The California Employment Development Department (EDD) ensures businesses meet state employment tax obligations, withhold and remit payroll taxes, and correctly classify workers. Failure to comply can expose you to severe financial penalties and, in some instances, criminal tax repercussions. At the Tax Law Office of David W. Klasing, our dual-licensed Employment Tax Attorneys and CPAs draw on nearly three decades of experience representing businesses and individuals in California’s complex employment tax landscape, with a particular focus on EDD penalties. We understand that EDD audits often arise from misclassified workers, underreported payroll taxes, and incomplete recordkeeping, all of which can lead to substantial back taxes, interest, and steep civil penalties and, at worst, criminal tax penalties. Our team excels at guiding clients through the intricacies of EDD audits, helping to identify vulnerabilities before an employment tax audit, effectively responding to document requests, and negotiating for penalty abatements or favorable outcomes during appeals through the California Office of Tax Appeals (OTA).
Whether you are facing high-risk audits due to red flags like destroyed records, significant underreporting, or other badges of fraud, or you need proactive assistance in ensuring compliance under strict California regulations such as AB5, we are here to protect your financial interests and personal liberty. To schedule a reduced-rate consultation, please contact the Tax Law Office of David W. Klasing online or call us at (800) 681-1295.
Types of Penalties in an EDD Audit
When the California Employment Development Department (EDD) audits a business, it examines whether the correct amount of state employment taxes has been withheld and paid (covering Unemployment Insurance (UI), Employment Training Tax (ETT), Disability Insurance (DI), and Personal Income Tax (PIT)), in addition to ensuring that workers are classified accurately. Failing to satisfy these obligations can expose you to multiple layers of severe penalties and consequences, such as:
Back Taxes and Interest
- If the EDD determines you underpaid or neglected to remit required employment taxes, you must pay the overdue amounts plus interest accruing from the original due date.
- Interest can compound quickly, making prompt resolution essential.
Late Payment Fines
- Penalties escalate based on how overdue the deposit is: 2% up to five days late, 5% for deposits six to fifteen days late, and 10% for deposits more than sixteen days late.
- Repeated late filings or payments can prompt deeper scrutiny and higher penalty rates.
Fraud Penalties
- Willful or deliberate tax evasion (e.g., fraudulent documents, misclassification of employees) can lead to $5,000 to $10,000 in additional fines.
- Frequent infractions may see fines climbing from $10,000 to $25,000.
- Where significant deceit is found, the EDD may impose liens on assets or seize property. Bankruptcy typically does not eliminate Federal of California employment tax trust fund liabilities.
Note: The EDD and IRS are known to share information so If you face California payroll tax adjustments, federal will follow. Therefore, we ordinarily advise that you should voluntarily amend your federal employment tax returns at the conclusion of an EDD employment tax audit.
Worker Misclassification Risks
Under AB5, willful misclassification of employees to avoid payroll taxes can trigger:
- Retroactive Assessments for multiple quarters or years.
- Civil Fines up to $25,000 per worker in severe cases.
- Trust Fund Recovery Penalty targeting individuals deemed personally responsible for unpaid withholdings.
- In serious instances, intentional misclassification may result in criminal tax charges (e.g., felony convictions, prison terms, and significant fines).
Eggshell and Reverse Eggshell Audits
- Eggshell Audits: Occur when your previously submitted employment tax returns are materially false. If EDD auditors uncover “badges of fraud,” a California or Federal criminal employment tax referral can be made.
- Reverse Eggshell Audits: An audit outwardly appears civil but is conducted in tandem with a covert EDD or IRS-CID criminal tax investigation. Statements believed to be benign can trigger felony charges if they’re judged knowingly false.
Ultimately, the EDD’s goal is to enforce compliance and deter willful evasion. Whether you omitted employment taxes accidentally or knowingly bypassed lawful obligations, an adverse employment tax audit can result in crippling employment tax assessments, interest, and penalties — and, in severe scenarios, Federal or California criminal tax exposure. Being diligent in recordkeeping, timely remittances and proper worker classification is your best defense. If you suspect your business practices may not withstand EDD scrutiny, seek experienced dual-licensed EDD tax audit attorneys & CPAs immediately to avoid steep fines, personal liability, or life-altering criminal tax consequences.
How the Tax Law Offices of David W. Klasing Can Help
At the Tax Law Offices of David W. Klasing, our dual-licensed Employment Tax Attorneys and CPAs combine substantial legal advocacy with rigorous accounting expertise to guide you through every step of an EDD audit or appeal. We begin by conducting a thorough pre-audit review of your workforce classification, payroll practices, and recordkeeping. This proactive approach helps us detect red flags, including potential misclassifications or underreporting, well before the EDD initiates any formal inquiry. By refining these areas early, we can reduce the likelihood of substantial penalties and limit your overall exposure.
If the EDD has already contacted you, we provide a precise audit defense by managing all communications and furnishing only the documentation required. This vigilant approach is particularly crucial in eggshell or reverse eggshell audits, where even minor misstatements may prompt felony tax charges. In cases where you dispute the EDD’s conclusions, our team represents you before the California Office of Tax Appeals (OTA). We meticulously prepare and present your factual and legal arguments, highlighting where the EDD may have overstepped its authority, misunderstood the records, or misapplied the law. Should litigation prove necessary, our EDD Tax Litigation Attorneys & CPAs stand ready, willing and able to litigate your tax case. Still, 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 tax court. We won’t take your case if we don’t believe we’ll win.
No matter how advanced or complicated your EDD case may be, we stress the importance of taking swift, decisive measures to protect your business operations and personal liberty. EDD audits can trigger enormous back-tax assessments, trust fund recovery penalties, and, in the gravest scenarios, criminal proceedings. If you sense your company is at risk from incomplete documentation, payroll anomalies, or an accelerating EDD dispute, call the Tax Law Offices of David W. Klasing at (800) 681-1295 or contact us online for a reduced-rate initial consultation. By acting proactively, you significantly reduce the threat of overwhelming liabilities, irrevocable harm to your reputation, and life-altering legal consequences.
