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ASK THE EDD LAWYER – THE FUTURE OF EDD AUDITS AND YOU – PART 2

By Robert S. Schriebman
2017

Introduction

This is part 2 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 informed me that the old way of doing business with the EDD is a thing of the past. You, the taxpayer-employer, can look forward to an increasing number of audits due to recent hiring of new EDD auditors over the past few months and increased demands on the EDD by the DOL. The DOL will be looking to the EDD to provide taxpayer documentation and information relating to compliance and other internal agendas within the DOL.

This article will set forth the specific new documentation that will be demanded by the EDD and the DOL behind-the-scene.

Expanded List of Documentation

The word "expanded" is a bit misleading. For years the standard EDD document request form, DE 231TA, set forth 2 categories of documentation. However, and for the most part, smart representatives dodged the request for everything the EDD wanted to examine. Now the EDD is going to put pressure on the taxpayer-employer and representatives to furnish the following basic documentation as follows:

Payroll records such as Payroll Journal, Individual Earnings Records, Payroll Summaries, and Federal Employment Tax Reports:

Form W-2, Wage and Tax Statement

Form W-4, Employee’s Withholding Allowance Certificate

Form 940, Employer’s Annual Federal Unemployment Tax Return

Form 941, Employer’s Quarterly Federal Tax Return

DE 9, Quarterly Contribution Return and Report of Wages

DE 9C, Quarterly Contribution Return and Report of Wages (Continuation)

DE 6, Quarterly Wage and Withholding Report

DE 9ADJ, Quarterly Contribution and Wage Adjustment Form

DE 7, Annual Reconciliation Statement

DE 678, Tax and Wage Adjustment Form

DE 4, Employee’s Withholding Allowance Certificate

In addition to the extensive list above, the EDD will also expect you to produce bank statements, canceled checks, check stubs, check registers, general ledgers and general journals, as well as financial statements such as a current balance sheet and income statement.

Is the EDD Legally Entitled To Everything They Want?

Generally speaking the two primary reasons for any taxing agency to justify its request for documentation are to ascertain the correctness of any return and to determine any liability under any type of tax in the California Unemployment Insurance Code these taxes include the following:

  • Unemployment Insurance Tax (UI)
  • Disability Insurance Tax (DI)
  • Education Training Tax (ETT)
  • Personal Income Tax (PIT)
  • The justification for the imposition of any of the EDD’s 14 different penalties.

In my opinion, a criteria necessary for the legitimate request for taxpayer-employer information and documentation should be no different than the requirements for the issuance of a legal summons as set forth by the US Supreme Court in the case of US v. Powell, 379 U.S. 48 (1964), as follows:

  • The request must be made pursuant to a legitimate purpose
  • The information or documentation sought must be relevant to a legitimate purpose
  • The information the EDD wants must not already be in its possession
  • The EDD must take the required administrative steps before it issues its demand for documentation and information.

From the above list of documentation it is very clear that the EDD payroll tax returns and related documentation are already in its possession. The other part of the challenge to the EDD will be based upon relevancy and the pursuit of a legitimate purpose.

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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