Key Takeaways
- The first and biggest problem is the misunderstanding that the taxpayer has thinking that just because they didn’t do anything wrong, there’s no risk associated with the audit.
- So it’s very important for the taxpayer to understand what their risk is in the beginning of the audit and then do things to mitigate that risk during the audit process.
- The second common problem that we have in audits is with independent contractors.
The first and biggest problem is the misunderstanding that the taxpayer has thinking that just because they didn’t do anything wrong, there’s no risk associated with the audit. A lot of taxpayers hang their hat on the fact that “well this is the way that I’ve done things, this is the way I’ve always done things and I’ve been doing everything a hundred percent correct” and that’s a fallacy because a lot of times the EDD is auditing somebody because they have a reasonable suspicion that’s something they’re doing is not correct. So it’s very important for the taxpayer to understand what their risk is in the beginning of the audit and then do things to mitigate that risk during the audit process. The second common problem that we have in audits is with independent contractors. A lot of times the clients will insist that their independent contractors are really independent contractors but the problem is that because of what the independent contractor says or does, or because of the circumstances of the situation, it actually convoluted the analysis and the EDD is very aggressive towards the classification of workers. Whenever possible, it tries to classify workers as employees and the presumption is that they are employees unless the taxpayer can demonstrate evidence to show that they’re not. So those are by far the most common problems with EDD audits and those are the things that you should work to mitigate. That list is not exhaustive. There’s lots of other things that go into the payroll tax audit analysis and things that tend to be problems for taxpayers as they go through it but most importantly if you go in there, if you pre-audit yourself and if you have a good presentation, you can usually screen out most of the issues before they pop up and before they create financial liability to your company or yourself.
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