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ASK THE EDD ATTORNEY – NEW EDD AUDIT DOCUMENTATION AND INFORMATION DEMANDS – WHAT DO YOU LEGALLY HAVE TO GIVE THEM? – PART 3

By Robert S. Schriebman

2017

Introduction

This is Part 3 and the final part 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. We lead very busy personal and business lives. We do not pause very often to ask ourselves the "Why’s" and the "How’s." Perhaps when something major happens, we do pause and reflect. I am just as guilty as everyone else especially when I’m involved in the day-to-day demands of a busy law practice.

Over the years I have written extensively on tax practice and procedure. I have written over 20 books and hundreds of articles, as this website will attest. In this article, however, I have stopped to question the authority of the EDD to make demands on employers and tax professional for documentation and information. At the conclusion of Part 2 I discussed avoiding a circular argument with the EDD auditor when challenging his or her right to expand the demand for transparency on how the employer does business. I want to avoid improperly challenging the auditor’s authority only to be confronted with an email containing Information Sheet DE 231TA, either version 9 or version 10 discussed in Part 2. Just because words are written on paper does not ipso-facto give anyone the legal right to anything. After all DE 231TA is not the Constitution of the United States or a Supreme Court decision. (We will get to that below.)

My goal in this Part 3 is to get down to the root authority of the EDD auditor to demand this or that from my client or from you the employer-taxpayer. Therefore, this article is going to get down to the nitty-gritty of the EDD auditor’s legal ability to make demands that may be irrelevant, redundant, and overly burdensome.

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. It does not matter what a specific rule, regulation, or statute says. 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.

The Source of EDD Authority - CUIC §§ 1085 and 1092

In Part 2 of this series we extensively discussed the demand for employer documentation and information set forth in DE 231TA, both versions 9 and 10. Version 10 greatly expands version 9 and divides the requirements for information and documentation into two broad areas:

  1. MINIMUM REQUIRED RECORDS,
  2. ADDITIONAL RECORDS REQUIRED FOR VERIFICATION OF ACKNOWLEDGED PAYROLL.

When we review page 2 of the revised version of DE 231TA we find that the authority for the EDD to demand documentation and information comes from two statutes: CUIC §§ 1085 and 1092.

CUIC § 1085 is a short statute entitled, "Work Records Required." The statute states that an employer (a) shall keep true and accurate records of all his workers and their status, i.e., employed, on lay off, or leave of absence; (b) the wages paid by the employer to each worker, and then a catch all provision; and (c) states "such other information as the director deems necessary to proper administration of this division. There is not much help here and there are no cases of record interpreting this statute.

CUIC § 1092 does not really apply to audits. It applies to hearings before an Administrative Law Judge primarily for UI Claims.

So where does the EDD truly gets its authority to demand the production of a laundry list of books and records? Most likely from CUIC § 1085 (c). The laundry list set forth in either version of DE 231TA was made up by a person or persons who thought it was a good idea to have an employer produce whatever they thought should be produced. What is relevant may be in the eyes of the beholder.

Perhaps you can understand why the standards set forth in the Powell decision are so powerfully important.

Conclusion

It is important for any employer under EDD audit to at least have one consultation with a tax professional knowledgeable in EDD matters to determine what should be produced and what should be withheld. For professionals representing clients before the EDD in a tax audit, it is important to be just that – a professional. If you are going to refuse the auditor’s requests do so in a professional manner and avoid giving the impression that you are stubborn or uncooperative. Always have a good reason to refuse production. And put your reason in writing so you create a record.

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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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