Awards & Recognition
The California Employment Development Department (EDD) is generally concerned with conducting audits on businesses paying the proper payroll taxes. Businesses must withhold payroll and income taxes from their employees’ checks and remit them to the appropriate government agency.
Failing to pay employment taxes and file employment tax returns can lead to severe consequences, including prison time and other significant civil and criminal tax penalties. Oxnard employers must be mindful of their federal and California state tax obligations, especially those in the bustling administrative, tech, and agricultural sectors. If you have failed to comply with your tax responsibilities—particularly employment taxes—or have intentionally evaded your tax obligations, it is in your best interest to speak with a seasoned employment tax attorney as soon as possible. Together, you can evaluate your situation, take corrective actions, and create a plan to bring you back into compliance with the law.
At the Tax Law Office of David W. Klasing, our dual-licensed Employment Tax Attorneys and CPAs combine nearly three decades of legal experience assisting businesses and individual taxpayers with the full spectrum of California state, federal, and international tax matters, ranging from employment and payroll tax to divorce tax issues to general tax planning and tax preparation to criminal defense in felony tax cases. We excel at representing clients under high-risk federal or California state tax audits, especially where they blatantly cheated on the tax return under audit and thus fear criminal tax prosecution. When facing high-risk tax audits from agencies like the IRS, EDD CDTFA, or FTB, certain red flags, such as destroyed records, underreported income, badges of fraud, or unfiled returns, can intensify the examination and may lead to high-risk eggshell and reverse eggshell tax audits. As such, residents and businesses must be aware of potential criminal tax violations and the signs indicating that they might be under a more rigorous investigation by the IRS’s Criminal Investigation Division (CID).
Whether you need to defend your innocence, prepare for a tax audit, have concerns about corporate tax liability or employment tax, or simply need help making sound financial decisions for your family or your company, look to our full-service California tax law firm for zealous professional support. To arrange a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online or call our Oxnard tax office at (916) 290-6625 or 888-564-1409.
Misclassification of Workers Can Lead to Criminal Tax Investigation in Oxnard
Classifying a worker as an employee or independent contractor has significant tax consequences for Oxnard employers across various industries, such as landscaping, tech, and construction. This classification will dictate your obligations regarding the payment and/or withholding of several federal and state taxes, including:
- Federal income tax
- Social Security taxes under the Federal Insurance Contributions Act (FICA)
- Federal Unemployment Tax Act (FUTA) taxes
As an employer, you carry specific legal responsibilities for these taxes when dealing with employees—responsibilities that do not apply to independent contractors. The cost savings and reduced legal liabilities of classifying workers as independent contractors may seem attractive. However, the financial and legal risks of misclassifying employees can be severe. Classification determinations need to be made with great care.
The Risks of Misclassification
To illustrate the risk, imagine you run a landscaping business in Oxnardo. You hire workers job-by-job, classifying them as independent contractors, and do not withhold or pay federal or state employment taxes. Some of them may even be undocumented workers (illegal aliens). As your business grows, you shift to paying workers weekly but continue treating them as independent contractors. If audited by the IRS or the Employment Development Department (EDD), you may be determined to have misclassified your workers, potentially resulting in:
- A payroll tax deficiency
- Substantial penalties and interest on unpaid taxes
Also, imagine a landscaping service operating as a cash-based sole proprietorship. They want to treat their workers as independent contractors but are encountering difficulties. The workers are not cooperating to attain the necessary business licenses. To make it appear that workers were independent contractors, they had the workers submit invoices for payment. As the landscaping service contracted for larger jobs, the taxpayers devised a scheme to make it appear that the workers were the employees of a third party. Suddenly, the IRS issues a letter to the landscaping service indicating that it conducts an “employment tax compliance check.” The letter suggests that the IRS would be looking at employment tax returns and income tax returns. These are the situations where you need the help of experienced dual-licensed EDD Tax Attorneys and CPAs.
Personal Liability and the Risk of the Trust Fund Recovery Penalty
Employers, company executives & accounting personnel involved with deciding which creditors get paid in Oxnard should also be aware that misclassifying employees can expose business owners and certain employees to personal liability for unpaid payroll taxes. Suppose you are deemed a responsible person who acted willfully. In that case, you may become personally liable for the trust fund recovery penalty—which imposes civil penalties and, in some cases, can lead to criminal employment tax prosecution. The same analysis applies to the state level, where California’s EDD conducts similar audits. Typically, responsible persons include
- Owners
- Corporate officers
- Employees deemed with sufficient authority, such as bookkeepers or office managers
Individuals with the authority to decide whether payroll taxes get paid or another creditor is prioritized may be deemed responsible. The IRS will closely scrutinize individuals overseeing day-to-day operations, including managing partners, corporate officers, and owners. Furthermore, employees involved in the payroll process—even if they do not make the final determination—can be at risk if they can ensure employment taxes are paid.
Who is a Responsible Person?
The IRS takes a broad view when determining who may be considered a responsible person. Key factors include:
- Authority to write checks or direct financial payments
- Involvement in the decision-making process for tax payments
- The ability to influence or direct company funds
Even employees or investors who may not have direct authority but who hold a position that could theoretically influence payroll decisions may be deemed responsible persons. Shockingly, there have been cases where individuals were held liable, even when they opposed the company’s decisions regarding payroll taxes, and subsequently resigned over the dispute. While the IRS provides some guidelines for this determination, there are no guarantees that you will not be considered a responsible person if you have any authority over payroll decisions.
Potential Criminal Employment Tax Issues During Seemingly Civil Examinations
You should be aware that eggshell audits can lead to criminal tax charges. An “eggshell” audit arises when a taxpayer who has filed one or more false employment tax returns in previous years is selected for audit. Although the exam is civil, it has the potential for a federal or California criminal tax referral. There is a chance that the auditor may never notice the criminal tax employment problem in a payroll tax return, and thus, you are not presented with the dilemma of responding to that issue. However, you should always prepare for the possibility that the employment tax auditor may spot a sensitive reporting issue. In such a scenario, using our decades of experience in the field, we do whatever we can to convince the auditor that the case is best resolved civilly and that your conduct does not warrant a criminal employment tax investigation or prosecution. The auditor, however, may nevertheless, make a criminal employment tax referral.
A reverse eggshell audit is even more dangerous and involves a criminal employment tax investigation disguised as a civil audit. These audits are expected in Oxnard, where local and federal authorities work together to identify employment tax fraud. In a reverse eggshell audit, the taxpayer and their ordinarily clueless representative are unaware that the auditor is collaborating with the IRS’s Criminal Investigation (CI) division or the criminal tax function of the EDD. Reverse eggshell audits typically begin when a federal or California criminal tax investigation refers the case to an EDD auditor and stays in the background to facilitate a clandestine criminal tax investigation discussed as a civil employment tax audit. any false or misleading statements made during the audit can trigger further criminal tax charges.
Understanding the Office of Tax Appeals (OTA) and Appealing an EDD Audit in Oxnard
In Oxnard, as in the rest of California, employment tax law encompasses a complex system of courts and agencies designed to resolve various employment tax disputes. While federal tax disputes typically go before the United States Tax Court, taxpayers may also choose to litigate in the United States District Court or the United States Court of Federal Claims. The primary venue for state-level employment tax disputes in Oxnard is the California Office of Tax Appeals (OTA).
The Role of the California Office of Tax Appeals (OTA)
Established in 2017 by Assembly Bill (A.B.) 131 under the Taxpayer Transparency and Fairness Act, the OTA is an independent entity that reviews disputes between Oxnard taxpayers and state tax agencies, which include:
- The Employment Development Department (EDD)
- The Franchise Tax Board (FTB)
- The California Department of Tax and Fee Administration (CDTFA)
Appealing an EDD Audit in Oxnard
If your Oxnard-based business is dissatisfied with the results of an EDD employment tax audit, it’s essential to know that you have options to appeal:
- Filing an Appeal: Appeals to the OTA must be submitted within a specific timeframe following receipt of the audit results.
- Review Process: The OTA has the authority to review the audit findings thoroughly and can either overturn or adjust the results if errors are found.
- Legal Representation: Engaging a seasoned employment tax litigaiton attorney is crucial for navigating the employment tax appeal process effectively. An attorney will help ensure all necessary documents are accurately submitted and argue your case, maximizing your chances of a favorable outcome.
Mistakes in applying the law or assessing facts during an EDD audit are common. These errors can lead to inaccurate findings and unjust financial consequences for your business. California law provides a structured appeals process through the OTA, allowing Oxnard businesses to challenge audit results and rectify inaccuracies. Whether you have recently been notified that you were selected for an employment tax audit and need help navigating the following steps or have already been audited and are now seeking California or IRS appeals representation, our aggressive EDD negotiators and, where necessary, California State FTB, EDD, CDTFA Tax Litigation Attorneys & CPAs stand ready willing and able to litigate your tax case but we find that the taxing authorities are more than willing to settle on fair and equitable terms once we convince them that the law and facts are on your side and we can prove it. To date, we have never lost in federal tax court. We won’t take your case if we don’t believe we’ll win.
Contact Our Oxnard EDD Tax Lawyers Today
At the Tax Law Office of David W. Klasing, our dual-licensed California Employment Tax Attorneys & CPAs specialize in providing experienced legal counsel to businesses navigating the complexities of California or federal employment tax law. Our team is dedicated to protecting both your business and personal interests from the significant legal and financial consequences that can arise from IRS and EDD employment tax audits. These government audits rigorously examine worker classifications and the treatment of employees, often challenging the classification of individuals believed to be misclassified as independent contractors.
With the enactment of AB5 in 2019, the state scrutiny of California worker classification has intensified, making our experienced legal representation even more essential. We are committed to helping you manage and contest any disputes or discrepancies that arise during these audits, aiming to secure a favorable outcome. Whether you are dealing with corporate tax concerns or employment tax issues, we provide a reduced-rate initial consultation to assess your situation and discuss potential strategies.
We represent entities and individuals in all types of California state and federal tax audits, including but not limited to California employment tax audits, California sales tax audits, foreign account tax audits, FBAR audits, and worker classification audits. It is a costly mistake to assume that the outcome of an audit is guaranteed to be accurate or even remotely appropriate. On the contrary, in our experience, there are common instances in which the IRS, FTB, CDTFA (BOE), or EDD will attempt to overstep its authority and secure a substantially excessive tax assessment. The taxing authorities often get the facts and the law wrong.
Call (916) 290-6625 or 888-564-1409 or contact us online today to schedule a reduced rate initial consultation at our Oxnard tax law offices or one of our other convenient locations.
Our Oxnard Office is Conveniently Located at:
1000 Town Center Dr Ste 300
Oxnard, CA 93036
(805) 617-4566
