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ASK THE EDD LAWYER – HOW TO BE PREPARED FOR AN EDD AUDIT “ENTRANCE INTERVIEW” Part 3

By Robert S. Schriebman

May 18, 2016

Introduction

This is Part 3 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.

Questions Relating To General Business Operation

Most of the following questions are proper EDD audit inquiries. You will find that IRS and FTB auditors will ask the same questions as part of their respective audit routine. Proper questions should be answered in an honest and forthright way. Ideally your answers should be short and to the point. However, most taxpayers who elect to go it alone in an audit, without professional representation, tend to say too much and give the EDD potentially damaging information. Having said this, there are several questions listed below that are improper and irrelevant to an EDD audit and have no business being asked by an EDD auditor. However, these improper questions and your responses are very useful to an EDD collector who is poised to garnish wages or levy bank accounts if the assessed taxes become due and owing. Keep in mind that an EDD audit is not an EDD collection proceeding.

  • How long have you been business?
    Bob’s comment: While this appears to be an innocent and proper inquiry, the information can be used by your auditor to extend the audit period beyond the normal 3 years or 12-quarter audit. A taxpayer is especially at risk of an extended audit if he or she has not filed quarterly payroll tax returns for acknowledged W2 wage earners.

    The normal EDD audit period is 3 years or 12 quarters. However if no returns are filed, the EDD can go back 8 years.

  • When did the business first have employees?
    Bob’s comment: While this question appears to be an innocent and proper inquiry – beware! In my practice I encounter many situations where no quarterly tax returns are filed because the owner has treated each worker as an independent contractor when, in reality, these workers should have been treated as common law employees.

    Unfortunately many owner-officers of small corporations or LLCs are ignorant of the fact that corporate officers must be treated as statutory employees. They issue 1099s to everybody including themselves and this is a major mistake.

  • Business Location? Owned or Rented?
    Bob’s comment: This is a proper audit question. However there is hidden danger in this simple question. A business owner may have several locations and each one treats its workers as independent contractors. It is a mistake to believe and hope that the EDD auditor will only audit one location and not others. Your website can work against you especially if all of your business locations are advertised on it.

    Whether one owns or rents a business location may seem like a harmless inquiry, that information may prove valuable to an EDD collector looking for a place to file a tax lien.

  • What days and hours is the business open?
    Bob’s comment: This is perfectly proper question. You will find the same question set forth in the Pre-Audit Questionnaire.

  • Does the business operate year-round or seasonal?
    Bob’s comment: This is perfectly proper question. You will find the same question set forth in the Pre-Audit Questionnaire.

  • Is there a Bank account? (Yes or No)
    Bob’s comment: A "Yes" or "No" answer is required here.

  • Is this a designated Business account? (Yes or No)
    Bob’s comment: Here a "Yes" or "No" answer is required. With this question the EDD auditor begins a probe into your banking operations and who controls the day-to-day fiscal affairs of the business operation. While these questions, in my opinion, are irrelevant to an EDD audit, they provide very important information to an EDD collector. If a corporation or LLC fails to pay an EDD assessment it is the collector’s job to determine individuals within the corporation or LLC who are "responsible persons" for payroll tax compliance.

    If the corporation or LLC owes payroll taxes, those taxes must be given the highest priority of payment. According to both the EDD and IRS, if the business funds are limited, and the choice has to be made whether to pay rent, utilities, or back payroll taxes, the payroll taxes must be paid first.

    Pursuant to CUIC § 1735 the EDD has the right to collect corporate level or LLC level delinquent payroll taxes from responsible individuals such as the CEO and CFO of the company. However, one need not be a shareholder, or officer, to be exposed to this assessment.

  • How many accounts are there for the business?
    Bob’s comment: Please see my comments immediately above relating to the designated business account.

  • Who signs the checks?
    Bob’s comment: This question is irrelevant and unnecessary in a payroll tax or worker status audit.

    This is potentially a dangerous question. The first thing the EDD and IRS collectors look for, when they want to personally assess the so-called "responsible person," is who signs the checks. This inquiry is not limited to those individuals who only sign payroll checks. The EDD and IRS want to know who is responsible for the day-to-day fiscal affairs of the corporation or LLC. Individuals, who sign checks for rent, utilities, supplies, inventory, etc., are prime targets for personal-level payroll tax assessments. You do not have to be a shareholder, or officer, to face an EDD personal-level assessment.

  • Provide the Bank Information as follows:
    Bob’s comment: During an EDD audit the auditor will routinely request copies of bank statements. Those bank statements may have all of the information listed below. Whether or not bank statements are relevant and necessary in an EDD audit remains a debatable point.

    1. Legal Name of the Bank Account:
      Bob’s comment: This is a proper and routine inquiry that is also found on the Pre-Audit Questionnaire.

    2. Address of the Bank:
      Bob’s comment: This is a proper and routine inquiry that is also found on the Pre-Audit Questionnaire.

    3. Home address of the signers on the account:
      Bob’s comment: This is a proper and routine inquiry that is also found on the Pre-Audit Questionnaire.

    4. Account No.:
      Bob’s comment: This is a proper and routine inquiry that is also found on the Pre-Audit Questionnaire.

    5. Routing No.:
      Bob’s comment: I do not believe the routing number is relevant to a routine EDD audit. In fact it is not relevant to a routine EDD collection proceeding.

Conclusion

There are many more questions contained in the EDD Entrance Interview Questionnaire. 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.

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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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