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ASK THE EDD LAWYER – TAX TIPS ON UNEMPLOYMENT BENEFITS Part 1

By Robert S. Schriebman
April 30, 2015

Introduction

This is Part One of a Two Part series dealing with Unemployment Insurance (UI) Benefit Claims from the points of view of the former employer and the former worker who is treated as an independent contractor (IC). In Part One we will discuss some basic do's and don'ts' as they apply to the former employer

There is not a week that goes by when we do not receive several calls seeking help for issues relating to EDD Unemployment Insurance Benefits (UI). We do not usually handle these types of cases because we are an EDD tax controversy office. However, we have learned much from our callers and I want to pass on to you some of the tax tips and real world strategies we have learned. This article will discuss UI benefit issues from the employer's point of view. In Part Two I will provide some basic tax tips to EDD UI recipients.

Real World Tips To Employers

We get calls from former employers who treated their ex-worker as an IC. This former IC is now applying for UI benefits from the EDD. The former employer is outraged by the application for UI benefits and wants to block the claim. Unfortunately the employer has gone on an active campaign to frustrate or obstruct the UI claim. The EDD examiner assigned to investigate the UI claim is now trying to contact the employer by phone to get more background information. It is usually after this phone conversation that the employer calls me for advice - very bad timing on the part of the employer.

The Former Employer Is Now On The EDD Radar

No two words get the attention of the EDD better than "Independent Contractor!" These are the words that generate audits and eventually mean money to the State Treasury. When an EDD UI applicant tells his or her interviewer that he or she was treated as an IC, as opposed to an employee, the former employer goes on the EDD radar. Naïve former employers mistakenly think they can win the day by trying to block the EDD UI claim on the grounds that ex-worker was an IC. It is a rare day indeed when the former employer wins this argument.

I have learned over the years that one of the cardinal rules in dealing with any taxing agency in knowing when to keep one's mouth shut. Somehow former employers rarely if ever understand the importance of this strategy.

When the EDD is told by an UI applicant that he or she was treated as an IC, the EDD wants to learn as much as it can from the applicant. The EDD knows that the applicant is going to be a key informant in an eventual tax assessment against the former employer. The EDD is willing and even liberal in granting UI benefits in exchange for valuable information. The UI applicant will provide leads to future contacts of others who have also been treated as ICs by this same employer.

The EDD examiner will call the employer to get as much information as possible. This information will be handed over to the EDD audit group and an auditor will be assigned to conduct an examination.

The Employer Goes To War

The former employer wants to block or obstruct the EDD UI claim. Without seeking any professional advice the employer will fill out the EDD form received concerning the claimant. Of course, everything on the form is in writing and becomes a permanent record in the EDD files. The EDD examiner telephones the employer as part of standard operating procedures. Here is when and where the employer wants to give the EDD examiner a full and complete confession. The EDD examiner takes notes and these notes become part of the EDD audit file.

When an employer contests the EDD UI claim it is technically known as an "Obstructed Claim". These types of claims are assigned to an administrative law judge and a formal administrative hearing will be calendared with the CUIAB. Any former employer who wants to move forward with a formal hearing must understand that a formal record under penalty of perjury will be created and eventually made part of an audit file.

Choose Your Battles Carefully

I am mindful of the time when a dear friend tried to explain to an EDD UI examiner why she treated a former sales person as an IC. She called me after her phone conversation to ask me if she did the right thing in speaking with the examiner. She felt very justified by classifying this worker as an IC. I had to represent her against an EDD Assessment of close to $100,000!

It is always best, when dealing with any taxing agency, to say as little as possible and do not volunteer information. It is better not to arm the EDD with ammunition to use against you. EDD UI examiners and EDD auditors are not your friends.

I have found that it usually best not to contest a potential EDD UI claim regardless how righteous you believe your position is. You may not be able to prevent a future EDD audit, but the EDD will not be armed with your inventory of admissions and confessions.

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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.