Payroll Tax Audit
Payroll tax audits by the IRS or California EDD can result in significant assessments and potential personal liability for responsible parties. NewPoint Law Group's tax attorneys represent employers in Roseville and throughout Northern California during payroll tax audits, working to correct errors and minimize exposure before assessments become final.
Payroll Tax Audit Defense | Tax Attorneys in Roseville, CA
What Is a Payroll Tax Audit?
A payroll tax audit is an examination by the IRS or the California Employment Development Department (EDD) of an employer's payroll records and tax filings. Auditors verify that payroll taxes were correctly calculated, withheld, reported on quarterly and annual returns, and deposited to the appropriate agencies on a timely basis.
Payroll tax audits often arise from discrepancies between W-2s and 1099s filed with tax agencies, prior audit history, industry-wide compliance initiatives, or anonymous tips.
Worker Classification: A Core Audit Issue
One of the most significant — and costly — issues in payroll tax audits is worker classification. Businesses that classify employees as independent contractors may be assessed for the employer's share of Social Security and Medicare taxes, the employee's share (which the employer failed to withhold), federal and state unemployment taxes, and associated penalties and interest.
California applies the ABC Test under Labor Code § 2775 for determining worker classification in most contexts, which creates a presumption of employee status unless all three elements of the test are satisfied.
Personal Liability for Payroll Taxes
The IRS Trust Fund Recovery Penalty (TFRP) under IRC § 6672 allows the IRS to hold individuals personally liable for the employee portion of unpaid payroll taxes — including owners, officers, bookkeepers, and others who had control over payroll decisions. This liability survives business closure and bankruptcy. The EDD has parallel authority under California law.
Protecting responsible individuals from personal assessment — and contesting TFRP determinations when the IRS gets it wrong — is a critical component of payroll tax audit defense.
Audit Defense and Resolution
Our tax attorneys represent employers from the first audit notice through examination, protests, and appeals. We help clients organize payroll records, respond to IRS and EDD information requests, challenge worker reclassification determinations, negotiate penalty reductions, and, where appropriate, contest proposed assessments through the administrative and judicial process.