California’s Employment Development Department (EDD) is notorious for aggressive payroll-tax examinations—especially when worker-classification questions arise under AB 5 and the strict ABC test. Yet many employers are surprised to learn that, even in the midst of an audit, there are multiple points at which you can negotiate a settlement or otherwise limit the financial fallout. Contact the Tax Law Offices of David W. Klasing today to understand exactly when, where, and how to strike a deal with EDD and why having our dual-licensed tax attorneys and CPAs in the room can make a crippling employment tax assessment turn into a manageable resolution.
For a reduced-rate initial consultation about how we can assist with settling with the EDD auditor, contact the Tax Law Offices of David W. Klasing online or call us today at (888) 640-3408.
Understanding “Settlement” in the EDD Context
EDD literature rarely uses the word settle. Instead, you’ll see references to “adjusting the assessment,” “mitigating penalties,” or “reaching an administrative agreement.” In practice, however, these are all forms of settlement: you and the EDD employment tax audit team agree—formally or informally—to close quarters, reclassify only some workers, drop specific penalties, or fix liability at a negotiated figure. The earlier in the employment tax audit cycle, you raise settlement concepts, the more leverage you often have because auditors face statute-expiration pressures and caseload quotas just like their counterparts at the IRS, CDTFA, and FTB.
EDD tax audits typically unfold in four phases, each with its own settlement window:
- Entrance and Initial Fact-Finding: Before an Information-Document-Request (IDR) is complete, you can sometimes persuade the auditor that only a small universe of workers or quarters should be examined—effectively a “scope settlement.”
- Pre-Assessment (Case Write-Up): Once the auditor drafts findings, you can request a supervisor conference to negotiate adjustments before a Notice of Assessment issues.
- Formal Appeal to CUIAB: Filing a timely Petition for Reassessment stays collection and shifts the file to EDD’s Tax Branch Legal Office, which has latitude to negotiate docketed settlements before the hearing.
- CUIAB Hearings & Beyond: Even on the courthouse steps—Administrative Law Judge (ALJ) day—EDD counsel can stipulate reduced employment tax, limited penalties, or partial worker reclassification to avoid employment tax litigation risk.
The key is to tie every settlement ask to a concrete legal or factual weakness in EDD’s position: inadequate evidence of control, failure to observe the “Borello” factors for exempt professionals, statute-barred quarters, or demonstrable hardship that favors penalty relief. Our job is to identify those weaknesses early and package them into a proposal that the auditor can present to management.
Early-Stage “Damage-Control” Settlements—Limiting Scope Before It Balloons
During the entrance interview, the auditor will outline a preliminary test year (often the most recent calendar year). This is the first chance to settle the scope. Our dual-licensed Employment Tax Attorneys & CPAs walk in with a Worker-Classification Matrix—each payee is tagged by role, payment method, and ABC/Borello status. When the auditor sees that (say) graphic-design freelancers have LLCs, multiple clients, and independent websites, we argue—right then—that those workers be excluded from test sampling. Excluding every worker from the initial sample significantly reduces the statistical upscaling that drives the final assessment.
If the auditor insists on a broader review, we invoke CUIC § 1132’s three-year statute. Unless EDD can show unfiled returns or fraud, quarters older than 12 are off-limits. Demonstrating that you filed all DE-9/DE-9Cs and paid timely builds creates a statutory wall that the auditor cannot cross without your consent. Frequently, the field agent will agree—verbally or by notation in the case file—to drop pre-statute quarters rather than fight a losing battle with the supervisor and the Tax Branch Legal Office later.
Another early settlement tactic is the “documentation swap.” We offer complete, indexed payee files (contracts, 1099s, proof of multiple clients) in exchange for the auditor agreeing to waive a site visit or limit worker interviews. The benefit is twofold: you control the narrative through curated evidence, and you remove opportunities for auditors to elicit damaging, off-the-cuff statements from line workers.
Supervisor Conferences and Pre-Assessment Negotiations
Once the auditor finishes fieldwork, you will receive a draft Audit Findings worksheet and a proposed Notice of Assessment. EDD allows (and encourages) a “closing conference,” which can include the auditor’s supervisor. This is Settlement Window #2. Most supervisors would rather resolve issues informally than handle a formal appeal file, so they often have the discretion to:
- Reclassify only contested worker categories and leave clearly independent vendors alone.
- Drop civil penalties (late deposit, late filing, or §13052.5 misclassification) when provided with a reasonable-cause narrative.
- Reduce the look-back where records are thin for the early quarters but solid later.
- Accept statistical sampling for minor cash disbursements instead of exhaustive tracing.
We arrive at the conference with a Penalty-Abatement Brief that cites CUIC penalty provisions, reasonable-cause regulations, relevant CUIAB precedents, and any hardship factors (e.g., COVID-era closures or wild-fire disruptions) to justify dropping or cutting penalties. In many cases, EDD supervisors will sign off on a revised worksheet on the spot.
If a partial agreement is reachable but the statute is about to expire on key quarters, we may offer a short, issue-specific Form DE 1977 extension. Example: “Taxpayer consents to extend the statute solely for potential UI/SDI contributions arising from XYZ driver classification for the period 1-1-23 through 12-31-23.” That gives the supervisor time to process changes while preventing new issues from arising.
A lot of anxious business owners wonder, “Can I just slide the auditor a lump sum—say fifteen thousand dollars—and make the whole thing go away?” The answer is NO. EDD examiners are public officials, not dealmakers, and any adjustment they propose must undergo rigorous scrutiny. What can be negotiated is how the assessment is constructed—namely, (1) which payees fall into the “obvious employees,” “obvious contractors,” or “borderline” categories, and (2) how steep the penalty calculations will be. Auditors are rewarded for closing cases with the taxpayer’s signature; the more issues that end up in Appeals, the more hassle and risk they face. That dynamic opens the door to compromise on gray-area workers and penalties, which often eclipse the tax itself. Your best play is to stay actively involved: handle much of the evidence gathering, hand over a detailed worker matrix, and allow the auditor to react only after you’ve set the framework. Presenting organized, defensible classifications and solid penalty-abatement arguments keeps you in control—and maximizes your chance to slash the final bill and prevent future surprises.
Post-Assessment Settlements: CUIAB Petitions, Docketed Appeals, and the Settlement Office
If an assessment issues despite best efforts, filing a timely Petition for Reassessment (30 days) transfers the case to the California Unemployment Insurance Appeals Board (CUIAB) and stays collection. Here, the employer gains fresh leverage: EDD’s Tax Branch Legal Office (TBLO) must now defend the audit in a quasi-judicial forum and weigh litigation risk, witness availability, and docket backlog. Before the ALJ hearing, TBLO attorneys often entertain settlement discussions—particularly when our Pre-Hearing Brief pinpoints evidentiary gaps or raises constitutional arguments (e.g., Commerce Clause concerns for out-of-state employers).
EDD also runs an internal Settlement Program—a small but real avenue for compromise modeled on the FTB and CDTFA settlement units. Cases with genuine hazards of litigation (legal uncertainty, factual disputes, or collectability issues) can be referred by TBLO or requested by the taxpayer. Typical concessions might include:
- 30–50 % penalty reductions where intent was negligent, not willful.
- Partial worker reclassification (e.g., W-2 for onsite installers, 1099 for offsite consultants).
- “Walk-away” deals on old quarters that are weakly documented for both sides.
When settlement talks stall, our dual-licensed tax litigation attorneys and CPA stand ready to advocate on your behalf vigorously. We subpoena third-party records (bank statements, Slack logs, GPS data) to prove independence, line up expert witnesses on industry custom, and craft closing briefs citing CUIAB precedents. Paradoxically, the stronger our trial posture, the more inclined EDD becomes to reopen settlement—often on the courthouse steps, where we can lock in a last-minute stipulation that slices liabilities dramatically.
Levers You Can Use in Any EDD Settlement Discussion
- Statute Pressure. Auditors hate watching quarters expire; a looming CUIC §1132 deadline can turn a rigid stance into compromise.
- Worker Hardship Evidence. Show that retroactive employee status will actually strip workers of legitimate business deductions or push them into back taxes—EDD supervisors sometimes soften penalties to avoid harming the very workers the system aims to protect.
- Prospective Compliance. Offer to reclassify going forward and file amended DE-9/DE-9Cs; EDD often trades penalty relief for future payroll inflows.
- Pay-Plan Readiness. Arrive with a down payment and an installment plan. Collection managers prefer a bird-in-hand settlement to an appeal that could end in uncollectible liabilities.
- Cross-Agency Risk. Quietly remind TBLO that a crushing assessment could bankrupt the employer and cost the state future tax revenue—an argument that resonates when the facts are gray.
Contact the Tax Law Offices of David W. Klasing as Soon as an EDD Auditor Comes Calling
An EDD audit pits legal nuance against raw accounting data—and you need a team that masters both. Our dual-licensed Attorney-CPAs translate AB 5, Borello, and CUIC penalties into the ledgers, sampling statistics, and wage tie-outs that auditors must respect. We cross-examine control factors one minute, then walk examiners through QuickBooks screenshots the next, shutting down inflated wage extrapolations without outsourcing sensitive work or sacrificing privilege. Because we also defend businesses before the IRS, CDTFA, and FTB, every settlement we negotiate is engineered to seal off domino risk: no surprise federal payroll tax assessments, no sudden sales-tax nexus headaches, and no lingering income-tax exposure. Every brief, affidavit, and penalty abatement request is written as if it might be Exhibit A in CUIAB or Superior Court. This trial-ready posture projects confidence and breeds concessions.
If an EDD field examiner has already requested records or a site visit, call the Tax Law Offices of David W. Klasing at (800) 681-1295 or book a confidential, reduced-rate consultation online HERE. In our first meeting, we will:
- Map your worker matrix against the ABC/Borello standards;
- Chart the statute timeline to close quarters that are already time-barred;
- Draft a settlement roadmap from the supervisor conference through CUIAB, if needed, and
- Deploy dual-licensed firepower to cap tax, slash penalties, and head off multi-agency referrals.
The earlier we step in, the more leverage you keep. Let our proven strategy—built over hundreds of EDD examinations—turn a potentially devastating payroll-tax audit into a manageable, targeted settlement.
