ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FREQUENTLY ASKED QUESTIONS – ALL ABOUT EDD AUDITS – PART 5
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 welcome to call my office and speak with an experienced professional.
The following FAQs are real. They are not academic. They have been asked by callers and clients over the years. I have learned that there is no such thing as a stupid question. I pass these onto you.
Bob, do you handle EDD audits in Northern California?
Yes, I handle EDD audits conducted throughout California. I receive many audit cases originating out of the Bay Area and Northern Counties.
Bob, do you handle EDD audits for out of State employers?
Yes. Many companies headquartered outside of California have satellite operations here in California. These out of State companies are not immune from an audit by the EDD. When the EDD audits an out of State employer they are only allowed to examine W2 wage earners and 1099 recipients located in California. The EDD is not allowed to expand its examination into activities in other states. This is why it is important to confine the EDD examination only to operations in California. The same also applies to the EDD’s attempt to examine books and records of the entire business operation of the out of State employer. Care must be taken in the audit process to limit the scope of any EDD investigation.
What is the period covered by the audit?
Section 1132 of the CUIC (California Unemployment Insurance Code) is the primary statute governing audit time limits. A great majority of audits involve 12 payroll tax quarters or 3 years. The 3 years are not necessarily calendar years. For example, as of this writing a typical audit period will begin April 1, 2018 through March 31, 2021. The basic 3-year period applies to the typical business that has timely filed quarterly payroll tax returns as well as issued W2s and/or 1099s. In the event that the auditor discovers that no payroll tax returns have been filed, and the business records are inadequate, the audit can be expanded beyond 3 years. The maximum look-back period is 8 years. The construction and restaurant industries are prime targets for this type of expanded audit. If the auditor believes that fraud has played a part in the employer’s business operation, this will usually warrant an 8-year expanded audit.
Due to the pandemic, it is common to see audits covering only the years 2018 and 2019. The EDD has been reluctant to issue assessments for 2020, although I have seen a few.
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.
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.
On the other hand, the IRS is not too interested in reviewing cases where the taxpayer has disagreed with the proposed assessment and has filed a petition with the CUIAB. These types of cases will go on for a long time and wither be resolved by a judge hearing, or a settlement. EDD cases that are settled, instead of going to hearing, are not available to the IRS.
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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