Can an EDD Audit Turn Into a Criminal Investigation?

In short, yes. If you are paying workers who are not reported on a 1099 or W2 (for instance you are paying workers in cash and have no record of their payroll or payments), EDD may assess a fraud penalty and could open a criminal investigation. If your contractors are misclassified and should be employees, then you likely do not have WC insurance, which is insurance fraud.

What is more common are investigations of construction contractors who hire unlicensed works.

This investigation will then involve the Contractors State License Board (CSLB). A case can start with CSLB or EDD and the two generally work together. If CSLB or EDD find misclassified and unlicensed workers, the cases will then be referred to the District Attorneys Office in your City for possible criminal prosecution. These cases include workers’ compensation insurance fraud because your company did not have workers’ compensation insurance to cover these workers.

If you find yourself in this situation, contact a qualified tax attorney before providing any information to an investigator.

Our office has significant experience and has represented contractors who were under investigation. These investigations involve a detailed factual and legal analysis of tax law and a deep understanding of how to navigate an EDD and CSLB investigation.