal services and the nature of the working
relationship(s) with y
ou and the worker(s). Based on
the facts obtained from the records, input from you,
and discussion(s) with the worker(s), the auditor will
determine whether the worker(s) are employees or
independent contractors.
In addition, if your account has been selected for a
complete audit, the follo
wing tests will be performed:
• Verification that your acknowledged gross wages and
taxable wages have been properly reported.
• Verification that you have correctly withheld and
reported personal income tax for wages paid to your
employees.
PROVIDING BUSINESS RECORDS FOR THE AUDIT
To expedite the audit process, please ensure that the
records listed on page 2 are made av
ailable to the auditor.
The examination of records may be limited to the records
listed in item 1, but there may be a need to examine the
records in item 2 as well. Therefore, please have all the
listed records available for the period indicated at the
top of page 2. In addition, if worker classification issues
are encountered, the auditor may need to examine other
documents, such as invoices, billings, corporate minutes,
or other written agreements.
EDD – INTERNAL REVENUE SERVICE (IRS) EXCHANGE
A
GREEMENT
The EDD employment tax audit information is made
available to the IRS under an exchange agreement, and
the IRS may use the information in the administration of its
tax program.
DE 231TA Rev. 11 (8-18) (INTERNET) Page 1 of 2 CU
PLEASE MAKE AVAILABLE RECORDS FOR THE PERIOD
OF _________________________
NOTE: An audit begins with the examination of records
for a test year. The test year is generally the most recent
completed calendar year. If differences are found in the
test year, then the examination may be expanded to
include the records for the entire period covered by the
audit.
1. MINIMUM REQUIRED RECORDS
Sections 1085 and 1092 of the CUIC require all
employing units to make business records available to
the EDD during normal business hours. These records
include:
• Check registers, check stubs, canceled checks,
and bank statements
• General ledger and general journal
• Annual financial statements (income and expense
statements, balance sheet, etc.)
• Cash payments records (pay out slips and
vouchers)
• Ownership verification
○ City business license
○ California Department of Tax and Fee
Administration number
○ Any license required to operate your
business, such as a liquor license, California
Contractor's State License, etc.
○ Written agreements (such as Partnership
Agreement or Articles of Incorporation)
• Federal/State income tax returns
• Form 1099 series, federal information returns, and
worksheets
2. ADDITIONAL RECORDS REQUIRED FOR
VERIFICATION OF ACKNOWLEDGED PAYROLL
• Payroll records such as payroll journal, individual
earnings records, payroll summaries, etc.
• Federal employment tax reports:
○ Wage and Tax Statement, Form W-2
○ Employee’s Withholding Allowance
Certificate, Form W-4
○ Employer’s Quarterly Federal Tax Return,
Form 941
○ Employer’s Annual Federal Unemployment
Tax Return, Form 940
• State employment tax reports:
○ Quarterly Contribution Return and Report of
Wages, DE 9
○ Quarterly Contribution Return and Report of
Wages (Continuation), DE 9C
○ Quarterly Contribution and Wage Adjustment
Form, DE 9ADJ
○ Tax and Wage Adjustment Form, DE 678
○ Employee’s Withholding Allowance Certificate,
DE 4
DISCUSSION OF AUDIT FINDINGS
As part of the audit, the auditor will arrange for an exit
interview, either in person or by phone, to review the
audit findings, identify any other information that should
be considered, and attempt to resolve disputed issues, if
any. If you do not reach an agreement with the auditor,
you may request a pre-assessment conference with the
supervisor of the auditor.
The audit will result in one of the following outcomes:
• A no-change audit, where no differences are found.
• An overpayment, where a credit or refund will be
issued.
• An underpayment, where the differences will be
assessed.
• Both an underpayment and overpayment.
APPEAL
If an assessment is issued, you will receive information about
your appeal rights (Employer's Bill of Rights, DE 195). You
may petition for reassessment with an independent third
party, the California Unemployment Insurance Appeals
Board, for a hearing before an Administrative Law Judge.
TAXPAYER ADVOCATE OFFICE
If you are unable to resolve an employment tax problem
with the assigned EDD representative, supervisor, and
office manager, you may contact the Taxpayer Advocate
Office at 1-916-654-8957 or toll-free at 1-866-594-4177.
The EDD is an equal opportunity employer/program.
Auxiliary aids and services are available upon request
to individuals with disabilities. Requests for services,
aids, and/or alternate formats need to be made by calling
1-888-745-3886 (voice) or TTY 1-800-547-9565.
This information sheet is provided as a public service and is intended to provide nontechnical assistance. Every attempt has been made
to provide information that is consistent with the appropriate statutes, rules, and administrative and court decisions. Any information that
is inconsistent with the law, regulations, and administrative and court decisions is not binding on either the Employment Development
Department or the taxpayer. Any information provided is not intended to be legal, accounting, tax, investment, or other professional advice.
DE 231TA Rev. 11 (8-18) (INTERNET) Page 2 of 2
