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Situated on the western coast of Southern California, Los Angeles is a sprawling metropolis with over 3.9 million residents. As the largest city in California and a global center for entertainment, technology, and manufacturing, Los Angeles plays a crucial role in the state’s economy. However, with this economic vibrancy and diversity comes the heightened responsibility of complying with some of the nation’s most stringent and rigorously enforced tax codes.
California’s Employment Development Department (EDD) and the IRS closely monitor compliance with federal and state employment tax laws, conducting employment tax audits and criminally investigating cases of potential tax fraud for potential prosecution. These agencies assess significant taxes, interest, and penalties for any detected non-compliance, making it essential for businesses in Los Angeles to ensure they meet their employment and payroll tax obligations.
Navigating Employment and Payroll Taxes in Los Angeles
Businesses in Los Angeles are obligated to collect and remit employment and payroll taxes, including both federal and state requirements. Whether these obligations fall under federal employment tax laws managed by the IRS or state tax laws overseen by the Employment Development Division (EDD), employers are required to withhold on behalf of their employees, employment taxes and federal and California withholding in trust and submit them when due.
During an audit by the EDD or IRS, it is common for auditors to request access to the business facilities, often including a tour. This tour serves as an informal part of the audit process, where auditors may interview company representatives about their role in the business and the company’s business activities. Businesses that fail to report or remit these taxes accurately can face steep penalties, including interest on unpaid taxes, which can quickly escalate the stakes for any company under audit.
Complex and Lengthy Audits: What Los Angeles Businesses Should Know
In recent years, the audit process has grown increasingly complex and time-consuming, with audits sometimes extending for a year or longer. If an employment tax audit uncovers a tax deficiency, penalties and interest are typically assessed, further increasing the financial risks for businesses. In these situations, Los Angeles employers must understand their rights during the audit process and the statutes of limitations governing the timeframe in which the federal and state governments can conduct the audit.
In addition to employment taxes, residents and businesses in Los Angeles are subject to state income taxes, which are administered by the California Franchise Tax Board (FTB). For the 2024 tax year, California maintains nine tax brackets, ranging from 1% to 12.3%, depending on taxable income. Those earning over $1 million are also subject to the Mental Health Services Tax, which imposes an additional 1% tax on income over this threshold. Furthermore, specific individuals may be subject to the Alternative Minimum Tax (AMT), set at 7%.
Los Angeles residents typically file their state taxes using Form 540 or Form 540 2EZ. If taxpayers fail to meet their tax obligations, whether federal or state, they may receive a notice of deficiency from the relevant tax agency. Such notices can lead to penalties, interest, and even criminal tax investigations, particularly if the underreporting or failure to pay is deemed intentional.
The consequences of non-compliance with employment tax laws are severe, and for businesses in Los Angeles, the risk of an audit turning into a criminal investigation is genuine. Ensuring that your business meets its employment tax obligations and engaging professional tax representation during an audit can help prevent costly penalties, protect your reputation, and safeguard your financial stability.
At the Tax Law Offices of David W. Klasing, we specialize in guiding Los Angeles businesses through complex employment tax audits, helping to resolve disputes with the EDD, IRS, and FTB, and offering strategic defense for businesses facing criminal tax investigations. Our dual-licensed Los Angeles 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. Whether you need to defend your innocence, prepare for a tax audit, or simply need help making sound financial decisions for your family or your company, look to our full-service California tax firm for zealous professional support. Call 310-492-5583 or schedule a reduced-rate initial consultation here at our Los Angeles tax law office or one of our other convenient locations across Southern California.
EDD, IRS, and Criminal Tax Investigations: The Risks of Intentional Tax Cheating in Los Angeles
Employers in Los Angeles sometimes misclassify their workers as independent contractors rather than employees. This misclassification allows employers to avoid withholding and contributing payroll taxes, such as Social Security and Medicare. However, when a worker is classified as an employee, the employer is legally required to cover half of the worker’s Social Security and Medicare taxes. Additionally, the employer must withhold federal income taxes, Social Security, Medicare, and state taxes, holding these funds in trust on behalf of the employee to submit to the appropriate taxing authorities.
When an employer misclassifies workers, both the IRS and the Employment Development Department (EDD) can impose assessments for current and back taxes on the amounts the employer should have paid. In Los Angeles, where compliance with both California state and federal tax obligations is rigorously enforced, these back tax assessments can be substantial. If the misclassification is determined to be intentional, penalties can quickly escalate, potentially leading to federal or California criminal tax charges, especially when there is evidence of willful fraud or misconduct.
Two types of audits that pose the highest risk for Los Angeles businesses are eggshell audits and reverse eggshell audits, where misclassification issues often come under scrutiny. Any indication of fraud can trigger deeper investigations, significantly raising the stakes for employers.
Eggshell Audits and Reverse Eggshell Audits: Critical Red Flags
Eggshell audits can pose elevated risks compared to other audits already discussed. These civil audits occur when the taxpayer and potentially their representative know information regarding intentional or unintentional, substantial noncompliance that the EDD or IRS representative do not, and the taxpayer is at high risk of facing civil fraud penalties or criminal tax prosecution. Generally, eggshell payroll tax audits manifest when information has not been reported or has been materially & intentionally misrepresented on a series of employment tax returns. Deliberately understating taxable wages, paying employees under the table in cash, intentionally misclassifying employees as independent contractors, and a pattern of failing to remit withheld payroll taxes are actions that create conditions for an eggshell payroll tax audit to emerge.
A reverse eggshell payroll tax audit is far more dangerous than an eggshell audit. In this scenario, the IRS or EDD criminal tax investigators know or suspect incriminating information about the employment tax returns in question, but the taxpayer is not aware that a clandestine payroll tax criminal tax investigation is underway. Reverse eggshell payroll tax audits are like a Trojan horse in that a criminal employment tax investigation is disguised as a civil employment tax audit. Auditors may request information aimed at proving that the taxpayer was willfully evasive or untruthful with the payroll tax returns under audit. Reverse eggshell employment tax audits can consist of simultaneous civil and criminal tax investigations or can start as civil employment tax audit that is later referred to a Fraud Referral Specialist or an IRS Special Agent or to the criminal tax function of the state of California for evaluation as to criminal tax liability.
How the Tax Law Offices of David W. Klasing Handle High-Risk Audits and Criminal Tax Exposure
The Tax Law Officer of David W. Klasing excels at representing clients under high-risk federal or California state tax audits, especially when they blatantly cheat on the tax return under audit and thus fear criminal tax prosecution. When facing tax audits from agencies like the IRS, CDTFA, EDD, or FTB, certain red flags, such as destroyed records, underreported income, or unfiled returns, can intensify the examination, leading 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). This is especially so when the taxpayer has a history of blatantly cheating on their federal tax returns and is now under audit and thus fears criminal tax prosecution.
Prevention is Key: Protecting Yourself From Criminal Tax Liability
Like with any audit issue, prevention is crucial to reduce or mitigate civil or criminal tax liability. It is essential to get in front of these audits by ensuring that your tax returns are prepared accurately and that all necessary disclosures are made. If you know for a fact you have a history of filing fraudulent returns, a voluntary disclosure entered into before an audit or criminal tax investigation has been initiated is the key to avoiding criminal tax culpability.
Hiring our Dual Licensed Tax Lawyers and CPAs to represent you or your business during an employment or income tax audit will help mitigate any risks and identify and successfully mitigate potential reverse eggshell audits. Part of what makes a reverse eggshell audit so risky is that a taxpayer is being criminally investigated without knowing it. That means they will not ordinarily avail themselves of constitutional protections like the Fifth Amendment right against self-incrimination and the Fourth Amendment right against unreasonable searches and seizures. The Tax Law Offices of David W. Klasing excel at recognizing when an IRS representative’s actions suggest a clandestine criminal tax investigation is occurring or imminent and take action to reduce your exposure.
How Can I Appeal an EDD Audit in Los Angeles Through the Office of Tax Appeals (OTA)?
Tax law in Los Angeles, California, operates under a complex system of agencies and courts. Federal tax disputes are usually resolved in the United States Tax Court, which handles cases between taxpayers and the IRS. Additionally, taxpayers may pursue litigation in the United States District Court or the United States Court of Federal Claims. However, for tax disputes within the state of California, the California Office of Tax Appeals (OTA) is the primary body that addresses issues with state tax agencies.
The California Office of Tax Appeals (OTA) was created in 2017 as part of the Taxpayer Transparency and Fairness Act under Assembly Bill (A.B.) 131. As an independent agency, the OTA reviews disputes between taxpayers and state tax agencies, including the Employment Development Division (EDD), the Franchise Tax Board (FTB), and the California Department of Tax and Fee Administration (CDTFA).
If your Los Angeles business disagrees with the findings of an EDD employment tax audit, there is a formal process for filing an appeal. While EDD auditors are expected to be thorough, errors in law application or factual interpretation can occur, which may result in inaccurate audit outcomes. The good news is that you have the right to challenge these findings through the OTA, where you can appeal the audit results and seek corrections.
To begin the appeals process, you must file your appeal within a set timeframe after receiving the audit outcome. The OTA has the power to review and potentially modify or overturn the audit findings. Securing the services of an experienced tax attorney can be crucial to navigating this process effectively, ensuring that all documentation is filed correctly, and improving your chances of a successful outcome.
Contact Our Dual-Licensed Los Angeles EDD and Criminal Tax Investigation Attorneys Today
If the statements or behavior of an IRS or EDD agent suggests that a criminal employment tax investigation is ongoing, involving a criminal tax defense attorney as early as possible in your audit is crucial to preventing the inherent criminal tax exposure in your audit from evolving into a full-blown federal or California criminal tax prosecution. When an IRS representative is collecting evidence for a clandestine criminal tax investigation, your attorney’s intervention might prevent such an investigation from resulting in criminal tax charges. Certain lines of questioning, a focus on the intent behind various tax reporting decisions, the sudden halting of an ongoing audit, and other suspicious behavior are obvious red flags to the trained eye. Quickly identifying a reverse eggshell audit will allow you and your attorney to take protective action immediately. As of the date of this writing, the Tax Law Offices of David W. Klasing have never had a client go to jail as the result of an audit, eggshell audit, or reverse eggshell audit.
If you suspect, or know for sure, that an eggshell, reverse eggshell, or criminal tax investigation is underway, we can prevent you from making criminal tax admissions, avoid unreasonable searches and seizures, and help protect your due process rights. If constitutional rights have been violated, our Dual Licensed Tax Lawyers and CPAs can fight to suppress the evidence that was improperly obtained.
We will help your understanding of the stages of an audit, criminal tax investigation, tax crime indictment, and prosecution, as well as the red flags that may pique the interest of the IRS or the California Franchise Tax Board (FTB), California Department of Tax and Fee Administration (CDTFA) and the Employment Development Department (EDD) and trigger the entire sequence. If you or your small business has been selected for a tax audit in Los Angeles, and you are concerned about a criminal tax investigation resulting from or occurring alongside the audit, engaging our Los Angeles Dual Licensed Criminal Defense Attorneys & CPAs services at the onset of a high-risk audit / criminal tax investigation will maximize the possibility of a favorable outcome without escalating to criminal tax charges. We have never had an audit client criminally prosecuted for tax crimes. Call 310-492-5583 or schedule a reduced-rate initial consultation here at our Los Angeles tax law office or one of our other convenient locations across Southern California.
Our Los Angeles Office is Conveniently Located at:
10940 Wilshire Blvd 1600 Ste 1600
Los Angeles, CA 90024
