Ask The EDD Lawyer – How To Be Prepared For An EDD Audit “Entrance Interview” Part 1
By Robert S. Schriebman
May 4, 2016
Introduction
This is Part 1 of a several part series of articles dealing with EDD probing questions on an initial “first impression” Entrance Interview. EDD auditors always try to conduct an entrance interview as the first phase of a worker status audit. The taxpayer-employer’s presence is required for an entrance interview. The goal of the EDD is to gather as much potentially damaging information as possible. This is why I make it a practice to avoid my client being subjected to this process.
In this series of articles I will set forth verbatim each and every interview question on the EDD’s agenda. I am sure that the EDD believes all of the questions listed in the “Entrance Interview” questionnaire are necessary, proper and relevant. Many interview questions are as the EDD perceives them to be. However, from my point of view many questions are vague and potentially dangerous to you.
It is my goal, in setting forth these questions, to give you insight and to allow you to get a “heads-up” so-to-speak. A knowledgeable taxpayer is a prepared taxpayer.
The following questions are taken verbatim from a multi-page “Entrance Interview” Matrix.
Background Questions – Operation Of The Business
· What is the nature of your business? (i.e., manufacturer, service, retailer, wholesaler, etc.
Bob’s comment: This is a proper and necessary question. All EDD audit reports (AR) start out with a summary description of the taxpayer’s business operation.
· What products do you manufacture or sell?/ What services do you provide? (Describe in detail as we need to understand the way the business operates to better understand what services are integral)
Bob’s comment: These questions can be tricky and only the shortest possible response should be given. The EDD’s goal may be to define the nature of the business in order to determine whether the services provided by independent contractors are an integral part of the business model. In that case, the EDD will classify the service provider as a common law employee.
According to the EDD Audit Manual, “If the individual’s services are so integrated into an employer’s operations that the success or continuation of the business depends on the performance of the services, it generally indicates employment.”
· Who are your service customers? (Please provide a few examples)
Bob’s comment: Be careful here. The identity of specific customers is none of the EDD’s business. Keep your response as broad as possible, e.g. “the general public;” “the entertainment industry,” “medical practitioners,” etc
· How many employees do you engage to accomplish your business objectives?
Bob’s comment: This is a proper question. You will have to furnish copies of W-2s, and W-3s, so be as accurate as possible.
Questions Relating to Employees
· What type of services do they perform? (i.e, job description)
Bob’s comment: I recommend being as broad as possible with such terms as “management,” secretarial,” “assembly,” etc.
· Please indicate the duties for each description:
Bob’s comment: As I said above, make your description as broad as possible.
· How often do you pay the employees? (daily, weekly, bi-weekly, semi-monthly, monthly etc)
Bob’s comment: This is a proper question.
· Are they paid an hourly rate, or salary?
Bob’s comment: This is a proper question.
· Do you issue the employees a W-2 at the end of the year?
Bob’s comment: This is a tricky and loaded question. If you fail to issue accurate W-2s and do not timely file them annually with the IRS, you can face stiff worker information return penalties that increase almost each year. In addition you will be charged maximum personal income taxes (PIT), plus other penalties and interest. The same goes for failure to issue 1099s.
If you did not issue W2s or 1099s you should have professional representation; dangerous to represent yourself.
· Are the employees work hours the same as the business hours?
Bob’s comment: Be careful. There are hidden Labor Code violations in this very loaded question. You may also be exposed to additional workers’ compensation costs.
· Who is in charge of supervising the EE’s?
Bob’s comment: Caution – If you identify the supervisor the EDD will want to interview that person to determine the scope of control that you exercise over workers. Control is the key to all EDD assessments. It is not the actual control that is important here, but the “right” of control that is of key importance to a potential EDD assessment
Conclusion
These are only the first few questions. There are many more. While some questions appear to be simple and straight-forward, other questions carry great potential harm and risk of assessment. In our next article, we will continue our review of Entrance Interview questions.
***
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.
Web Site Article 220