Employment Development Department (EDD) Investigations
The EDD takes its investigations very seriously and is aggressive against small business owners who fall behind on their required payroll tax deposits. Falling behind for even just a quarter or two can trigger collection action or potentially put a business at risk of an audit. Many businesses facing financial burdens and/or without the appropriate internal quality controls may fail to file, properly calculate, and/or deposit all of their quarterly payroll taxes. Businesses that also deal with a high number of cash employees or are in sectors where there is a greater potential for abuse are also likely targets of investigations.
The EDD obtains information from former employees (whistleblowers and those filing for unemployment benefits are often fruitful sources of information) as well as cross-referencing information from the California Franchise Tax Board and the IRS. Dissolved entities with substantial outstanding payroll liability are also increasingly popular targets. In this case, the EDD runs searches on the former directors and officers of a corporation to see if they are connected with any new EDD account numbers. Those directors and officers that are connected to a new business venture that is “substantially similar” to the dissolved entity are subject to a Trust Fund Recovery Interview and possible reassessment of their former payroll tax liability. Filing bankruptcy or having the limited liability protection of a corporation will not protect you. Through the Trust Fund Recovery Penalty, the EDD can take steps to hold you personally liable for your company’s non-payment of payroll taxes. Your assets are at risk and can be seized, including your home and other personal property.
For more information on Trust Fund Recovery Interviews and Penalties, please contact our office to speak to our attorneys and staff. Note that the Trust Fund procedures involved for IRS and EDD are largely the same and both organizations can assess liability.
Depending on the information received, EDD investigations are lengthy and can go on for months or years in particularly serious cases. They are also particularly cumbersome processes requiring the submission of numerous business records and EDD agents will often press for visits to the business location in order to inspect operations and potentially to interview employees. One of the principal advantages of having counsel represent you is that it provides a neutral site for the EDD personnel to conduct their investigations, if needed. Qualified tax counsel can avoid the inconvenience of having business operations disrupted and scaring employees by restricting access to your business. In addition, because many EDD representatives issue over-inclusive document requests out of a desire to be thorough, attorneys can often help limit the scope of documents the business will ultimately be required to produce. This saves both time and legal expenses. This is particularly important for businesses who do not wish to produce their accounts receivable lists or risk having customers contacted by the EDD. This is not always possible, depending on the degree of severity, but usually can be avoided through attorney negotiations.
Most EDD matters remain civil controversies, although enforcement action recently has stepped up against fraudulent activities associated with payroll tax. Anti-fraud measures include employer audits and fiscal monitoring, as well as analyzing client, employer, and medical provider demographic data. In addition, EDD agents conducting criminal investigations can use measures that include surveillance, undercover operations, computer forensic analysis and data mining, search warrants, witness and suspect interviews, evidence seizure, and arrest and prosecution of suspects.
In addition, many disputes with the EDD arise over whether workers are classified as independent contractors or employees. If a worker who is classified as an independent contractor files for unemployment insurance, it may trigger a payroll tax audit or a reclassification of your independent contractors as employees. Worker reclassification is particularly costly because it shifts the payroll tax withholding and liability burden to the employer and creates liability for all quarters during which the “employee” has been under your control. More information about independent contractor disputes can be found under Independent Contractor Disputes.
If you have any questions or if we can further assist you, please contact our San Diego office.
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