Ask The California Employment Tax And Payroll Tax Attorney – FAQs About EDD Audits, Assessments, And Settlements – Part 2
By Robert S. Schriebman
Introduction
This is Part 2 of a 2 Part series.
I have been representing clients in EDD audits and before the California Unemployment Insurance Appeals Board (CUIAB) for decades. I also get a lot of telephone calls from tax professionals seeking my advice about EDD related issues that have crossed their desks.
People have asked me a lot of questions; most of them I can answer, and some cause me to scratch my head. Covid 19 changed the way the EDD does business. Audits were down and most EDD auditors worked remotely from home and rarely came into their offices. People had employment-related problems and unique issues generated by Covid.
In this series of articles, I would like to pass onto you some of the more common questions that have been put to me.
FAQs
What is an Entrance Interview?
The Entrance Interview, like the name suggests, is held at the beginning of the audit process. The auditor has an extensive list of questions to ask you. These questions range from the mundane such as, business location, hours of operation, and whether the business is seasonal or year-round. But these questions are soon followed by probes designed to determine whether you properly treated workers as independent contractors as opposed to W2 wage earners. All too often the employer under interviewing attempts to justify and defend his/her treatment of workers as independent contractors. The auditor also seeks contact information so that these workers can be called by the auditor and interviewed outside the presence of the employer. The Entrance Interview is not the time or the place to attempt to convince the auditor that the workers are true independent contractors. The sad reality is that most auditors have made up their minds in advance how they are going to classify your workers. In my experience I have found that anything said by the employer, at this initial stage of the audit, can and will be construed against the employer and in favor of reclassifying the so-called contractor as a common law employee for purposes of eventually issuing an assessment.
Do I have to attend the Entrance Interview?
No. According to the Employers’ Bill of Rights, you are allowed to seek professional advice and representation without personally having to attend any EDD interview. Some people are “do-it-yourselfers.”
Should I go it alone at the Entrance Interview?
I find that it is money well spent to seek professional advice before you decide to go it alone at this early stage of the audit. Keep in mind that the EDD auditor is not your friend.
What records must I send to the EDD auditor? Do I have to send original documents?
When you are first notified that you are being audited by the EDD, you will receive a long list of documentation and information the EDD feels is necessary for the examination process. There are many items on this list that are required and many items that are not required. Every EDD audit is different, and the required documents will depend on many factors. You are wise to consult an experienced professional to determine exactly what documentation is required. Most EDD audits have the same basic required documentation such as:
- Current business license
- Current sales tax permit
- Relevant portions of the general ledger. If you do not maintain a general ledger, you may be required to furnish a check register.
- 1096s and 1099s
- W3s and W2s
- California corporate income tax returns
- California personal income tax returns
Only send copies of the required documentation; do not send originals – you may not get them back!
The EDD wants the addresses and telephone numbers of my 1099 contractors. Must I furnish this information?
You are required to furnish basic contact information for contractors and others receiving 1099s. Having said this, this information should only be furnished if and when requested by the auditor.
I do not like my assigned EDD auditor. May I request a new auditor?
Once an auditor is assigned to your matter it is very difficult to request a change of auditor. There must be a very good reason for this request. If an auditor bullies you or threatens you in any way, it is best to request a conference with the auditor’s manager. Most EDD manager want to have good relationships with employers and will speak to your auditor addressing your complaint.
I just received a Notice of Assessment (NA); What should I do?
The first thing to keep in mind is that there are two types of assessment notices. The first notice you will receive is the Proposed Notice of Assessment (PNA). The fine print tells you that you are not required to take any action such as filing a petition. At this point you may wish to have a meeting with the auditor and his/her supervisor to argue why you should not be assessed. Frankly, most of these meetings are a waste of time and you run the risk of saying something you shouldn’t. Within a few weeks after receiving the PNA, you will receive the final NA by certified mail. Do not ignore the final NA! You must file a petition with the CUIAB within 30 days from the mail-date stated on the NA. A timely filed petition means that you disagree with the assessment. You do not have to pay anything until your matter is finally resolved through either a judge hearing on the merits or a settlement. If you do not timely file a petition, the NA will become a final assessment and it must be paid in full.
What are my options after receiving a final Notice of Assessment?
There are usually three options available after receiving the final NA:
- Pay it in full and walk away from the matter.
- Proceed to a judge hearing before the CUIAB. This will be a hearing on the merits of the assessment.
- Settle the matter for a lower amount.
What is an EDD Settlement?
If you do not want to fully pay the EDD assessment, and you do not want a judge hearing before the CUIAB, consider the settlement process. There is a small unit within the EDD that is devoted to resolving your matter based upon the hazards of litigation. Of course, a settlement means that you will have to pay the EDD a portion of the assessment. As part of the settlement process, you will be required to sign a written Settlement Agreement. You may also pay the settlement in monthly installments, but you will have to pay a penalty for not fully paying the assessment within 30 days. There will also be interest charged on the unpaid balance should you elect monthly installments. As part of the settlement process, you will be required to treat questionable workers as W2 wage earners commencing at a date certain in the future.
What happens if I default on my EDD Installment Settlement Agreement?
Defaulting on your EDD Settlement Agreement will bring you a world of hurt. The Settlement Office will try to work with you to get the agreement reinstated, but if this fails, a default means that you will owe the EDD the original amount of the assessment plus accruing interest. Your account may be turned over to an EDD Collector who will file a tax lien against the business and may engage in enforced collection action. If the employer is a corporation or an LLC, you may face personal liability pursuant to CUIC § 1735.
Will the EDD share my audit information and documentation with the IRS?
The IRS has agreements with all states to share information. EDD audit files may be available to the IRS upon request. The IRS wants to look at closed audit cases. These are cases where the audit has been completed, an assessment issued, and the taxpayer agrees with the audit changes by paying the deficiency. These closed cases are referred to internally as “statistics.” The IRS is primarily interested only in these statistics.
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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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