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Companies and corporations operating in Oakland, CA, are uniquely positioned due to their access to both the thriving U.S. economy and growing Asian markets like China. California’s economy alone surpasses the combined economic output of countries such as Italy and Russia, making it a prime location for businesses looking to engage with both domestic and foreign markets.

While businesses in Oakland, CA, benefit from extensive infrastructure and trade networks, these systems come with costs, including the obligation to collect and pay taxes. Employment and payroll taxes, in particular, must be accounted for, held, and turned over by employers. Whether it is a federal or state employment tax obligation, employers must keep this money in trust for the government and remit it when due.

The Employment Development Division (EDD) oversees state employment tax obligations in California, while the IRS manages federal employment tax matters. During an audit by the EDD or IRS, it is common for tax authorities to request a tour of the business facilities. This tour often serves as an informal introduction to the audit process, where the agent may interview the individual conducting the tour regarding their role in the company, the nature of the business, and the markets in which the company operates.

The audit process has become increasingly lengthy in recent years, often taking up to a year or more to complete. Interest and penalties may apply if the audit reveals a deficiency, increasing business stakes. Employers must understand their rights during the audit process, including the time limitations the government has to conduct the audit.

Whether you are a longtime resident of Oakland, a local business owner, or have recently moved to Oakland from another state or country and aren’t sure of your filing obligations, seeking professional assistance to navigate these challenges and avoid severe penalties is crucial. At the Tax Law Office of David W. Klasing, our dual-licensed Oakland 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. 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. To arrange a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online or call our Oakland tax office at (510) 764-1020.

Can an EDD Employment Tax Audit Lead to a Criminal Tax Investigation?

Employment tax audits can result in significant civil and criminal tax consequences for businesses and individuals, especially in Oakland, CA, where a diverse and growing economy presents unique challenges for employers. The IRS and California’s Employment Development Division (EDD) actively pursue cases of intentional misclassification or payroll fraud, which can lead to severe civil tax penalties and, in some cases, criminal tax prosecution. Below are key areas where businesses in Oakland may face criminal exposure during employment tax audits.

What Happens if I Misclassify My Employees or Commit Payroll Fraud in Oakland?

In Oakland, a vibrant city with a wide range of industries, misclassifying workers as independent contractors can expose businesses to significant risks. Employers in sectors such as technology, construction, and services may face worker classification audits by the EDD and possibly the IRS if misclassified workers file for unemployment benefits after being terminated.

Employers sometimes misclassify their workers as independent contractors instead of employees. When this happens, the employer typically does not withhold or contribute payroll taxes such as Social Security and Medicare. However, if a worker is classified as an employee, the employer must pay half of the worker’s Social Security and Medicare taxes. In addition, the employer must withhold amounts for federal income taxes, Social Security, Medicare, and state taxes, holding these funds in trust on behalf of the employee to submit to the taxing authorities.

If an employer misclassifies workers, the IRS and EDD can assess both current and back taxes on the amounts the employer should have paid for payroll taxes, and this amount can be substantial. This is particularly important in Oakland, where compliance with both California state and federal tax obligations is strictly enforced. If the misclassification is found to be intentional, civil penalties can escalate to criminal tax charges.

Employment tax audits in Oakland may escalate into exponentially severe criminal tax investigations, particularly when there is evidence of willful fraud or misconduct. Two types of audits that pose the highest risk for Oakland businesses are eggshell and reverse eggshell audits.

What is an Eggshell Audit?

An eggshell audit is a civil audit in which the return(s) under examination contains a material understatement of income, overstatement of deductions, or credits claimed the taxpayer was not entitled to. These errors lead to a lower tax liability than what would have been owed if an accurate return had been filed. In Oakland, businesses may face this type of employment tax audit, and it is crucial to understand that while errors may result from negligence, which could lead to a 20% negligence penalty, they can also be caused by willful intent to defraud the government. In cases of willful misconduct, businesses may face a 75% fraud penalty or even 3 to 5 years in jail.

What is a Reverse Eggshell Audit?

A reverse eggshell audit is even more dangerous and involves a criminal tax investigation disguised as a civil audit. These audits are common in Oakland, where local and federal authorities work together to identify tax fraud. In a reverse eggshell audit, the taxpayer and their representative are unaware that the auditor is collaborating with the IRS’s Criminal Investigation (CI) division. Reverse eggshell audits typically begin when a civil examiner refers the case to a Fraud Referral Specialist, who works the case for a handoff to a special agent in CI. In these cases, any false or misleading statements made during the audit can trigger further criminal charges.

Can I Be Personally Liable for My Company’s Delinquent Payroll Taxes in Oakland?

Yes, in Oakland, as elsewhere in California, the IRS and EDD can hold individuals personally liable for unpaid payroll taxes if they are considered responsible persons who acted willfully. Responsible persons are often business owners, corporate officers, or managing partners, but in Oakland’s diverse industries, employees such as bookkeepers or office managers may also be considered responsible persons if they have authority over payroll tax decisions.

Any person in Oakland with the authority to decide whether payroll taxes are paid will always be considered a responsible person. This includes individuals who oversee day-to-day operations, such as business owners or corporate officers. Employees involved in ensuring that employment taxes are paid, even if they do not make the final decision, are also at risk. This is especially true if the employee has the authority to make payments and prevent tax defaults. On the other hand, employees and investors who lack the authority to write checks or have duties unrelated to payroll tax payments are less likely to be considered responsible.

Although the IRS has guidelines for determining responsible persons, there are no guarantees that an individual in Oakland will not be deemed responsible. Even individuals who did not make the final decision but had the theoretical authority to influence payroll tax payments may be held liable. Shockingly, there have been cases where the IRS has considered someone a responsible person even after they argued against non-payment of payroll taxes and quit their job over the dispute.

What is the Office of Tax Appeals (OTA) and How Can I Appeal an EDD Audit?

Tax law in Oakland, California, encompasses a multifaceted system of courts and agencies. Federal tax disputes are usually settled in the United States Tax Court, which presides over conflicts between taxpayers and the IRS. Taxpayers also have the option to litigate tax disputes in the United States District Court or the United States Court of Federal Claims. In California, tax disputes are generally addressed by the California Office of Tax Appeals (OTA).

The California Office of Tax Appeals (OTA) was established in 2017 under Assembly Bill (A.B.) 131, as part of the Taxpayer Transparency and Fairness Act. The OTA serves as an independent body that reviews disputes between taxpayers and state tax agencies, including the Employment Development Division (EDD), Franchise Tax Board (FTB), and California Department of Tax and Fee Administration (CDTFA).

If your Oakland business disagrees with the results of an EDD employment tax audit, there are options for appeal. While auditors are trained to be thorough, mistakes in the application of law or assessment of facts are not uncommon, which can lead to inaccurate findings. The good news is that California law provides an appeals process through the OTA, where you can challenge audit results and seek corrections to errors that may have occurred.

Appeals to the OTA must be filed within a specific timeframe after receiving the audit results. The OTA has the authority to review and potentially overturn or adjust the audit findings. Engaging an experienced tax attorney is critical to navigating the appeal process, ensuring all necessary documents are properly submitted, and maximizing your chances of a favorable outcome.

At the Tax Law Offices of David W. Klasing, our dual-licensed Oakland Tax Audit Appeal Attorneys and CPAs meticulously assess litigation risks where latent criminal tax issues may exist to secure resolutions as soon as possible, drawing upon our deep understanding of the procedural rules and substantive issues at play. We can support clients with EDD audits, appeals, and litigation, helping you understand employment tax laws’ complex and evolving landscape. Our team of seasoned litigators can work to protect your rights and ensure a fair outcome in your EDD disputes. To date, we have never lost in federal tax court. We won’t take your case if we don’t believe we’ll win. Among David W. Klasing’s credentials as an Orange County tax litigation attorney, he is a past chair of the California State Bar Association Tax Procedure and Litigation Committee and the Orange County Bar Association Tax Section and an active Member at Large of the California Society of CPAs Committee on Taxation. Call (510) 764-1020 or schedule a reduced-rate initial consultation here at our Oakland office or one of our other convenient locations across Northern California.

Contact Our IRS and EDD Criminal Tax Defense Attorneys in Oakland Today

Facing criminal tax charges would surely be a horrific nightmare for anyone so unfortunate to be accused. Just the mere allegation and subsequent investigation can result in sleepless nights and can have a very damaging emotional, financial, and reputational effect even where the wrongly accused is later found innocent.

When facing high-risk tax audits from agencies like the IRS and EDD, 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, Oakland’s 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. Even international tax evasion schemes that utilize remote tax havens are easily detected by the IRS, which works with tax and law enforcement agencies around the globe and throughout the United States.

If you or your small business has been selected for an IRS or EDD tax audit in Oakland and you are concerned about a criminal tax investigation resulting from or occurring alongside the audit, engaging our Oakland Criminal Tax 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 a federal or California audit client criminally prosecuted for tax crimes.

For a reduced-rate initial consultation, call our Oakland tax office at (510) 764-1020 or contact the Tax Law Office of David W. Klasing online here. Please note that our Oakland office is by appointment only.

Our Oakland office is Conveniently Located at:

505 14th St.

Oakland, CA 94612

(510) 764-1020