ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – CHALLENGING AN EDD EIGHT-YEAR AUDIT ASSESSMENT – PART 1
By Robert S. Schriebman
This is Part 1 of a 2-Part series that will discuss and instruct you how to challenge an 8-year EDD audit assessment as opposed to the standard 3-year or 12 payroll-tax-quarter assessment. Of late I have seen more 8-year audit assessments being issued by the EDD. I find these assessments to be particularly harsh and disturbing.
In this Part 1, I will discuss why the EDD issues these types of audit assessments, how they are structured, and why I find them abusive and unreasonable.
EDD Audit Statute of Limitations and Why the EDD Conducts an 8-Year Audit?
There is only one statute of limitations section in the entire California Unemployment Insurance Code (CUIC § 1132). This section states that the basic audit process shall be 3 years. If the examining auditor finds “bad conduct” on the part of the employer, the auditor can extend the audit up to 8 years. Bad conduct means failure to file quarterly payroll tax returns without “good cause.” Good cause is not defined. Most auditors, however, do not delve into why returns were not filed. If the computer shows that returns were not filed, that is enough bad conduct to warrant an extended audit. Most auditors do not take the time to inquire as to why the returns were not filed.
Favorite Target for an 8-Year Audit Assessment
For as long as I can remember, the typical 8-year audit involves the construction industry and the audit of general contractors. Occasionally a restaurant owner will also be subject to an 8-year examination.
Typical Structure of an 8-Year Assessment
3-year EDD assessments involve the following taxes:
- Unemployment (UI)
- Employment Training Tax (ETT)
- State Disability Insurance (SDI)
- Personal Income Tax (PIT)
Interest is added to the assessment and it is also common for the EDD to assess a Negligence Penalty pursuant to CUIC § 1127.
The typical 8-year assessment includes the taxes and interest discussed above, but will also include the following additional penalties:
- Late Report Penalty
- Wage Item Penalty
- 1127 Negligence Penalty
- First Worker Information Return Penalty
- Second Worker Information Return Penalty
These penalties coupled with interest may more than double the amount of the basic tax portion of the assessment.
Estimated Assessments / Settlement Not Possible
Most employers do not keep records beyond 4 years and some will keep them as long as 6 years. When an EDD audit goes back 8 years, the employer does not have sufficient documentation for an exacting assessment. This causes the auditor to guess or estimate at least 25% of the overall assessment. This is fundamentally unfair!
The EDD Settlement Office will not entertain a settlement where a portion of the assessment is estimated. This leaves the employer in a bad spot. To challenge the assessment the matter must be brought before an administrative law judge. The waiting time for a judge hearing has been greatly extended due to the impact of the Covid pandemic. When you finally get your judge hearing, you may be ordered to go back to the auditor for a reexamination. Think of all this wasted time and expense.
Reexamination Or Audit Reconsideration
The most efficient way of challenging an estimated assessment is to request that the original auditor reexamine your matter or grant an audit reconsideration. This will provide an opportunity to submit additional documentation and information to turn the estimated assessment into one that can be challenged on the merits. However, if you do not have the necessary documentation, you may be back to square-one.
CUIC § 1735 Exposure
CUIC § 1375 allows the EDD to issue a personal level assessment against a responsible person who operated or controlled a corporation or an LLC. The individual target is potentially liable for every penny owed by the entity including accruing interest.
As if an 8-year audit partially based on estimations is not bad enough, you may have personal exposure if you conducted your business as a corporation or an LLC. Most personal-level assessments are conducted by EDD collectors.
In Part 2, I will discuss ways of combating an EDD 8-year assessment.
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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