ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD MUST SHOW “GOOD CAUSE” TO EXPAND AN AUDIT
By Robert S. Schriebman
I have been representing clients undergoing EDD audits for decades. These days my EDD audit caseload greatly exceeds my IRS audit caseload many times over. In all these years, I am still perplexed when an EDD auditor expands a standard 3-year or 12-quarter examination back as far as 8 years. The latest example of an unjustified expanded audit has driven to me to the point of where I must share my feelings of outrage with you.
The audit in question was initially conducted by the assigned auditor as a standard 3-year or 12-quarter examination. The auditor requested the usual documentation such as 1099s, W2s, relevant portions of the general ledgers, tax returns, etc. At no time did the auditor request any documentation or information that would hint of an expanded audit.
When I received the Notice of Assessment, I was unpleasantly surprised that the audit period had been expanded back to 2017 instead of beginning with the 3rd quarter of 2019 and continuing until the end of the 2nd quarter of 2022. There was no explanation from the auditor, and no justification on the face of the Notice to expand the examination. If you are on the receiving end of an expanded Notice of Assessment, the most important thing to do is to immediately file a Petition with the CUIAB in order to protect your rights and avoid of having to pay the assessment. Confronting the auditor for his/her reasons for expansion comes second.
Justification for Expanding the Audit
The entire EDD code has only one audit statute of limitations provision – CUIC § 1132. The section provides, in substance, that the standard audit period is 12 quarters or 3 years. The section goes on to state, “In case of failure without good cause to file a return or report, every notice of assessment shall be made within eight years…” (emphasis added).
An auditor must have “good cause” to expand the audit and the employer must have “good cause” for not filing payroll tax returns. The important thing to remember, as far as the EDD is concerned, comes down to accountability to the employer and the employer’s representative.
What does “good cause” mean? Certainly, it does not mean that an auditor may expand the audit without doing his/her homework. “Good cause” is not defined in the assessment portions of the regulations under Title 22. The auditor has the duty to inquire of the necessity for expanding the audit. The Employers’ Bill of Rights states in no uncertain terms, “You have the right to an impartial audit and a full explanation of the audit findings.” Accountability is of prime importance!
“Good cause” is not defined in the code section. It appears that the standard for expanding the audit requires no standard. Auditors are granted great latitude and most administrative law judges are reluctant to question or challenge the justification for expanding the audit. Perhaps, “good cause” means the same as “reasonable cause.” The guidelines for “reasonable cause” were established in 1985 when the US Supreme Court decided the Boyle case (Boyle v. US, 469 US 241 (1985)
“Reasonable cause” has been interpreted by both State and Federal courts as conduct performed by a reasonably prudent businessperson under same or similar circumstances. This definition does not let the EDD auditor off the hook. There must be some action taken by the auditor to affirmatively prove that he/she had “good cause” to expand the audit and not just make an arbitrary assessment solely because there are no payroll tax returns on file for questionable periods. The auditor should be accountable and show you the justification for expanding the audit in black and white.
If you are on the receiving end of an expanded audit, you must be proactive. You should demand that the auditor state the specific reasons to expand the audit – put it writing. If the auditor is not responsive go to his/her supervisor and if that is not sufficient, contact the general manager of the audit office. If you do not receive an adequate response, contact the Taxpayer Advocate to intervene. The bottom line must be accountability.
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.
Web Site Article 673