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ASK THE EDD LAWYER – THE FUTURE OF EDD AUDITS AND YOU – PART 1

By Robert S. Schriebman
2017

Introduction

This is part 1 of a 2 part series that will discuss the future of EDD audits due to pressures being put on the EDD by the California Department of Labor (DOL).

I recently had the good fortune of visiting with upper management at the EDD who candidly informed me that the old way of doing business with the EDD will soon become a thing of the past. You, the taxpayer-employer, can look forward to an increasing and more intrusive number of audits. This is due to the recent hiring of new EDD auditors. It is also due to increased demands on the EDD by the DOL. The DOL will be looking to the EDD to provide taxpayer-employer documentation and information relating to compliance and other internal agendas within both the EDD and the DOL.

This article will discuss what I believe will be the future of EDD audits as they directly impact you, the taxpayer-employer.

More EDD Auditors – More EDD Audits

By way of example: one of the EDD offices that I have been working closely with over the years had only 16 auditors in its auditor pool. This played out to the taxpayer-employer’s benefit because this relatively small group of auditors could only handle so many audits. Audits that were transferred to this audit office from other EDD audit offices throughout California often did not get audited at all! There was a good chance that a potential audit transferred to this office fell into a "black hole" and just did not get assigned to an auditor or if it was assigned, the auditor was just too busy to get to it. Over the past year or so we saw many transferred audits eventually get assigned to a young auditor who indeed conducted an examination. Therefore, the odds of ducking an audit by way of transfer have greatly diminished. Why? Because this specific office hired at least 12 new auditors; bringing the manpower to 28 auditors instead of only 16. I believe that the increase in audit staff will be in most of the larger audit offices throughout California.

The powers-that-be in Sacramento have realized that EDD is capable of generating substantial sums of revenue! In the 1980s and 1990s the EDD referred to itself as the "unknown taxing agency." Unlike the FTB and the BOE, that have historically been huge generators of revenue, no one paid much attention to the EDD. Now, things are different. And we can look forward to an increased funding of the EDD because Sacramento finally woke up.

According to my source within the EDD, the increase in the number of field auditors does not necessarily mean that the number of audits will increase proportionately. New auditors need a learning curve and they are, for the most part, slower than more experienced auditors. So far this learning curve has created a bottle neck within the EDD system, but this will not last indefinitely.

We can be sure of one thing: the demands of the EDD by the DOL will increase the number of auditors and the number of audits.

We can look forward to more inexperienced auditors following the "EDD Party Line" by adopting standard and rigid points of view that certain industries and occupations must treat their workers as common law employees not as independent contractors. There will also be an increase in the assessments of penalties especially the negligence penalty and those horrible Worker Information Return Penalties (WIRP) along with daily accruing interest thereon.

DOL Pressures on the EDD

In my candid conference with upper management at the EDD, I learned that the DOL funds much of the EDD’s operations and, as such, is in a position to dictate to the EDD demands for taxpayer-employer documentation and information. In turn, these new demands are passed down to the taxpayer-employer. These demands will include the disclosure of Federal quarterly and annual payroll tax documentation as well as forcing the taxpayer-employer to produce EDD quarterly and annual filing documentation that the EDD already has in its computers and storage facilities. It’s sort of like an IRS audit of income tax returns. Even though the IRS has the original return they want you to produce your copy at the audit.

The standard EDD document request form currently in use may be modified to expand more documentation and information to eventually be turned over to the DOL and perhaps the IRS too!

This will become a whole new ball game as the DOL and EDD put pressure on the taxpayer-employer as well as his or her representative. Where is the line to be drawn between proper and relevant documentation for a worker status audit? Will representatives, such as attorneys and CPAs, challenge the EDD’s demands as nothing more than a "fishing expedition?"

In part 2 we will take a look at the specific documentation and information requested by the EDD, on behalf of the DOL, and whether those demands should be challenged and refused.

Conclusion

From the look of things it is all too clear that the future does not bode well for you as a taxpayer-employer. EDD audits are going to increase because there are more auditors hired. The demands on the EDD by the California Department of Labor will demand the production of more documents and information than have previously been demanded or available to the EDD. There will be increasing adversarial relationships between representatives and the EDD. You, the taxpayer-employer, will now be more at risk if you retain an attorney or CPA who does not have the backbone to say "NO."

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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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