Underground Economy Operations

Report Payroll Tax Fraud

The Employment Development Department (EDD) has a charge to investigate businesses that avoid paying payroll taxes, many of which are part of the underground economy. If you would like to help us protect workers and create a level playing field for business competition, the EDD offers several methods for reporting such businesses:

  • Call our toll-free hotline: 1-800-528-1783
  • Fax: 916-227-2772
  • Submit a Fraud Reporting Form online
  • Mail us a UEO Lead Referral/Complaint Form, available in English (DE 660) (PDF) and Spanish (DE 660/S) (PDF)
  • Review Help Us Fight Fraud (DE 2370) (PDF)

Definition of "Underground Economy"

"Underground economy" is a term that refers to those individuals and businesses that deal in cash and/or use other schemes to conceal their activities and their true tax liability from government licensing, regulatory, and taxing agencies. Underground economy is also known as tax evasion, tax fraud, cash pay, tax gap, payments under-the-table, and off-the-books.

What Does It Cost You?

The actual size of the underground economy is difficult to measure. In January of 2012, the Internal Revenue Service released a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. After adjusting for audit and collection activities, the Internal Revenue Service estimates that in 2006 the net national tax gap was approximately $385 billion. Based on this figure, the California Franchise Tax Board estimates California’s tax gap (for the personal and business taxes that they administer) to be about $10 billion per year.

Reports on the underground economy indicate that it imposes significant burdens on: (1) the State of California, (2) businesses that comply with the law, and (3) workers who lose benefits and other protections provided by state law when the businesses they work for operate in the underground economy.

Business:

When businesses operate in the underground economy, they illegally reduce the amount of money expensed for insurance, payroll taxes, licenses, employee benefits, safety equipment, and safety conditions. These types of employers then gain an unfair competitive advantage over businesses that comply with the various business laws. This causes unfair competition in the marketplace and forces law-abiding businesses to pay higher taxes and expenses.

Workers:

Employees of noncompliant businesses are also affected. Their working conditions may not meet legal requirements, which can put them in danger. Their wage earnings may also be less than those required by law, and benefits they are entitled to can be denied or delayed because their wages are not properly reported.

Consumers:

Consumers can also be affected when contracting with unlicensed businesses. Licensing provisions are designed to ensure minimum levels of skill and knowledge to protect the consumer.

The ultimate consequence is the erosion of economic stability and working conditions in California. Our pamphlet Paying Cash Wages "Under the Table"... Is It Really Worth the Risk? outlines some of the costs and effects of cash pay on your business, your employees, and taxpayers in general. It is available in both English (DE 573CA) (PDF) and Spanish (DE 573CA/S) (PDF).

Underground Economy Operations

The EDD is concerned about workers who lose benefits and other protections provided by state law when the businesses that they work for operate in the underground economy. When businesses operate in the underground economy, they gain an unfair advantage over businesses that comply with the law. This causes unfair competition in the marketplace and forces law-abiding businesses and every citizen in California to pay higher taxes. The EDD’s Underground Economy Operations (UEO) organization was established in 1993 to implement and administer the activities of the Joint Enforcement Strike Force. The mission of the UEO is to reduce unfair business competition and protect the rights of workers by:

  • Coordinating the joint enforcement of tax, labor, and licensing laws.
  • Detecting and deterring payroll tax violations in the underground economy. This includes unreported cash pay, wages reported on Forms 1099, and unreported/unpaid payroll tax deductions.
  • Conducting research to identify strategies to increase compliance with payroll tax laws.
  • Educating customers on UEO programs to increase compliance with payroll tax laws.

Significant UEO Program Efforts

The UEO is involved in the following significant underground economy program focus areas:

Joint Enforcement Strike Force

On October 26, 1993, the Governor signed Executive Order W-66-93, which created the Joint Enforcement Strike Force on the Underground Economy (JESF). The Governor subsequently signed Senate Bill 1490, which placed the provisions of the Executive Order into law as Section 329 of the California Unemployment Insurance Code, effective January 1, 1995.

The EDD is the lead agency for the JESF, and the Director of the EDD is the chairperson. The JESF is responsible for enhancing the development and sharing of information necessary to combat the underground economy, to improve the coordination of enforcement activities, and to develop methods to pool, focus, and target enforcement resources. The JESF is empowered and authorized to form joint enforcement teams when appropriate to utilize the collective investigative and enforcement capabilities of JESF members. For more information, visit the Joint Enforcement Strike Force page.

In addition to the EDD, the other JESF members are:

Employment Enforcement Task Force

The Employment Enforcement Task Force (EETF) is the first program implemented by the JESF. The EETF works with the JESF partner agencies to conduct joint on-site business inspections to identify employers who operate in the underground economy. The goal of the EETF is to identify and bring into compliance those individuals and businesses participating in the underground economy that are in violation of payroll tax, labor, and licensing laws. To minimize the disruption of businesses that comply with federal and state laws, the EETF conducts investigations only if there is reasonable belief that businesses are violating provisions of the California Unemployment Insurance Code, the California Labor Code, the Business and Professions Code, and/or the California Insurance Code. The results of EETF activities can be viewed in the JESF’s Annual Reports.

Participating agencies in the EETF include:

Labor Enforcement Task Force

The Labor Enforcement Task Force (LETF), under the direction of the Department of Industrial Relations, is a coalition of California state government enforcement agencies that work together and in partnership with local agencies to combat the underground economy. In this joint effort, information and resources are shared to ensure that employees are paid properly and have safe work conditions and that honest, law-abiding businesses have the opportunity for healthy competition. Members of the LETF include: the Department of Industrial Relation’s Division of Labor Standards Enforcement and Division of Occupational Safety and Health; the EDD; the California Department of Tax and Fee Administration; the California Department of Insurance; the State Attorney General; the California Department of Alcoholic Beverage Control; and the Department of Consumer Affairs’ Contractor’s State Licensing Board and Bureau of Automotive Repair.

More information about the LETF is available on the Department of Industrial Relations' LETF page.