What to Do If You Get a California EDD Letter or Notice

EDD payroll tax audits: your first response may shape the entire case.

An EDD employment tax audit is different from a routine unemployment insurance claim notice. The audit may examine whether workers were correctly treated as employees or independent contractors, whether wages were properly reported, and whether California payroll taxes were paid. Do not disregard the initial audit notification or postpone preparing your records.

How the audit typically develops

1. Initial contact and scheduling: EDD's Tax Audit Guidelines (DE 40) describe an Inquiry Regarding Records (DE 996), a Pre-audit Questionnaire (DE 996Q), and an Audit Appointment (DE 996C). The guidelines call for the questionnaire to be returned within 14 calendar days and establish a 15-day follow-up for the DE 996. An inconvenient appointment may be rescheduled—ignoring it is not a sound strategy.
2. Entrance interview: The auditor discusses the business, ownership, operations, accounting system, and records. This is an important opportunity to clarify facts before the auditor draws conclusions.
3. Records and investigation: EDD reviews payroll records, payments to workers, contracts, invoices, and other records. The auditor may discuss worker relationships with both the business and workers and make classification findings.
4. Findings and proposed assessment: The auditor explains adjustments and, where applicable, the proposed assessment and the basis for it. EDD procedures include a closing interview, notice of audit results and review rights, and opportunities to discuss disagreements or request a conference.
5. Formal assessment and challenge: If a Notice of Assessment is issued, an employer who disputes it generally must file a petition for reassessment within 30 days, subject to applicable rules. The petition is handled by the independent California Unemployment Insurance Appeals Board (CUIAB). The assessment does not become automatically correct merely because EDD issued it, but a failure to challenge it on time can make it final and much harder to contest.

Why early participation matters

Once EDD has developed an assessment, the business may need to assemble contracts, payroll records, witness information, accounting data, and legal arguments to challenge factual findings or worker classification. That can be time-consuming and expensive. Presenting complete, accurate information early may avoid misunderstandings or narrow the disputed issues. The employer has rights to representation and review, and the agency must follow applicable procedures; the burden and evidentiary rules vary by issue and proceeding.

Before the initial appointment: Verify the notice and auditor, calendar all deadlines, organize payroll and contractor records, identify who can explain business operations, and consider involving an authorized tax representative. If you disagree with findings, request the audit workpapers and review the notice's conference and petition procedures promptly.

EDD primary sources: DE 231TA: Employment Tax Audit Process; DE 40: Tax Audit Guidelines (initial contact, interviews, assessments); DE 231MW: Assessments for Misclassified Workers and Petition Rights.