ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FAILURE TO COOPERATE WITH YOUR EDD AUDITOR YIELDS DEVASTATING RESULTS
By Robert S. Schriebman
Failure to cooperate with your assigned EDD auditor is never a smart move. Auditors have more power than one can imagine. They can literally cause economic ruin because they have the right to make estimations and projections that may have no basis in reality but can cause great hardship. I want to share with you a letter that I recently wrote to a client who ignored repeated requests from his assigned EDD auditor to furnish documentation and to meet and confer with the auditor. The auditor had no choice but to guess-estimate issues concerning worker status and unreported officer compensation. Instead of the usual 3-year or 12-quarter examination, the audit was expanded to 8 years with a resulting assessment of close to $300,000. The employer-taxpayer filed a timely petition but did nothing else. I was requested to give him viable options under these circumstances. What follows, with some modification, is the letter I wrote responding to his request. My letter was written shortly after I received the audit file from his auditor. She was dismayed and frustrated at his lack of communication and she was willing to do whatever it takes to work with him in order to establish a more accurate assessment.
My Letter to John
“I received the documentation I requested from your assigned auditor, namely the Notice of Assessment, Audit Report, and History Employer Contact (Form DE 106).
In this letter I will discuss each document and thereafter, explain your available options.
Notice of Assessment
The Notice of Assessment was issued on August 5, 2021. The assessment covers an 8-year audit period. The usual audit period is 3 years, but your audit assessment was expanded due to your failure to respond to the EDD and to provide the documentation and information requested. If you look at the bottom of the Notice, you will see that it is an estimated assessment. This means that it is not eligible for settlement unless it is taken before a judge of the CUIAB. Most likely the judge will order you to cooperate in the audit process and to produce the documentation and information necessary to turn an estimated assessment into one based upon an actual examination. You have filed a timely petition and eventually your matter will come up before a judge hearing.
Attached to the NA you will find schedules showing that the assessment was primarily due to estimated compensation for you between 2013 and 2020. These are pure estimations and may have no basis in reality. However, without actual evidence of compensation the auditor can only estimate.
The Audit Report (AR) states why the assessment was estimated. The estimation was essentially due to frustration and consternation on the part of your assigned auditor who was not able to identify any workers to determine their correct worker status. Estimations were done based upon limited information from the year 2019.
You were classified as a statutory employee by law, as you are a corporate officer.
Your compensation was estimated based upon internal EDD studies. You were assessed several penalties including a 15% negligence penalty and two harsh worker information return penalties, all based upon estimated salary projections.
Form DE 106
In reviewing the history of employer contact, there were several attempts by the auditor to reach you by phone. In November 2020, the auditor made two attempts to reach you by mail at your new address. In early January 2021, the auditor wrote you to reschedule your audit appointment, but this was returned to the EDD by the post office. Two more attempts were made in March 2021. All in all, there is a clear history of the EDD attempting to reach out to you without success. Obviously, there was a failure of communication, and this failure generated the final estimated Notice of Assessment.
What Needs to Be Done – Your Options
In addition to reviewing the enclosed documentation, I have had several telephone conferences with your assigned auditor. She is willing to conduct a reexamination of the periods in issue. This is essential if you want to substantially reduce the estimated assessment as well as attempt to confine the audit to a standard 3-year period, instead of 8 years.
You are not in a good position as of this writing. You cannot settle your matter for less money because your assessment is estimated. The EDD’s Settlement Unit will not entertain settlements based upon estimated assessments. While you can take your matter before a judge, you cannot expect any relief. The judge will suggest that you cooperate in the audit process.
In my opinion, you should fully cooperate with your auditor and give her the documentation and information she needs to conduct a professional level objective examination. This may result in a Notice of Adjustment that will be based upon an actual examination and this will allow you to consider a settlement for a substantially smaller net assessment.”
It is never wise to bury your head like an ostrich when dealing with any taxing agency and whether you are dealing with an auditor or a collector. Both have tremendous powers and can cause economic devastation. An EDD auditor has the right to issue an estimated assessment based upon estimations and projections that may have no basis in reality. An EDD collector can file a tax lien and undertake enforced collection action including repeated bank account levies, wage garnishments, and even placing a keeper inside your business.
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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