ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FREQUENTLY ASKED QUESTIONS – ALL ABOUT EDD AUDITS – PART 1
By Robert S. Schriebman
During the COVID-19 pandemic the EDD conducted very few if any audits. Auditors were reassigned primarily to handle the unprecedented number of unemployment benefit claims. The auditors worked from remote locations. In early 2021 the audit program resumed. I have received many calls from employers who find themselves under examination. 2020 was a tough year for them. They have many common questions and concerns. In this series of FAQs, I will attempt to provide answers to their questions and address their concerns. If you find yourself in this situation, you are welcomed to call my office and speak with an experienced professional.
How do I know that I have been selected for an audit?
You know you are under audit if you have received a package of documents. The first document states, “Inquiry Concerning Records.” Another document is the Pre-Audit Questionnaire. And the final document is a standard form letter requesting documentation and information.
Some employers have received phone calls from EDD auditors informing them that they are under examination.
What event has triggered the EDD to select my company for an audit?
There are many reasons an employer is selected for an audit. The most common reason is due to former workers filing for unemployment benefits who told the EDD the employer treated them as an independent contractor.
During the pandemic, the EDD granted benefits to all who applied including acknowledged independent contractors.
EDD policy calls for an automatic audit when a benefit-applicant states he/she has been treated as an independent contractor. Some believe that the granting of benefits to independent contractors provided audit leads for the EDD to conduct future examinations.
What is the EDD looking for?
In short, the EDD is looking for money – your money. Let’s face it, California paid out an unprecedented amount of benefits and the Treasury is hurting.
During the examination the auditor will test books and records to find inconsistencies such as wrongful classification of workers. The auditor will also want to see if the compensation paid to workers jibes with the W2 or 1099 issued to that worker. The EDD also examines S corporations for issues relating to unreasonably low compensation paid to officers and principals when compared to corporate or LLC distributions.
Must I comply with the 14-day deadline?
Ideally the EDD wants you to contact them within 14 days of the receipt of the audit package in order to schedule an examination. However, any employer has a right to consult with a professional advisor with the possibility of being represented during the audit process. Therefore, the 14-day rule is very flexible. I have seen cases where several months have gone by before the audit is scheduled due an employer seeking representation. I have never seen a situation where the EDD strictly adheres to the 14-day deadline.
Why did I receive a Notice of Assessment, when I was never audited?
During the pandemic, the EDD paid out benefits regardless of whether a worker was treated as a common law employee or an independent contractor. As a result of paying benefits to independent contractors, EDD computers were programmed to issue quarterly Notices of Assessment solely based upon an estimation. Employers who failed to file quarterly returns during the pandemic were also targets for assessment. Employers did not have to be formally audited prior to these Notices being issued.
Protect yourself! If you receive one of these Notices, read it very carefully. You must protect your rights by timely filing a petition with the CUIAB. These “mini assessments” are usually under $5,000 per quarter. It’s strictly guesswork by the EDD. However, do not take these assessments lightly. If you do not file a timely petition, the proposed assessment will become final and will be assigned to an EDD collector who may file a tax lien against your company and levy your bank account.
No particular form is necessary. You may simply state that you received the Notice and that you disagree with it entirely. Send you petition by certified mail and get ‘round-stamped’ by the USPS so you can prove that your petition was timely sent even though it may arrive after the 30-day filing deadline. The CUIAB has been allowing a 5-day extension grace period. You may also use a recognized private carrier, like Fed Ex or UPS. Make sure you follow the tracking number and print out written proof that your petition was delivered to the CUIAB.
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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