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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE EDD’S AGGRESSIVE AND INTRUSIVE SEARCH FOR DOCUMENTATION AND INFORMATION – PART 1

By Robert S. Schriebman
2020

Introduction

This is Part 1 of a 2-Part series. In 2019, I noticed that the EDD auditors' requests for audit documentation and information had expanded. Auditors were asking for more than they had ever requested before. This trend has continued into 2020. I have represented many clients over the years in IRS audits. For the most part I have noticed a difference how taxpayers and employers are treated by IRS agents as compared with their EDD counterparts. Many IRS auditors tend to reciprocate if they believe you have been friendly and cooperative in the audit process. Sometimes they will not assess penalties, or if they do assess penalties they may not be as severe as would have been had the taxpayer or representative not been so cooperative. The EDD on the other hand, seems to "throw the book" at each and every employer regardless of the level of cooperation. I recently had a conversation with an EDD supervisor concerning not assessing penalties if I gave the auditor anything and everything requested. He just laughed and told me that my request was impossible because the EDD would not be doing its job if it did not assess all the penalties the employer deserves. It was this response that caused me to write this article.

In this series of articles we will look at the EDD's legal sources for an ever increasing demand for documentation and information. We will also discuss why the auditor feels justified in widening the search. We will then determine if there are any legal limits that control this search at both the federal and California levels. In doing so one must accept that there will always be a tension between the points of view of the EDD, the employer, and the employer's representative.

When The EDD Audits You

When you receive the notice that you are going to be audited by the EDD, you will receive the usual package: Inquiry Regarding Records, Pre-Audit Questionnaire, and Form DE 231TA, listing all the documentation and information wanted in a form request. Nowhere does it state the EDD's authority to make the request for documentation and information. Where does this authority come from?

The Legal Genesis of the EDD's Authority

The EDD's initial authority has its origin in CUIC § 2105: Failure or neglect to make records available for inspection:

It is a violation of this chapter (CUIC § 2101-2129) for any employing unit or any officer or agent of an employing unit, to willfully and unlawfully fail or neglect to make available required records for the inspection of the director or his authorized representatives at any reasonable time during business hours.

How the EDD Auditor Sees Things

An EDD auditor will tell you that his/her authority not only comes from the statute but from DE 231TA as well. Standing alone DE 231TA has no legal authority; it is just a form. No one remembers who wrote the form and what authority they had. An auditor's reliance on this form as authority is misplaced. It is just a form and, standing alone, it has no authority whatsoever. This does not mean that you can ignore the form with impunity. It does mean that you must carefully review DE 231TA to determine what is and what is not proper for the EDD to obtain.

New Auditor Demands for Documentation and Information

Many EDD auditors only use Form DE 231TA as a guide. They make up their own list. Here is a typical current demand I received on an audit:

  • Check Registers and General Ledgers (preferably in Excel format) for the periods of 1/1/17-12/31/17, 1/1/18-12/31/18, and 1/1/19-12/31/19 (separately).
  • Profit and loss statements, trial balance and balance sheets for each of the above periods.
  • Copies of Bank statements and cancelled checks for 2019.
  • Federal Income Tax returns for 2017, 2018 and 2019.
  • Copies of business licenses.
  • Copies of forms 1099 and 1096 series for 2017, 2018 and 2019. Please provide me with job description of each 1099 payee.
  • 3 sample copies of signed contracts with the 1099 payees, if any. I may ask for invoices (if any) and contact information for these 1099 payees later.
  • Cash Payment Records, if any
  • Detailed computerized payroll journal, (showing gross wages, withholdings and net wages per quarter for all employees and for all employees per pay period for fourth quarter 2018). Please provide cancelled checks or check stubs for one employee for that fourth quarter as well.
  • Copies of DE9 and DE 9C and forms 940 and 941.
  • Copies of forms W-2, W-3 and W4.
  • Job description of each reported employee in 2018.

This list is intimidating and overwhelming - but it is proper and legal?

In Part 2 we will discuss whether the auditor is entitled to all of this documentation and information.

***

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. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

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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