Ask The California Employment Tax And Payroll Tax Attorney – Does The Employer Have To Be Personally Interviewed By The EDD Auditor?
By Robert S. Schriebman
2023
Introduction
For the past several years the IRS has required a personal interview of the taxpayer at the taxpayer’s place of business. This allows the IRS auditor a tremendous latitude in viewing the business operation and even interviewing employees. The EDD has taken a page out of the IRS’ audit procedure manual and now demands an in-person business premises Entrance Interview. COVID-19 put the brakes on the Entrance Interview for years up until recent times. COVID caused EDD auditors to work from home and this practice has continued through the beginning of 2023. Now that the pandemic has ebbed, EDD auditors are going back to pre-COVID times and are insisting upon in-person entrance interviews. If an employer is represented by an attorney or an accountant, the audit interview may be conducted at the professional’s office in lieu of an interview conducted at the employer’s business premises. However, if the employer chooses to go it alone, and not retain a professional advisor, EDD auditors are now looking at on-site business premises entrance interviews.
I have always followed the practice of keeping the employer at a distance from the EDD auditor. I do this because most employers adopt a psychological fantasy of a parent-child relationship between the employer and the auditor. Employers want to put their best foot forward and impress the auditor with their honesty and their insistence that they did not do anything wrong in treating a worker as independent contractor instead of an employee. Employers have all kinds of pre-prepared arguments that fall on deaf ears as far as the auditor is concerned. It is a sad situation, but I do believe that there are EDD auditors who have made up their minds way in advance of any interview that the workers treated as independent contractors should have been reclassified as employees.
One of the primary reasons EDD auditors seem to make up their minds in advance, is due to the fact that they have reviewed prior unemployment insurance benefit claims (UI) filed by a former “independent contractor.” That contractor was interviewed by another auditor in the same office who concluded that the worker was misclassified and should receive UI benefits. Armed with the interview report, the auditor feels he/she has an accurate insight into the employer’s business operations.
During COVID, especially in 2020 and 2021, the EDD adopted a policy of granting UI benefits to those workers treated as independent contractors. This turned out to be a win-win for both the worker and the EDD because the EDD had a new lead for conducting worker status audits.
Is the Employer Required to Attend an EDD Entrance Interview?
Is the employer required to be personally interviewed by the EDD auditor? The short answer is no! There is no statute or regulation requiring personal attendance at any form of EDD questioning. I protect my clients by keeping them as far away from the auditor as possible. I do not want my clients to make any type of statement or provide any type of information that can be used against them.
Have the EDD Auditor Put the Questions in Writing
When it comes to the Entrance Interview, or any post-interview follow-up, the employer has the right to request that the auditor put any interview questions to the employer in writing so that the employer may have the opportunity to consult with a professional advisor before responding. Some auditors balk at this because putting things in writing takes time and they are on a tight schedule to complete the audit. The auditor may respond by requesting to conduct the Entrance Interview over the phone. Either way, the employer should insist that the questions be in writing.
EDD auditors have a databank of interview questions that have been provided by their training, management, or their own field experiences. It is an easy thing for the auditor to select questions from the databank and forward them to the employer via email.
The Pre-Audit Questionnaire
When the employer is initially contacted by the EDD to begin the audit process, the employer is given several documents, one of which is the Pre-Audit Questionnaire. This is a two-page form wherein the employer fills in the blanks. There are several articles on this website that discuss the Questionnaire. I have consistently found that many of the Entrance Interview questions are the exact same ones my clients have already answered in the Pre-Audit Questionnaire. The employer is not required to answer the same set of questions twice. If the employer finds a duplication in the Entrance Interview with the Questionnaire, the employer should point this out to the auditor and let the auditor know that the employer has previously responded to the same question.
Employment Relationship Questionnaire (DE 1870F)
EDD auditors, not wishing to take the time to provide individually drafted questions for the Entrance Interview, will simply send the employer the Employment Relationship Questionnaire and leave it to the employer to complete and return it to the auditor within a short period of time. This Questionnaire is 5 pages in length and contains 37 questions. However, many of the questions have as many as 6 subparts (a)-(f). The auditor is either lazy or attempting to bully the employer with a lengthy Questionnaire. Many of the questions ask the employer to inquire into an independent contractor’s internal business affairs and obtain information about workers hired by the subcontractor. One question is especially disturbing, “How did the individual report earnings for income tax purposes? Were they reported as wages or self-employment income?” Why would anyone give a stranger this type of personal information? Another question asks whether the employer is carrying workers compensation insurance for the contractor. Answering this question in the negative might cause a worker compensation investigation.
There are sets of questions for workers treated as agent-drivers or commission-drivers. Another set of questions involves home workers. There are sets of questions for real estate professionals.
Finally, there are questions aimed at general contractors in the construction industry. The construction industry is a huge target for the EDD to audit. Many contractors commit infractions such as hiring unlicensed subcontractors as well as hiring day laborers and not giving them W2s or 1099s. There are many articles on this website that discuss issues relating to EDD audits of general contractors.
The EDD wants to know if subcontractors were licensed, and when licenses were issued. The final question asks, “What are the minimum and maximum prices of jobs (including materials) that you charge your customers, when the worker performs services on these jobs?” I fail to see the relevancy of this question for any worker status audit.
If the employer is on the receiving end of this Questionnaire, that employer may want to give serious thought to refusing to answer any of these questions and seek the advice of an experienced professional tax representative. Most likely the representative will insist that the auditor send specific questions that are relevant to the employer’s specific examination.
Determination of Employment Work Status (DE 1870)
The EDD auditor may send the employer this form as opposed to the Employment Relationship Questionnaire (DE 1870F). While the former Questionnaire contains only 37 multiple-part questions, the Determination Form contains 79 questions, many of which have several subparts. There are well over 100 questions in this form alone. If there was ever a fishing expedition conducted by the EDD, this form creates no doubt. This form is sometimes used to obtain an advance ruling from the EDD for worker status. Many of the questions relate to the issue of control over the job detail of the independent contractor. The issue of control has always been of primary importance to the EDD and is still the key element in the new ABC Test initiated by AB-5.
Like the Employment Relationship Questionnaire, there are subparts for agent-drivers, home workers, real estate professionals, and employee leasing operations.
This form should neither be completed nor submitted to the EDD auditor unless and until the employer has consulted an experienced professional tax representative. Many of the questions call for potentially damaging responses that once given to the EDD can never be retracted.
Conclusion
It is an easy thing for the EDD to ask questions and to request documentation and information. It is quite another matter for the questions and requests to be relevant, reasonable, and proper. The primary job of a competent tax professional is to be able to analyze and filter questions and requests and to give the EDD information and documentation that the EDD is legally entitled to receive. That’s what the professional can do for the employer that the employer cannot do for on his/her own. It is very important when, where and how to just say no.
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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 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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