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ASK THE EDD ATTORNEY – NEW EDD AUDIT DOCUMENTATION AND INFORMATION DEMANDS – WHAT DO YOU LEGALLY HAVE TO GIVE THEM? – PART 2

By Robert S. Schriebman

2017

Introduction

This is Part 2 of a series of articles that will inform you of new audit demands by the EDD that aim for transparency in the employer’s business affairs. The most recent audits handled by this office find the EDD asking for more documentation and information than they have in the past. A week does not go by when I receive calls from tax professionals and employers questioning whether or not the EDD has a right to ask for extraordinary information. Before reading the rest of this article, I suggest you review the extensive list of documentation and information set forth in Part 1.

The new thrust by the EDD may come down to a battle of wills between a demanding EDD auditor and a tax professional seeking to vigorously represent his or her client. Earlier this year the EDD published "Information Sheet DE 231TA, Employment Tax Audit Process" (revision 10). This Information Sheet has a new checklist broken down into two areas: 1) MINIMUM REQUIRED RECORDS, 2) ADDITIONAL RECORDS REQUIRED FOR VERIFICATION OF ACKNOWLEDGED PAYROLL. Unlike the old form (revision 9) submitted with the "Inquiry Concerning Records" revision 10 is broader and more intrusive.

In this article we will take a look at some of the new requirements and demands made on employers and discuss generally what will become the two future battle grounds of EDD audits; relevancy and duplication of documentation already in the EDD’s possession.

Before getting specific let’s review the standards and guidelines established by the US Supreme Court in the powell decision.

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.

DE 231TA (Revision 10) - An Overview

Even though DE 231TA Revision 10 (1-17) has been around for many months, EDD auditors continue to use the old checklist DE 231TA Revision 9 (5-12). The new checklist begins by requesting "check registers, check stubs, cancelled checks, and bank statements." This is followed by "annual financial statements (income and expense statements, balance sheet, etc.)." These two requirements alone will generate much conflict. I’m sure you are scratching your head and asking yourself many questions, such as, "What does this stuff have to do with worker status?" "How much is it going to cost to obtain three years of cancelled checks etc, from my bank?"

Another area of concern is under the subheading "Ownership Verification." Here the EDD is requesting the following documentation:

  • "City business license
  • Board of Equalization sales tax license
  • Any license required to operate your business, such as a liquor license, California State contractor’s license, etc.
  • Written agreements (for example, Partnership Agreement or Articles of Incorporation)"

The new DE 231TA is a two-page document. On the first page, one is reminded that the EDD shares information with the IRS, as follows, "The EDD employment tax audit information is made available to the IRS under an exchange agreement and the IRS may use the information in the administration of its tax program." If the EDD exchanges information with the IRS, the EDD also exchanges information with the FTB and the BOE. This is why it is troubling to see requests for a sales tax license and other licenses.

These days no responsible tax professional involved in any tax audit can assume that, "what happens in Vegas, stays in Vegas." An EDD audit is no longer just an EDD audit. It is also a potential IRS, FTB, and BOE audit. Not long ago I represented an employer in the restaurant business concerning EDD worker status issues. Soon after the EDD audit was completed the BOE stepped in to conduct a sales tax audit. The IRS has conducted a "Me Too" audit while an EDD audit was in progress. You need to keep this in mind whenever you are handling any type of tax audit.

The Tax Professionals Role in Expanded EDD Audits

Where does an EDD auditor come up with the list of information and documentation required? What is its genesis? Very few EDD auditors, and only the most experienced, will custom tailor his or her request for documentation and information. Their requests will be based upon their knowledge and experience in the employer’s industry. The EDD has recently hired many new and inexperienced auditors. Most of them will simply parrot-back the checklists set forth in DE 231TA (old and new versions). They will not give much thought to the inconvenience and relevance of their requests. They will also request that the employer go out of his or her way to prepare and generate specialized presentations. It is a long standing audit fundamental that no taxpayer shall be required to generate new presentations. No audit should be a "fishing expedition."

The tax professional’s role in effectively representing his or her client is to challenge the EDD on the issues of relevancy as well as whether or not EDD requests are overly burdensome.

The newest version of DE 231TA requires the employer to produce previously filed EDD returns. These returns are already in the possession of the EDD and most likely are now on the EDD’s computer data systems. I am confident that if the employer requested copies of these filed returns from the EDD, they would be produced promptly. Why should any employer be required to give the EDD copies of documents already in its possession?

Conclusion

With the expanded demand for information and documentation set forth in the newest version of DE 231TA, we may see a circular argument from the EDD that will benefit no one. For example, a tax representative may challenge the auditor’s requests for documentation and information based upon relevancy, redundancy, or an excessive employer burden. The auditor may reply that his or her authority for the request comes from DE 231TA. This begs the question and leads to circular reasoning that accomplishes nothing.

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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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