ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – AN EDD AUDIT CAN BE A COSTLY MATTER
By Robert S. Schriebman
I get my share of interesting as well as challenging calls from employers who have received notices from the EDD that they are about to be audited. Some calls leave me scratching my head. That is the purpose of this article. The latest call turned out to be a debate. The caller was questioning why he should hire professional representation and spend his hard-earned money. He took the position that EDD payroll taxes were cheap when compared to his IRS liability for the specific quarters in issue. I can’t deny the employer’s logical reasoning. Certainly, if you compare your EDD taxes to your IRS taxes for the same period, you will conclude that California payroll taxes are as low as 13%, when compared to the same taxable compensation at the IRS level. Following this to its logical conclusion, one can take the position that it does not make economic sense to hire professional representation to fight the EDD. Unfortunately, logic does not always give you an accurate answer. My caller failed to take into consideration the big picture.
Is DIY the Best Approach When it Comes to EDD Audits?
While EDD payroll taxes seem small when taken on a quarter-by-quarter basis, we are seeing more aggressive EDD audits that expand the standard audit period. The standard audit period is 3 years or 12 quarters. However, now we are seeing more EDD audits that go back as far as 8 years. When EDD auditors see that the employer has not filed quarterly payroll tax returns, they are now electing to conduct an 8-year examination. Needless to say, this can result in a “revolting development” and a big bill. But that’s not the whole picture.
Don’t Forget the Penalties
EDD auditors love to assess as many penalties as they can. These penalties can easily exceed the total amount of the payroll tax portion of the assessment.
The EDD can assess up to 14 different penalties including 2 fraud penalties, each in the amount of 25%. This is in addition to stiff Worker Information Return Penalties close to an additional 13%.
If you are incorporated or operate as an LLC, every dime that is owed the EDD by the entity may be assessed against the responsible individuals in addition to being charged to the entity. Now the employer has multiple exposures of taxes, penalties, and accruing interest.
Enter the IRS
If the EDD woes were not enough, the EDD shares information with the IRS. There is a new movement within the IRS on payroll tax compliance at both the federal and state levels. In addition, the IRS and the Department of Labor, as well as other federal agencies, now have memoranda of understanding (MOU) to refer to payroll tax violators to several federal agencies and California as well. It goes both ways.
We have all read that the IRS has received billions of dollars to hire and train auditors and collectors. In the future we can expect a very aggressive IRS especially when it comes to issues of payroll tax noncompliance.
As you can see from the above, what logically appears to be a flea bite on an elephant when looking at the cost of an EDD audit, can result in an economic disaster if not handles properly by a knowledgeable and experienced EDD professional representation. Every tax audit has many moving parts, especially these days. Adopting a “DIY” attitude in handling your EDD audit can come back to bite you hard in your wallet.
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 50 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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