ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD’S NEWEST ENTRANCE INTERVIEW FORM – POTENTIAL TRAPS FOR THE UNWARY – PART 1
By Robert S. Schriebman
EDD audits have become more expansive. EDD auditors are more aggressive than ever before in their requests for documentation and information. As part of the audit process, auditors are demanding that the employer complete a document entitled “Entrance Interview.” This is a 3-page form containing over 40 questions some of which have, in my opinion, a hidden agenda of setting a trap for corporate and LLC officers and management members. CUIC § 1735 allows the EDD to disregard the corporate or LLC protections and hold responsible individuals personally liable for every dime assessed against the corporation or LLC. The other hidden agenda is to trap the employer in admitting control over the functions performed by 1099 recipients.
In this article I will review those questions that are red flags to trip you up during the audit process.
Questions You Already Answered!
When an employer is singled out for an audit, that employer will initially be provided with a Pre-Audit Questionnaire (PAQ). Many of the questions set forth in the Entrance Interview form were previously answered by the employer in the PAQ. Questions such as the business address, locations, commencement of operation and the name of the principal executive have already provided in the PAQ. The mundane questions also include the number of employees and the nature of the services performed by them. Again, these questions have already been answered in the PAQ. Indeed, over 50% of the questions set forth in the Entrance Interview were already answered in the PAQ. Therefore, the auditor should be referred to the PAQ in responding to the majority of Entrance Interview questions.
Questions Designed to Set Up a Future CUIC § 1735 Assessment
Here are the questions that, in my opinion, set up officers and other managers for potential personal exposure.
- Who are the corporate officers? Corporate officer on payroll? Percentages owed? Salary Titles? Services performed?
- Who is responsible for the preparation and issuance of the 1099s?
- Who managed and directed entity operations?
- Who determined what bills would be paid?
- Who authorized these payments?
- Who has authority to use the business back accounts?
At the end of every EDD Audit Report (AR) you will find these questions, or most of them, asked and answered by the auditor. The irony is that these questions are currently not reviewed by EDD collectors when determining the CUIC §1735 assessment. Independent questionnaires are used by collectors, but times are changing, and the EDD has been empowered by the Dynamex case discussed in other articles on my website.
Questions Designed to Trap the Employer on the Issue of Control over 1099 Recipients
When it comes to assessing payroll taxes against the employer, the issue of “control” is the name of the game. That is the way it has been and will continue to be for the future. The primary objective of every EDD auditor conducting a worker status audit, is to find control lodged with the employer.
The final section of the Entrance Interview is devoted to questions concerning the relationship between the employer and 1099 recipients. The questions are, in my opinion, structured to seek admissions of control by the employer.
- Whom do these individuals report to when they are working?
- Who gives these individuals job assignments/tasks?
- Who determines the pay rate?
- How these individuals are found (online, referral, etc.)?
- Do these individuals wear a uniform?
- Who provides tools/equipment for these individuals to perform their work?
- Do these individuals work on a set schedule? How are their work times determined?
These questions appear simple, but there are hidden traps in them. You also do not know how far deep these questions penetrate. For example, they may relate to the hiring of sub-workers by 1099 recipients. My best advice is to discuss your potential answers with experienced counsel. Sometimes the best answer may be to politely ask the auditor to interview 1099 recipients for answers. Lately, EDD auditors are depending more upon the employers to do their basic homework.
I have approached the Entrance Interview in an adversarial environment. For example, my responses to the mundane majority of questions are to refer the auditor to the Pre-Audit Questionnaire. With regard to the CUIC §1735 potential trap questions, I have taken the position that they are not appropriate to the initial level of audit currently being conducted – they are simply not relevant. I’m also becoming sensitive of having my client do the auditor’s basic homework.
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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