Some points to keep in mind as your prepare your EDD audit.
Gather your payroll records, EDD & IRS employment tax returns for the audit period they indicated in their letter.
The first question to ask your client is whether or not your client was incorporated during the period covered by the audit. The EDD preliminary audit notice will inform your client of the audit period and what quarters are involved. If your client was not incorporated, any resulting EDD status determination will be directly assessed against your client. He or she will be personally liable; a husband and wife will have joint and several liability.
A status audit is the most common type of EDD audit these days and involves the central issue of whether workers are employees or independent contractors. If your client was incorporated during the period covered by the audit, the corporation, as a separate entity will be liable. Your client will not be personally liable.
It will be up to the EDD, at some time in the future, to make the determination whether to issue an assessment against those individuals whom the EDD believes were “responsible persons”.
The second question to ask your client is whether or not quarterly EDD and IRS employment tax returns were filed during the audit period. This question is critical because it will determine just how far back the EDD and the IRS may examine books and records. We will discuss the IRS at a later time. Let’s focus on the EDD.
In the EDD code there is only one statute of limitations for assessment and it governs everything the EDD does. That section is California Unemployment Insurance Code Section 1132 (you can refer to this code as CUIC). Whether the EDD makes an assessment against your client as an individual, corporation, or both, it must do so within the language of this code section.
What are the statutes of limitations for assessment? Let’s start with the basic rule: If your client has filed quarterly EDD employment tax returns, the statute of limitations for assessment is anytime up to three years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued or within three years after the deficient return was file, whichever was later. If your client has failed to file returns because all workers had been treated as independent contractors, including the owners of the corporation, the statute of limitations for assessment is anytime up to eight years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued. This is an important difference between EDD and IRS rules. Under IRS rules, if no return is filed, there is no statute of limitations for examination. If the EDD suspects fraud, whether or not a return has been filed, there is no statute of limitations for assessment.