Ask The California Employment Tax And Payroll Tax Attorney – EDD Audits In A Post Covid-19 World

By Robert S. Schriebman
2020

Introduction

What can we expect from EDD audits when we all arrive at the new normal?   We read in the paper and hear in the media that city and county treasuries are seriously hurting.  The Treasury of the State of California has been drained by billions.  Where is California going to go to replenish the Treasury?
What can we expect from EDD audits throughout 2020 and beyond?

I have spoken with members of the EDD at many levels.  Currently most auditors are assigned to process UI claims.  Those who are working from home are behind on the audit inventory they were assigned before the pandemic hit.  The California government does not have many options when it comes to restoring fiscal normalcy.  The legislature can impose new taxes such as increasing sales taxes and gasoline taxes, but a lot of money is generated through the audit process from EDD, FTB, and sales tax auditors. We will all experience higher taxes on one hand, and less spending money on the other.

In this article I want to share my thoughts with you on where this is all going.  Full disclosure: these are my thoughts and only my thoughts.  As an attorney whose specialty is IRS and EDD tax controversies, I have had over 50 years of experience representing clients involved in tax audits as well as those who owe taxes and cannot pay in full.  I have written over 20 books and hundreds of articles dealing with IRS and EDD tax audits and tax collections.  With all of this experience and knowledge, I do not have the answers to the questions posed above. But I have gained much insight and wisdom and this tells me that many small and medium size businesses are going to experience a tough and rocky road when it comes to future audits.

EDD Auditors Go Back to Auditing

From what I have been told, EDD auditors do not expect to resume their normal duties at their desks until approximately mid-July.  There will be a large backlog of audits in process.  The statute of limitations on examinations continued to run during the pandemic.  Audits that commenced with the quarter beginning January 1, 2017, or earlier, will have fallen off the assessment statute.  This may mean that the EDD will be forced to make hard decisions on whether to continue auditing old inventory or to abandon these audits altogether.  Newer inventory will most likely have an audit period beginning July 1, 2017 through June 30, 2020. For the quarter ending June 30, 2017, the assigned auditor may be pressed to request an extension of the statute of limitations for examination in July 2020.

It is important for you to keep in mind that you are under no obligation to extend the statue of limitations on any specific quarter.  You have the right to just say no.  If you refuse the EDD has the option to issue a Notice of Assessment for any quarter that is expiring.  Having said this, the EDD may be overwhelmed with many expiring quarters and just not get around to issuing that Notice of Assessment.  Saying no is always a gamble, but in this current environment, you may win and the EDD may never issue the assessment.

Expect Tougher Audits

California desperately needs money. The Treasury has suffered an unprecedented demand on funds.  We can expect that the EDD will hire more auditors and make demands on all auditors to be more thorough and issue larger assessments. We can expect more penalties to be assessed with each audit.  Will the EDD demand more records and will they review those records to assess as much as they can?  I do not believe this unrealistic.

More than ever before it is imperative to protect your right to privacy and fight back, giving the EDD only those records that are absolutely relevant.  In other words, it is going to be up to you to prevent “fishing expeditions” during the audit process.  I predict that the tensions between what auditors believe they are entitled to see verses your right to protect yourself from fishing has never been greater or more important.

The EDD has never understood that their search for documentation and information must be governed by the standard of relevancy as interpreted by the US Supreme Court’s Powell decision of 1964 (US v. Powell, 379 US 48).  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 of the taxpayer’s books and records in the hope that something useful could be found.  The EDD is bound by the rules set forth in the Powell case.  However, just try to find an EDD auditor whoever heard of the Powell case!   Here are a couple of basic rules that you must keep in mind during the EDD audit process:

• The documents and information requested by the EDD must be relevant to their examination.
• The EDD has no right to ask you to produce documentation already in its possession, such as, filed quarterly and annual payroll tax returns.

Conclusion

We are all in the dark as to what the future will bring and how most of us will go about adjusting to what may be the new normalcy.  This goes for the EDD as well.  Certainly, EDD auditors are going to have to make serious decisions regarding current backlogs.  In this pandemic, gig workers and other independent contractors were allowed to file for benefits.  This may have turned out to be a huge windfall for the EDD because it is going to provide new audit leads for those employers whose independent contractors were afforded UI benefits.  The volume of EDD audits is going to increase and these new audits are going to result in larger than ever assessments.