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ASK THE EDD ATTORNEY – DO EDD SETTLEMENTS GET REPORTED TO THE IRS?

By Robert S. Schriebman
January 5, 2016

Introduction

It is no secret that taxing agencies share information. For example the EDD shares information with its sister agencies, the FTB and BOE. In turn all three California agencies share information with the IRS.

It is a common fear for clients being audited by the EDD to be concerned that the IRS will also enter the picture and issue an assessment much larger than they can expect from the EDD. How is EDD audit data shared with the IRS? When is it shared with the IRS? Can anything be done to bypass the IRS getting involved in an EDD employee vs. independent contractor audit? This article will discuss these questions.

How And When Does the EDD Share Audit Information With The IRS?

Inside the EDD there is a unit known as the "FUTA Unit." One of its functions is to periodically notify the IRS when final worker status cases have concluded. This process occurs about every 6 months. What the IRS does with this information is known only to the IRS.

A common myth is that the IRS will enter an EDD matter while the EDD worker status audit is in progress. I have been representing clients before the EDD since the 1980s. I can literally count on the fingers of one hand the number of times the IRS began its audit during an ongoing EDD audit. In these few occasions the IRS conducted a routine income-expense audit and did not look into any issues involving employee vs. independent contractor status. The probability of a concurrent IRS-EDD worker status examination is too small to measure.

When Can The IRS Be Expected To Enter The Scene?

The operative word here is "statistic." The word "statistic" has special meaning in an EDD audit. It usually means a closed case where the EDD FUTA Unit concludes that additional "wages" have been determined and assessed by the EDD. If the EDD FUTA Unit does not make a finding of additional wages assessed the chances are that the IRS will not be interested in pursuing the matter. The IRS likes to receive completed files from the EDD because the EDD does all the footwork for the IRS. This means that the IRS and the EDD have become virtual bedfellows against a specific employer-taxpayer. The IRS "piggy-backs" its assessment on EDD findings.

How Is A "Statistic" Created?

Again, a "statistic" has a special meaning here; it is a closed case where the EDD has found additional unreported wages. How is a "statistic" created? There are two primary causes:

  • A Defaulted Notice Of Assessment: If a taxpayer does not timely file a petition before the CUIAB the Notice of Assessment (NA) is defaulted. A defaulted NA is treated as a concession by the taxpayer that the taxpayer agrees with the assessment. The EDD FUTA Unit now has a new matter that has generated additional unreported wages and is ripe for the IRS. The FUTA Unit gathers up these defaulted assessments and turns them over to the IRS about every six months.
  • An Adverse Decision By An ALJ: When an Administrative Law Judge (ALJ) issues an adverse decisions against the taxpayer -employer, and that decision becomes final it is reported to the EDD FUTA Unit as additional assessed wages. The judge's decision, together with the case file, is available to the IRS. The same process also applies when an ALJ's decision is appealed to the Appeals Division of the CUIAB and the ALJ's decision is affirmed.

What Happens During The EDD Settlement Process?

When an NA is protested with the CUIAB the taxpayer-employer comes to a fork in the road. One can go for a judge hearing in front of an ALJ or one can settle the case through the EDD Settlement Office. There are many advantages to an EDD Settlement resolution and these have been discussed in earlier articles on this website. However, one advantage that has not been discussed until now is how the EDD FUTA Unit regards settlements. An EDD settlement is just that - a settlement. No one is making any findings or concessions on the merits of the audit. Therefore, a settlement is not considered a determination or finding of any additional wages. Accordingly it is not reported to the IRS as additional wages. It is reported to the IRS only as a settlement. From my experience the IRS does not follow up an EDD settlement with its own worker status examination. An EDD settlement is not considered a "statistic." This factor alone may make a settlement very attractive regardless of the dollar amount of the settlement.

Conclusion

If you want to minimize your exposure to the IRS also getting involved in your ongoing EDD audit, focus on the term "statistic" and understand its impact. Your EDD audit must avoid becoming a "statistic" at all costs. You may believe that you have a very strong case against the EDD and you are inclined to have your matter heard by an ALJ. You may be successful at a trial but there is always the risk of getting a judge who does not see matters as you do. While a settlement will certainly cost you out-of-pocket, the fact that it does not become a "statistic" for IRS purposes may make it an EDD settlement is a wise investment indeed.

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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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