ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD’S NEWEST ENTRANCE INTERVIEW FORM – POTENTIAL TRAPS FOR THE UNWARY – PART 2
By Robert S. Schriebman
This is Part 2 of a 2 part series discussing the EDD’s newest Entrance Interview Form.
Let’s review briefly some of the potential hidden traps in the Entrance Interview Form. First, there are potential traps designed to set up a future CUIC § 1735 assessment. The second set of questions is designed to trap the employer on the issue of control over 1099 recipients.
I also pointed out that there is an overlap between the questions set forth in the Pre-Audit Questionnaire and those that are set forth in the new Entrance Interview Form. Before an audit starts, the EDD demands that a Pre-Audit Questionnaire be completed and submitted together with requested books and records. Auditors rarely, if ever, review the Pre-Audit Questionnaire prior to sending out the Entrance Interview Form. Let’s look at a few of those redundant questions:
- Who prepares the employer’s federal/state tax returns? (Provide the name, address and phone number). As a side note, it is none of the EDD’s business who prepares tax returns other than the basic EDD forms DE 9 and DE 9C. This question is irrelevant especially when you consider the next question asked by the EDD.
- Who prepares the employer’s EDD tax returns/reports? (Provide the name, address and phone number).
- When did your business commence operation?
- Do you operate year-round or seasonal?
- On average, how many workers/employees does the business have working for it at a given time?
- What types of acknowledged employees does the business have? Services performed?
- What type of non-employee workers are there (not on payroll)? Services performed?
- What type of accounting system do you maintain? Cash or Accrual; Computerized or Manual Posting; Inside accountant or outside accountant?
All of the above questions were asked on the Pre-Audit Questionnaire. I now answer these questions by simply asking the auditor to review the Questionnaire.
That Portion of the Entrance Interview Designed to Assess the Negligence Penalty Against the Employer
CUIC § 1127 imposes a 15% penalty for negligence. This penalty is assessed on the total computation of UI, SDI, PIT and ETT taxes. As part of every audit the assigned auditor will ask the following question: “Did you consult a tax professional to get advice on the status determination of the individuals that performed services for you? How did you arrive at the status determination?
Most of my clients have been in business for many years before receiving an EDD audit notice. They have forgotten if they consulted anyone or the name of any attorney, CPA, or other advisor. Sometimes the advisor is deceased or cannot be located. The good thing about this question is that the auditor rarely, if ever, consults the professional to verify whether or not his/her counsel was sought. There is also a legal privilege issue involved here.
If the employer responds that he/she failed to seek any professional advice at all, the negligence penalty will automatically be asserted as part of the overall assessment. I’m also finding of late, that the EDD Settlement Unit is reluctant to abate the negligence penalty when considering an overall assessment.
How Truthful Is the Entrance Interview Remarks on the EDD’s Information Sheet “Employment Tax Audit Process”
Every EDD audit starts with four basic documents.
- Inquiry Regarding Records
- Pre-Audit Questionnaire
- Documentation and Information Required for the Audit
- Information Sheet – Employment Audit Process Form DE 231TA (revised 8-18)
The Information Sheet discusses several topics such as Record Keeping, Scope of the Audit, Providing Records for the Audit, and the Entrance Interview. We are going to discuss the truthfulness of that portion of the Information Sheet that discusses the Entrance Interview. Here is what it states:
“ENTRANCE INTERVIEW Before reviewing your records, the auditor will conduct an entrance interview with you or your designated representative to explain the purpose of the audit and the audit process, gather general information about the operation and organization of your business and accounting records, and answer any of your questions.”
When I first started practicing tax law, five decades ago, there was a standing joke about the IRS as follows: “Hello, I’m from the IRS and I’m here to help you.” That quote always got a good laugh from the audience. The EDD Entrance Interview quoted above states, among other things, “to explain the purpose of the audit” …and to “answer any of your questions.”
Certainly there are those EDD auditors who stick to the script. But my colleagues and I have found, all too often, that many EDD auditors have a hidden agenda. That agenda is to gather information and documentation necessary to make an assessment. The auditor is there to achieve that objective, and has little if any concern about seeing things through the eyes of the employer who has engaged the services of independent contractors. The auditor does not care about good faith and good intentions. The auditor is going to conclude that all or most 1099 recipients should have been treated as common law employees. The new California Supreme Court Dynamex decision will further enable EDD auditors to conclude, before the audit has begun, that all workers should be classified as W2 wage earners with tax assessments and penalties aplenty.
There is also a disturbing secrecy in the EDD audit process – the auditor hides the ball. What I mean by this is that the auditor issues the Notice of Assessment without first contacting the representative to discuss the potential assessment, and entertain a rebuttal argument and rebuttal evidence. The auditor leaves this basic fairness up to the CUIAB to resolve.
Can we say, with tongue in cheek, “Hello, I’m from the EDD, and I’m here to help you?”
Tax auditors are not your friends. It does not matter whether they are from the IRS or the EDD. One must be very careful in responding to written questionnaires. According to the EDD’s Employers’ Bill of Rights, a taxpayer under examination is entitled to an impartial and objective audit. In fact the Bill of Rights states, “You have the right to an impartial audit and a full explanation of the audit findings.” Having said this, my advice is that an employer should approach an EDD audit with the same caution as he/she would have negotiating a barbed-wired fence naked.
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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