Ask The EDD Attorney – Why An EDD Audit Can Be A Frightening Experience

By Robert S. Schriebman

August 20, 2015

Introduction

They say that one of the most stressful events in life is to open your mailbox and see a letter from the IRS. I would change this is a bit to say that a letter from the EDD telling you that you are about to be audited for treating your workers as independent contractors instead of employees these days is more frightening.

Ever since the late 1990s, when Congress took the IRS to task, I have observed a progressively more docile IRS today than even 2 or 3 years ago. My own client problems involving the IRS seem to be resolved more favorably and with less IRS heavy-handedness.

Not so with the EDD. I am seeing an EDD conducting a “Heads I Win, Tails You Lose” resolutions to audits requiring appeals to the CUIAB rather than a resolution at the examination level.

What is going on with the EDD these days?

New Demands For Taxpayer Information and Documentation

This may have started with the IRS push for taxpayer transparency. For the past few years IRS audits have become more intrusive. IRS auditors insist on visiting the taxpayer’s business premises and even questioning workers. The IRS demands on information and documentation requests, are repeatedly made during any given business audit. The EDD too seems to have expanded its usual standard request for “the usual suspects” such as W2s, 1099s, general ledgers and tax returns. Let me give you 3 examples of recent EDD audit experiences.

New Headaches With Credit Cards

I recently saw a client who was audited by the EDD. The client represented herself during the audit. She did business as an S Corporation. The auditor gave her a pass on worker status issues. That is to say the auditor agreed that her workers were independent contractors. I admit that this is very rare. However, the auditor requested 3 years of credit card statements. Without sampling a few months here and there, the auditor simply totaled up each year’s corporate credit card expenditures and concluded these expenditures were in reality additional unreported wages! Because the taxpayer – president did not issue herself a 1099 for these credit card expenditures, severe penalties were imposed. These penalties could not be administratively appealed with a Petition to the CUIAB. The EDD auditor turned the matter over to an EDD collector who is now demanding the full payment of these penalties.

Upon reviewing my client’s credit card statements it was clear that at least 90% of these credit card expenditures were ordinary and necessary business expenses and would have been allowed in any income tax audit. The EDD auditor did not bother to take an in-depth look at these expenditures.

Picking On The Little Guy

Unfortunately, I have to report that I am becoming increasingly disturbed by harsh treatment to small businesses. This country was built on the enterprises of small businesses. Let me give you an example.

My client is in the landscaping business. He operates as a sole proprietor. He has been in business since 2009. Over the years he has hired skilled professionals to assist him in servicing his clients. He has properly, in my opinion, treated these workers as independent contractors and issued them 1099s. He also has a comprehensive subcontractor agreement that each is required to sign before being retained. He has not filed quarterly payroll tax returns because of his good faith belief that these people are independent contractors. The EDD usually conducts a standard 3-year audit, regardless of whether or not quarterly returns have been filed. However, my client’s auditor is on a campaign against this taxpayer. The audit period, instead of going back to mid 2012 forward to mid 2015, is going back to the day my client started in business in 2009! While it is legal for the EDD to go back as long as 8 years when no returns are filed; I find this audit particularly punitive in nature.

My Mind Is Made Up – Don’t Confuse Me With Facts

This mentality is not new with the EDD. For as long as I have been involved in EDD audits, I have found this institutional mentality to be pervasive. Sometimes it seems that the EDD auditor has made up his or her mind well in advance of actually conducting the audit only to conclude that workers should be classified as employees across the board. Two recent examples come to mind. We had long meetings with the auditors in which we presented our case substantiating our position that the workers were properly classified as independent contractors. We even had legal authority supporting our position. In both cases the EDD agents appeared to agree with us. The next thing we received in the mail were large assessments as though no meeting occurred at all.

Conclusion

Yes, EDD audits can be stressful, uncertain, and even unfair. I wish I could give my clients assurances as to how the EDD audit is going to play out. I cannot. I pray for the best but I prepare for the worst.

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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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