What Records Does an EDD Auditor Request? A California Employer's Guide

By Marc Boulanger, CPA

If your California business has been selected for an EDD employment tax audit, one of the first practical questions is simple: What records will the auditor want to see?

The answer can be much broader than payroll reports.

The California Employment Development Department's own audit guidance lists bank records, general ledgers, financial statements, income tax returns, Forms 1099, payroll records, federal payroll tax returns, California payroll tax filings, and ownership records among the documents that may be examined.

And if the audit involves independent contractors or worker classification, the auditor may request additional records such as contracts, invoices, billings, corporate minutes, and other written agreements.

What Records Does EDD Officially List for an Employment Tax Audit?

EDD's Information Sheet: Employment Tax Audit Process (DE 231TA) divides its records list into two broad categories.

1. Minimum Required Records

EDD lists the following among its minimum required records:

• Check registers
• Check stubs
• Canceled checks
• Bank statements
• General ledger
• General journal
• Annual financial statements
• Income and expense statements
• Balance sheets
• Cash payment records
• Pay-out slips and vouchers
• Ownership verification
• Applicable business licenses
• Organizational agreements and documents
• Federal and state income tax returns
• Forms 1099 and related federal information returns and worksheets

2. Additional Records for Verification of Payroll

EDD separately identifies records used to verify acknowledged payroll, including:

• Payroll journals
• Individual earnings records
• Payroll summaries
• Forms W-2
• Forms W-4
• Forms 941
• Forms 940
• California DE 9 filings
• California DE 9C filings
• DE 9ADJ adjustment forms
• DE 678 adjustment forms
• California DE 4 withholding certificates

Why Does EDD Want Your General Ledger and Bank Records?

This is one of the most important things for an employer to understand about an EDD audit.

The auditor is not limited to checking whether the numbers on your DE 9 and DE 9C match the payroll reports.

The accounting records can help the auditor identify payments made for services that never entered the payroll system.

Depending on the business, accounts that may deserve attention can include:

• Contract labor
• Outside services
• Professional services
• Commissions
• Casual labor
• Repairs and maintenance
• Management fees
• Officer or shareholder payments
• Reimbursements
• Other miscellaneous payments to individuals

The account name itself does not determine whether a payment represents wages. It can, however, help identify transactions the auditor may want to investigate further.

Why Are Forms 1099 Important in an EDD Audit?

EDD specifically includes the Form 1099 series among the minimum records listed in DE 231TA.

That's important because one of the principal issues in many employment tax audits is whether individuals paid outside payroll were correctly classified as independent contractors.

An auditor may compare Forms 1099 to:

• The general ledger
• Check and payment records
• Payroll reports
• Worker contracts
• Invoices
• The services actually performed

A Form 1099 does not itself establish that a worker was properly classified as an independent contractor.

For a detailed discussion, see our EDD Independent Contractor Audit Guide.

What Additional Records Can EDD Request for Worker Classification?

EDD's audit-process guidance specifically says that when worker-classification issues are encountered, the auditor may need to examine additional documents such as:

• Invoices
• Billings
• Corporate minutes
• Written agreements

Depending on the particular classification issue, other records concerning the worker and the services performed may also become relevant.

The reason is straightforward: worker classification depends on the actual relationship, not simply whether the business issued a Form 1099.

What if Someone Appears in Both Payroll and the 1099 Records?

A worker appearing in both sets of records deserves particular attention.

There can be circumstances in which an individual performs genuinely separate employee and independent contractor services. But the two relationships need to be supportable under the applicable classification rules.

If the person was performing essentially the same services in both capacities, the auditor may question whether the 1099 payments should have been included in payroll.

See our guide: Can You Be a W-2 Employee and 1099 Contractor for the Same Company in California?

Why Does EDD Request Income Tax Returns and Financial Statements?

Income tax returns and financial statements give the auditor another way to understand the business and reconcile its records.

For example, amounts reported as wages, contract labor, commissions, professional fees, or other expenses may provide information that can be compared with payroll reports, Forms W-2, Forms 1099, and the general ledger.

Differences do not automatically mean something is wrong. But unexplained differences can create additional questions.

Will EDD Request Three Years of Records at Once?

Not necessarily.

EDD states that employment tax audits generally cover a three-year statutory period consisting of the 12 most recently completed calendar quarters.

However, the examination generally begins with a test year, usually the most recently completed calendar year.

EDD's DE 231TA states that if differences are found in the test year, the examination may be expanded to include records for the entire audit period. In some circumstances, an examination may extend beyond the ordinary three-year period.

For more information, see How Long Does an EDD Audit Last?

What Should You Do Before Providing Records to the EDD?

An employer should respond appropriately to legitimate EDD records requests. But that does not mean the records should be assembled without first understanding what they contain.

Before providing the records, I generally want to understand:

• What period has EDD requested?
• What specific records were requested?
• Which accounts contain payments for services?
• Do the payroll reports reconcile to the accounting records?
• Who received Forms 1099?
• Did anyone receive both a W-2 and a 1099?
• Are there payments to individuals who received neither form?
• Are there worker-classification issues?
• Are any requested records missing or incomplete?
• Are there obvious differences that should be understood before the examination begins?

What I Look at Before an EDD Auditor Reviews the Books

When I receive a new EDD audit, one of the first things I want is the general ledger for the test year.

Why?

Because it gives me a map of the business.

I can see payroll, contractor payments, professional services, commissions, repairs, reimbursements, and other accounts that may contain payments to people.

From there, I can compare those accounts with Forms W-2, Forms 1099, payroll reports, and the other records.

The goal is not to hide or withhold legitimate records. It is to understand the accounting before the auditor starts asking questions about it.

What Are the DE 996 and DE 996Q?

EDD's current Tax Audit Guidelines describe the beginning of the audit process.

The employer is generally sent an Inquiry Regarding Records (DE 996), a Pre-Audit Questionnaire (DE 996Q), and the Employment Tax Audit Process information sheet (DE 231TA).

The DE 996 identifies the purpose of the audit and the period involved. The DE 996Q asks when and where records will be available, who the audit contact will be, contact information, and additional information about the business.

EDD's Tax Audit Guidelines state that the DE 996Q should be returned within 14 calendar days.

See our detailed guide: EDD Pre-Audit Questionnaire (DE 996Q): What California Employers Need to Know.

What Happens Before the Auditor Reviews the Records?

EDD says the auditor conducts an entrance interview with the employer or designated representative before reviewing the records.

The purpose includes explaining the audit, gathering information about the business and the organization of its accounting records, and answering questions.

That means the employer's explanation of its operations and accounting system can become an important early part of the examination.

See How to Prepare for an EDD Employment Tax Interview.

Common Mistakes When Responding to an EDD Records Request

• Assuming the audit is limited to payroll reports
• Ignoring contractor and outside-services accounts
• Providing records without first understanding obvious discrepancies
• Assuming every Form 1099 worker was correctly classified
• Ignoring workers who received both W-2 and 1099 compensation
• Waiting until the audit interview to determine what records are missing
• Failing to identify the exact audit period
• Assuming the initial test year is necessarily the end of the examination

CPA Representation for an EDD Records Examination

Boulanger CPA and Consulting PC represents California businesses in EDD employment tax audits, including examinations involving payroll records, accounting records, independent contractors, worker classification, and disputed assessments.

Because an EDD audit often moves between payroll reports and the underlying accounting records, CPA representation can be particularly useful when the examination involves reconciling payments, identifying contractor accounts, and reviewing the auditor's calculations.

EDD Audit Records FAQs

What records does an EDD auditor normally request?

EDD's published audit list includes bank and check records, general ledgers and journals, financial statements, cash-payment records, ownership records, income tax returns, Forms 1099, payroll records, federal employment tax returns, and California employment tax reports.

Does EDD request bank statements?

Yes. Bank statements are specifically included among the minimum required records listed in EDD's DE 231TA audit information sheet.

Does EDD request the general ledger?

Yes. The general ledger and general journal are specifically included in EDD's minimum required records list.

Will EDD look at my 1099 contractors?

Potentially. Forms 1099 are included in EDD's records list, and worker classification is one of the issues an employment tax auditor may examine.

Can EDD ask for contractor agreements and invoices?

Yes. EDD's audit guidance states that if worker-classification issues are encountered, the auditor may need documents such as invoices, billings, corporate minutes, and other written agreements.

How many years of records can EDD examine?

EDD states that employment tax audits generally cover a three-year statutory period consisting of the 12 most recently completed calendar quarters. The audit normally begins with a test year and may expand to the full audit period or, in some situations, beyond it.