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ASK THE EDD LAWYER – HOW TO BE PREPARED FOR AN EDD AUDIT “ENTRANCE INTERVIEW” Part 4

By Robert S. Schriebman

May 18, 2016

Introduction

This is Part 4 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 Contractors (Not Considered Employees)

These very critical and potentially dangerous inquiries are buried deep within the long list of Entrance Interview questions; perhaps intentionally so. The taxpayer employer is lulled into answering many seemingly harmless questions, but the real heart of any EDD audit is to determine worker status.

In an article published in the San Diego Union-Tribune on May 12, 2016, entitled "SuperShutte Sues California Over Worker Classification," the goal of the EDD was made very clear as follows:

"It’s not about the money. It’s about the EDD’s effort and desire to eliminate the independent contractor status in the state of California," said Alan Moldawer, the general counsel for the Transdev North America, the French transportation company that acquired SuperShuttle in 2006."

It seems to me, in my law practice, that the EDD sees contractors as targets for EDD assessments. The EDD, Labor Board, and Workers Compensation personnel together drive around to various jobsites trying to find and rope-in contractors who treat workers, day laborers, and others, as independent contractors. If these contractors happen to pay their workers in cash, the microscope is taken out and every facet of their operation comes under scrutiny. This is known as the Underground Economy Team. I have never seen this team go after any other occupation.

Allow me to disagree with Mr. Moldawer’s statement above; it IS about the money!

  • Does the business utilize services of individuals not considered employees (i.e. Contractors)?
    Bob’s comment: There is no area in EDD administrative litigation that even comes close to the volume of cases involving contractors. As soon as you answer "yes" to this question, you are on the EDD radar. Most businesses utilize outside services. You have a lawyer, a CPA, a landlord, a supplier. What the EDD is looking for is a factor known as "integration." Any outside service that is deemed essential for the operation of your business is going to be considered integrated or part of your business and therefore, those workers will be treated as employees by the EDD.

    Sure, if you call a plumber to fix a broken pipe that person is not an integral part of your business. However, if you are a law firm and treating your research staff as independent contractors that may constitute an integral part of your business.

    Contractors face additional problems if they hire subcontractors who are not licensed. The law deems them to be your common law employees. It is a hard and fast rule. You cannot explain your way out of it.

  • What type of services do they perform? (i.e. work description)
    Bob’s comment: Here the EDD will not bother to do an in-depth analysis of the work performed. Most EDD auditors have been trained and are biased in concluding that the worker is an employee. You are going to have to make a strong case and support your argument by documentation such as the following:

    • Does the worker have a contractor license that is currently valid? If so, provide a copy to the auditor.
    • Does the worker have business cards? If so, provide a copy to the auditor.
    • Does the worker have a city business license? This is especially important for a handyman. The EDD loves to treat an unlicensed handyman as your employee.
    • Does the worker submit an invoice before he or she is paid? It is important to provide copies of several invoices throughout the year or years under audit.

  • Do you issue the Contractors a 1099 at type end of the year?
    Bob’s comment: Beware! This is perhaps the deadliest question of them all. There are severe penalties for failing to issue 1099s to workers. Even if the worker should have been treated as an employee, and a W2 given, the penalties will not be imposed if that worker is given a 1099 instead of a W2.

    In other articles on this website, I have discussed at length Worker Information Return Penalties issued pursuant to CUIC §§ 13052 and 13052.5. Please read them in conjunction with this question.

    In addition to asking the above question, the EDD will want to know specific contact information for each 1099 recipient as follows:

    • - Complete legal name:
    • - Service Provided:
    • - Phone/Email/Address

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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