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ASK THE EDD LAWYER – DO I HAVE TO GIVE THE EDD AUDITOR EVERYTHING SHE OR HE DEMANDS?

by Robert S. Schriebman

If you are about to be audited by the EDD you will receive several standardized forms and letters. You will receive an introductory letter entitled, "Inquiry Regarding Records," a "Pre Audit Questionnaire," and a document entitled, "Please Make Available Records for the Period of ______ to _____." This article will discuss only the form letter requesting documents and the EDD auditor's demand for additional documentation as the audit progresses. I have been receiving calls and emails from readers of my web site informing me that they are under audit and that the EDD auditor assigned to their case has become very aggressive in demanding documentation and information that is not on the standard preprinted form. Can the EDD do this?

First, let us be realistic. There are more types of businesses in California than you and I can possibly count. No governmental agency, be it the EDD or IRS, can design a one-shot form that covers everyone's business. The EDD has done a good job on its initial preprinted request. Most of the items initially requested are appropriate and must be given to the auditor during the audit (I said "most documents, not necessarily all documents.).

Don't Play Hardball with Your EDD Auditor

In any tax audit it is better to be cooperative than it is to play hardball. If you do not know what you are doing and you play the wrong type of hardball, all you have done is create a hostile environment that could lead to a huge estimated assessment against you! If this happens you will spend huge amounts of time and money trying to get back where you should have been at the beginning of the audit process. To avoid this happening to you pick up the phone, call the EDD auditor, and ask him or her what documentation do they want to see first. This creates a good first impression.

Any tax auditor has a lot of power. If they deem you uncooperative, both the auditor and the auditor's manager can also be uncooperative and resolve any and all doubts against you. Having said this, however, I have been getting complaints from taxpayers that some EDD auditors have taken what they perceive to be both a hostile and aggressive attitude toward demanding additional documentation that the taxpayer feels is both irrelevant and burdensome.

Dealing with a Demanding Auditor

How do you deal with the demands of an EDD auditor whom you believe to be demanding, irrelevant, and burdensome information and documentation? My first recommendation is to contact the auditor's supervisor or manager to discuss the request. If this does not work to your benefit consider confronting the auditor with the broad audit standards set forth in the U.S. Supreme Court Powell decision of 1964 (U.S. v Powell 379 U.S. 48).

The Powell Case

The Powell case involved the interpretation of an Internal Revenue Code section dealing with the issuance of an IRS summons. Even though this case involved the IRS it has relevance and importance for every type of tax audit under the sun, and that includes the EDD.

No Fishing Expeditions Allowed

The Powell case did not permit the IRS to go on a "fishing expedition." That is to say the case did not give the IRS carte blanche to look over all of the taxpayer's books and records in hope that something could be found to use against the taxpayer. There had to be a valid reason to issue the summons. The Powell case gave us four very important guidelines to use anytime the EDD, FTB, or IRS makes a request for information and documentation:

  • The information or documentation requested must not already be in the EDD's possession.
  • The information or documentation requested must be relevant. In other words, the information and documentation "must through light upon the EDD's inquiry."
  • The information or documentation requested must be in existence at the time of the request. It can not be manufactured, prepared, etc. for purposes of the audit.
  • The information or documentation requested must be in the taxpayer's possession or control.

NOTE: YOU CAN NOT TAKE REQUESTED DOCUMENTATION OR INFORMATION, SECRETE IT, AND PRETEND IT DOES NOT EXIST. GAME PLAYING WITH THE TAX MAN IS NOT ALLOWED.

Put It in Writing

If I feel that the request made by an EDD auditor is not relevant, and the auditor starts to argue with me, I request that the auditor send me an email, fax, etc. explaining why the information or documentation sought is relevant. Not only does this defuse the potential hostility, but it allows both sides to take a step back and really think about things.

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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.