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ASK THE EDD ATTORNEY – NEW EDD AUDIT DOCUMENTATION AND INFORMATION DEMANDS – WHAT DO YOU LEGALLY HAVE TO GIVE THEM? – PART 1

By Robert S. Schriebman

2017

Introduction

This is Part 1 of a series of articles that will inform you of new audit demands that the EDD is currently making on employers. I have handled many audits in my career and no two are the same. If you have been selected for an audit, you will receive standard form documentation such as a Pre-Audit Questionnaire, and a preprinted list of required documentation and information. This list is a form and is usually sent out by a clerk. At this stage no specific auditor has been assigned to the case.

When an EDD audit is assigned to a specific auditor, that auditor will usually contact the employer or the employer's representative to request a list of documentation that auditor feels is necessary to conduct the audit. If the auditor is a "newbie" he or she will most likely use a preprinted form. However, more experienced auditors tailor their requests to the employer based upon the employer's industry.

This series of articles will first discuss the general principles of law that govern the request for audit documentation and information. I will then bring to your attention the latest audit request that I received recently, greatly expanding the documentation and information set forth in the standard preprinted form usually used. I believe that this new list is the beginning of a greatly expanded thrust by the EDD to probe wider and deeper into the employer's business and to go where the EDD has not gone before.

General Legal Standards Regarding the EDD's Request for Documentation and Information

No governmental agency including the EDD is legally entitled to ask that an employer produce anything and everything it wants. There are rules governing government requests for documentation and information. These rules apply to the IRS, FTB, BOE, and also to the EDD. You will not find these rules in any EDD manual or in any EDD publication. Rather, these rules were established by the US Supreme Court in the Powell decision of 1964 (US v Powell, 64-2 USTC §9858, 379 US 48, 85 SCt 248 (1964)).

The Powell case did not involve the EDD; it involved the IRS. But the principles and laws set forth in Powell govern the EDD. Most EDD auditors never heard of Powell. The Powell case does not permit the EDD to go on a "fishing expedition." That is to say, it does not give the EDD carte blanche to look over all of the employers' books and records in hope that something can be found so that new or additional taxes and penalties may be assessed. The Powell decision established four key elements. Each one must be met before a request for documentation and information is legally valid:

1. The EDD audit or investigation must be conducted pursuant to a legitimate purpose. This standard is going to be tough to challenge as the EDD has the absolute right to conduct an audit in a timely manner.

2. The information or documentation sought may be relevant to a legitimate audit purpose. In other words, it is documentation and information which "must throw light upon the EDD's inquiry." This is where the EDD's request and the representative's duty and protection of the employer often clash.

3. The information the EDD wants must not already be in its possession. There are new EDD requests for documentation and information put upon the employer that the EDD already has in its files.

4. The EDD needs to take the required administrative steps before issuing its demand or request for documentation and information.

These four Powell standards are going to be used in this series of articles so you will be able to see just how relevant and important they are to protect employer documentation and information.

New EDD Audit Demands for Documentation and Information - Is the EDD Entitled to All of This?

Over the past year I have seen the EDD expand its request for employer documentation and information. It seems with each new audit the list of demands gets longer. I recently discussed my concerns with an EDD higher-up who told me that both the California and federal departments of labor are making increased demands on the EDD and those demands are being translated into increasing the scope of employer audits.

Take the latest audit request I received a couple of days ago. I will change the auditor's name as well as the employer's name to protect privacy, but I will give you full disclosure on the information and documentation requested in the latest EDD demand.

"Hello Mr. Schriebman,

I would like to introduce myself, Able Baker, Tax Auditor, and I have been assigned the audit for your client Club Drerd, Inc. I have received the DE 48 POA general authorization for you to represent the taxpayer. This audit is designated for January 2018.

The current audit period will be from 01/01/2015 - 12/31/2017. Below please find a list of the documentation and information required for the audit:

1. Cancelled Checks or Check Stubs 2017 (If there is not a General Ledger or Check Register available, please provide for entire audit period)

2. Bank Statements 2017 (If there is not a General Ledger or Check Register available, please provide for entire audit period)

3. Credit Card Statements 2017

4. Federal Income Tax returns for 2015, 2016, and 2017

5. Detailed General Ledger separated by year (Excel format preferred)

6. Check Register separated by year

7. Chart of Accounts

8. Articles of Incorporation

9. Financial Statements such as the Income Statements and Balance Sheets separated by year

10. Copies of: city business license, State issued licenses, and/or ANY licenses needed to operate the business

11. Detailed payroll journal by pay period and quarterly payroll summary 2017

12. Payroll Check Stub/Cancelled Checks 2017 Q4

13. Form W-2, W-3, W-4 2017

14. Form DE 9 and DE 9C 2017

15. Form 940 and 941 2017

16. Forms 1096 and 1099 for 2015, 2016, and 2017

a. Please compile a spreadsheet indicating the types of services the 1099-MISC recipients rendered and their contact number.

b. Please provide an accompanying schedule that details the total payments made to the Form 1099-MISC recipients respective forms.

c. Copies of any written agreement with individuals on Forms 1099.

d. If any 1099 recipients were in business for themselves, please provide copies of either a business card, invoice, or receipt.

e. Provide any State issued business license number for 1099 recipients."

Is the EDD Legally Entitled to Anything and Everything on the Above List?

Did the EDD comply with the standards set forth in the Powell case? I am troubled by many of the requests put forth by Able Baker. Is he really entitled to all of this? If I disagree with Mr. Baker, how do I challenge his requests and do so in a legal and professional manner? It is very important in the audit process to be professional and cooperative. At the same time I have to protect my client.

In the next series of articles we will examine these requests and determine which ones are legitimate and which ones require challenge.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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