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ASK THE EDD LAWYER - Will The IRS Also Get Involved In My EDD Audit?

by Robert S. Schriebman

If you are audited by the EDD will the IRS also get involved and issue a "me too" assessment? Is there a way to keep the IRS away from my current EDD audit? I am often asked these two questions. These are very good questions because an IRS assessment is usually much larger than a corresponding EDD assessment for the same tax periods in issue.

The answers to these questions are not easy ones. Once the IRS decides to audit your payroll there is no way to stop them from the audit running its course. IRS assessments can be reduced substantially through the use of certain provisions contained in the Internal Revenue Code, but that is the subject for another article. For the present purpose, let us focus on how to minimize your subsequent IRS exposure when you are facing an EDD audit. Let us start with a real-life case that recently came into my office.

Ben owned and operated a delivery service. His business was incorporated. He treated his drivers and helpers as independent contractors. Ben thought he had done everything right. He went to an attorney to have independent contractor contracts prepared for his "contractors." He issued 1099s in 2010, 2011, and 2012. However, he failed to file quarterly payroll tax returns for himself as a corporate officer as well as his administrative staff. The EDD conducted an audit and Ben decided to represent himself. The EDD disagreed with his treatment of drivers and helpers and found them to be employees. Ben was in the process of moving his business when the EDD issued its Notice of Assessment. The Notice got buried in the shuffle, and Ben did not timely file a Petition to contest the EDD's findings. The assessment became final, and it was assigned to an aggressive EDD collector.

The EDD and the IRS share information. The IRS may or may not elect to conduct its own audit. One thing we have learned over time is that the chances for the IRS audit are greater if and when an EDD audit is finalized and the taxpayer's appeal rights have expired. This is what happened with Ben. The IRS decided to audit Ben and to use EDD data as a starting point for its own audit. Eventually, Ben received a hefty IRS bill in addition to a smaller but inconvenient EDD bill. But the IRS was not through with Ben.

Both the IRS and the EDD have laws establishing how long they have to audit a taxpayer after the taxpayer files a tax return. These rules apply to income taxes and employment taxes. However, if no tax return is filed things can get complicated and dangerous. If you do not file payroll tax returns with the EDD the statute of limitations for an audit is eight (8) years. However, the IRS has no such time limit but usually goes back about six (6) years.

In Ben's case the IRS not only audited his company for the same tax periods that the EDD assessed, but they are currently considering going back several more years and that can mean a lot more taxes, heavy penalties, and daily compounding interest on everything!

Could Ben have prevented IRS involvement in his initial EDD matter? Again, there are no sure-fire methods of avoiding the IRS. Having said this, my experience has shown that the IRS is less likely to get involved in an EDD audit if a Petition is filed and the matter proceeds on to either a formal hearing before an Administrative Law Judge or an "out-of-court" settlement. Either way, both roads take a long time before the matter is resolved. Since the IRS usually picks up an audit on a closed assessment, it is less likely to get involved with an EDD matter that has dragged on through litigation or settlement resolution. Again, I want to make it clear that there are absolutely no guarantees of any kind and no representations from my end that petitioning an EDD assessment may keep the IRS away. As they say at the amusement park, "You pay your money and you take your chance."

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An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.

As a trusted EDD lawyer, Robert S. Schriebman has successfully dedicated more than 30 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 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 and 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.