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ASK THE EDD ATTORNEY: The EDD auditor has asked me to sign an audit statute of limitations extension. Should I or shouldn’t I?

by Robert S. Schriebman

EDD audits can drag on for a long time. The EDD knows that every three months or so the statute of limitations for an older employment tax quarter involved in the audit may expire. The auditor has a choice, either to ask you to extend the statute of limitations for the older quarter or to roll the audit forward into a new quarter. For taxpayers who are currently treating their workers as employees but are facing exposure for past improper treatment of workers as independent contractors, the old expiring quarter may be a good thing. Everyone's case is different.

I am often asked by EDD and IRS auditors to extend the statute of limitation for examination in order to give the EDD or IRS more time to investigate my client's situation. To extend or not to extend, that is the question.

We can not choose our tax auditor. We have to work with the EDD auditor assigned to our matter. Most auditors are highly trained and competent people and approach both the taxpayer and the taxpayer's representative in a professional and courteous manner. Sometimes we get an EDD auditor who we wish was assigned to someone else. As the old Rock and Roll song said, "love the one you're with." What do we do when a pleasant or unpleasant auditor requests a statute extension?

There is a balancing act that goes on in my head every time the EDD or the IRS asks me to sign a statute of limitations form extending the time period for a specific quarter or a specific tax year. While it is important to be cooperative it is equally important to protect your rights and to strategically go for the best audit result possible. Never extend the statute out of coercion or duress. Never extend an audit statute to be "a nice guy." Unfortunately, I have found over the years that many tax practitioners, CPAs, and attorneys alike automatically agree to a statute extension. Many think they have no choice. There is always a choice.

When you extend the statute of limitations for examination you set in motion several events. First of all, you are going to be paying more interest on the eventual assessment because interest continues to compound daily until the determined assessment is paid in full. The more time the EDD takes to issue a Notice of Assessment the more interest will be charged. Secondly, once you have extended the audit statute you run the risk giving the EDD more time to dig into your business and perhaps discover things that should not be discovered (this goes for the IRS too). You may run the risk of additional penalties. Finally, extending the statute creates bureaucratic inertia and sloth within the government. Your case goes to the bottom of the stack while other audits get completed.

It is important for you to understand that it is okay to say no. You do not have to grant a statute extension at all. Your refusal may upset the auditor, and you may get a call from the auditor's manager or supervisor trying to talk you into the extension (by the way, if you do get that call it is a sure sign that "no" is the best way to go).

I like the new IRS letters that accompany a request for a statute extension. The terms of this letter should apply equally to the EDD. Here are the options given to you by the IRS:

1) You have the right to refuse to extend the limitation period.

2) You have the right to request the extension be limited to particular issues held open for further examination or appeal.

3) You have the right to request the limitation period be limited to a specific date.

Advice from the EDD attorney:

If you are under audit and have been asked to sign a statute extension, pick up the phone and call an EDD lawyer for a consultation.

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©Robert Schriebman 2013.

An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angles County serving clients throughout California and the United States. As a trusted EDD lawyer, Robert Schriebman has successfully dedicated more than 30 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 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.