ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD AUDITS RESUME IN 2021
By Robert S. Schriebman 2020
EDD audits came to a complete stop in early 2020 due to the pandemic. EDD auditors took on the enormous task of processing unemployment insurance and other work-related claims. This job is not over. A few audits resumed late in the year, but these were mostly continuing examinations of existing caseloads. I have it on good authority that many auditors have now been freed up to take on new examinations as well as to complete works in progress.
The resumption of audits, on a state-wide basis, is good news for California’s Treasury, but at the same time has created worry and anxiety in the private sector. We have received many calls from concerned employers about their exposure to EDD audits and potential assessments. In this article, I will address a few of these issues.
Computer-Generated Notices of Assessment
I have seen an increase in the EDD’s issuance of computer-generated assessments. These assessments are estimated and are not based upon any actual examination. Many small and medium-sized businesses have closed altogether or contracted. Quarterly payroll tax returns may have not been filed or have shown a substantial reduction in the number of employees and payroll taxes. If returns have not been filed, or there are other irregularities, EDD computers are programed to issue these assessments. These assessments are issued on a quarter-by-quarter basis. It is not unusual for an employer to receive more than one Notice of Assessment. One of our clients was issued an assessment notice on a recently purchased business that did not start operations for several months. Some notices may be issued upon the filing of benefit claims. There are many reasons these notices are issued.
The most important thing for you to keep in mind, is that these notices cannot be ignored. If a timely petition is not filed with the CUIAB, the assessment becomes final, due and payable. If not addressed you may find your bank account levied and a Notice of State Tax Lien filed. Do not ignore these notices!
Audit Exposure from Granting Benefits to Independent Contractors
Because of the pandemic, people received unemployment insurance and other benefits even if they were treated as independent contractors. This creates an interesting and at the same time worrisome situation. Prior to the pandemic, a person making a benefit claim who had been treated as an independent contractor, may or may not have received benefits. The decision was made by the auditor-investigator assigned to the case. A true independent contractor was denied benefits, but a misclassified worker was awarded benefits. The long-standing policy of the EDD was to audit each and every employer who misclassified their workers. Virtually 90% of audits were generated by benefit claims from improperly classified workers. Employers were almost guaranteed of being audited.
Because of the pandemic and the unprecedented number of claims being processed, including benefits paid to independent contractors, there is now such a huge number of potential audits that the EDD most likely cannot get to all of them. No one can possibly predict one’s exposure to an audit. Will the EDD be hiring new auditors to take on this unprecedented caseload?
The Impact of the Statute of Limitations in this Pandemic
The EDD code provides for only one statute of limitations for assessment. CUIC § 1132 governs audits. There has been no legislation staying or suspending the running of this statute due to the pandemic. As of this writing in early January 2021, the only old open period for examination is the fourth quarter of 2017. By the end of January, the standard audit period will cover the years 2018, 2019 and 2020. As this year progresses the audit statute will also encompass portions of 2021. There are exceptions for non-filing of quarterly returns and for fraudulent activities.
CUIC § 1735 Exposure
There are many articles on this website that discuss exposure to CUIC § 1735. The statute imposes personal liability for unpaid corporate or LLC taxes. Employers who were assessed at the corporate or LLC levels do face potential personal assessments that may result from business closures or the inability to pay these assessments due to the realities of a pandemic economy. Do not ignore any correspondence from the EDD and be on the alert for certified mail from the EDD that may contain a personal level assessment. It is very important that a timely petition be filed with the CUIAB if you are on the receiving end of one of these assessments.
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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