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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 2

By Robert S. Schriebman
2020

Introduction

This is Part 2 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 Part 1, we reviewed CUIC § 2105 that provides basic statutory authority for the EDD to demand the employer's documentation and information. We also reviewed EDD Form DE 231TA that set forth an extensive list of information and documentation the EDD feels it is entitled to review. CUIC § 2105 is the law; Form DE 231TA is not law. However, it does provide a guideline and a starting point for the audit process.

In this Part we will look at both the federal authority and the California counterpart to determine what the EDD is entitled to receive. Both the IRS and the EDD are governed by the Fourth Amendment of the U.S. Constitution as well as Article 1, Section 1 of the California Constitution.

The IRS and Powell Decision

I have been representing clients in tax audits since the late 1970s. CUIC § 2105, Form DE 231TA, and the auditor's authority are all governed by a higher authority -the United States Supreme Court. In 1964 the Court issued the Powell decision. (U.S. v. Powell, 64-2 USTC ¶9858, 379 U.S. 48, 85 SCt 248(1964)).

If you will permit me, I would like to quote a portion of my book entitled, How To Practice Before The New IRS. (CCH 1999), "The Powell case did not permit the IRS to go on a 'fishing expedition'. That is to say, it did not give the IRS carte blanch to look over all the taxpayer's books and records in the hope that something could be found...The Powell decision governs both the IRS and state taxing agencies, including the EDD. Each factor must be met before a valid summons can be issued or a valid EDD request can be honored.

The Three Supreme Court Criteria:

  1. The IRS investigation must be conducted pursuant to a legitimate purpose.
  2. The testimony or documentation sought may be relevant to that legitimate purpose. In other words, it is information which "might throw light upon the IRS inquiry.
  3. The information the IRS wants must not already be in its possession.

The primary test, under the Fourth Amendment, is consistently governed by relevancy.

The California Authority

In California, as with the IRS, the standard is relevancy. The Fourth Amendment is satisfied if documentation and information are specifically described and relevant to a lawfully authorized inquiry. (Brovelli v. Super.Ct. (Mosk) (1961) 56 C2d 529) The Fourth Amendment standard applicable to the EDD's search for documentation and information requires that what is requested is relevant to the audit. Younger v. Jensen 1980) 26 Cal 3d 397.

Conclusion

There is now, and I am sure there will be in the future, a natural tension between what the EDD perceives to be necessary and proper and what the employer and the employer's representative challenges as relevant. In my experience I find that the EDD can be overly broad in its demands and this is especially true with requesting bank account statements, cancelled checks, the check register, and the entire general ledger. I have found that merely giving the EDD everything and anything it wants can lead to an impermissible fishing expedition. Fishing is a "no no" in my book and can lead to excessive assessments and severe penalties.

Professional representatives such as CPAs and inexperienced attorneys are often intimidated by the auditors and tend to raise the white flag of surrender. It is all about relevancy.

***

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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