Facing an EDD audit resulting in an assessment can be a daunting prospect for any business owner. The steps you take immediately upon receiving notice of such an audit can significantly impact the outcome and potential consequences for your business. 

Here’s a detailed breakdown of what you need to know and the actions you should take:

  1. Filing an Appeal with CUIAB

Upon receiving a Notice of Assessment (NOA), ensure you note the issue date and mail date. You have 30 calendar days from the earlier of these dates to file an appeal with the California Unemployment Insurance Appeals Board (CUIAB). Missing this deadline could result in significant consequences, so it’s crucial to act promptly.

  1. Providing Evidence for Appeal

 If you decide to file an appeal, you must provide evidence to refute the EDD’s findings. Specifically, if the EDD converted your independent contractors into employees, you need to demonstrate that they satisfy the AB5 test, which consists of three elements:

  • The worker was not under your control.
  • The services provided by the worker were different from your company’s usual business activities.
  • The worker has an independently established trade or business, which may include possessing an EIN number, a website, a business license, insurance, or other evidence of an established business entity. Ensure that you gather and submit all relevant evidence accurately and within the 30-day appeal timeframe.
  1. Contacting EDD Collections and Taxpayer Advocate Service

If you receive an EDD collection letter, it’s imperative to contact EDD Collections immediately and request a hold on collections. This step has become necessary due to recent changes where EDD may initiate collections even while an appeal is pending. Additionally, consider reaching out to the Taxpayer Advocate Service for assistance. While they cannot provide legal representation, they can advocate on your behalf to protect your rights in disputes with government tax agencies. 

Understanding the AB5 Test

In our previous discussion, we touched upon the AB5 test as a crucial component in defending against EDD audit findings, particularly when independent contractors are challenged as employees. To provide a deeper understanding of this test, let’s delve into each of its elements in more detail.

Element 1: Control over the Worker

One of the key criteria of the AB5 test is determining whether the hiring company exercises control over the worker. This involves assessing the degree of direction and supervision exerted by the company. Control may manifest in various forms, including dictating work hours, providing specific instructions on tasks, or exerting influence over how the work is performed.

Element 2: Differentiation of Services

The second element of the AB5 test involves distinguishing the services provided by the worker from the usual activities of the hiring company. This criterion aims to ascertain whether the worker’s role is integral to the core operations of the business or if their services are distinct and supplementary. Clear differentiation can be evidenced by the nature of tasks performed, specialized skills required, or the autonomy granted to the worker in executing their duties.

Element 3: Independently Established Trade or Business

Lastly, the AB5 test evaluates whether the worker maintains an independently established trade or business. This criterion seeks to identify individuals who operate as bona fide independent entities rather than mere extensions of the hiring company. Factors indicating an independent business may include possessing an Employer Identification Number (EIN), maintaining a professional website, holding relevant licenses or certifications, carrying business insurance, and demonstrating a client base beyond the hiring company.

By examining these three elements comprehensively, businesses can better grasp the nuances of the AB5 test and strategically present evidence to support their classification of workers. Understanding the intricacies of control, differentiation of services, and independent business establishment empowers businesses to navigate EDD audits with confidence and accuracy.

Incorporating this detailed understanding of the AB5 test into your approach can strengthen your position during appeals and bolster your ability to defend against EDD audit assessments.

For more information, check out our ultimate guide to AB-5 here.

Final Notes

Facing an EDD audit can be daunting, but with the right approach, you can protect your business interests. By understanding the appeals process, providing compelling evidence, and seeking support from advocacy services, you can navigate the complexities of EDD audits with confidence.

For further assistance or legal counsel regarding EDD audits, consider reaching out to professionals like John Milikowsky, founder of Milikowsky Tax Law. With their expertise, you can effectively address EDD assessments and safeguard your business’s financial health.

Remember, timely action is key when dealing with EDD audits. By taking proactive steps and seeking appropriate support, you can mitigate risks and achieve a favorable resolution.

Facing an EDD Audit? Our Southern California Tax Attorneys Are Here to Assist.

In summary, if your business is undergoing an EDD audit, our tax attorneys can provide expert guidance in dealing with the Employment Development Department. 

To learn what to expect in a California EDD audit, read our article, here.

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