AASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FREQUENTLY ASKED QUESTIONS – NEW ENTRANCE INTERVIEW QUESTIONS – 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 welcome to call my office and speak with an experienced professional.
EDD auditors are now required to conduct an Entrance Interview on all new audits. While the questions appear to be routine and non-evasive, their goal is transparency. Unfortunately, “transparency” is a one-way street. The EDD wants to know all about you and your business without the EDD to disclose why you were selected for an examination or the name of any former worker claiming UI benefits, or the identity of any informant.
Many of the questions sought in the initial Entrance Interview may have already been provided when the employer completed the Pre-Audit Questionnaire. Even though the Questionnaire is usually completed and submitted before the audit begins, I have found that the auditor does not review the responses given in the Questionnaire.
The following are the least intrusive interview questions.
What type of entity is the company?
Bob’s Comment: Here the auditor is looking for the type of business operation such as a Sole Proprietorship, LLC, LLP, Partnership, C Corporation or S Corporation. Depending upon the entity, there may be personal liability for entity-level assessments pursuant to CUIC 1735.
Verify business address?
Bob’s Comment: This seems straight-forward enough. The auditor will check the internet to determine if the business has more than one location or is affiliated with another entity for the purpose of conducting a horizontal audit – that is to say an audit of each and every commonly-owned business.
Who handles payroll (outside payroll company)?
Bob’s Comment: An employer under audit gains credibility with the EDD when the business uses an independent and recognized payroll company, such as ADP or PayChex. The W2s and 1099s issued by these companies seem to have more credibility and undergo less scrutiny. If the company uses an outside accountant or bookkeeper the auditor will want to know if the employer received any counselling on how to classify workers as either W2 wage earners or 1099 independent contractors. Failure to seek professional advice often leads to the assertion of the negligence penalty pursuant to CUIC § 1127.
Bob’s Comment: Workers who work regular business hours, on a daily basis, are viewed as common law employees and not independent contractors. This can be a potentially dangerous inquiry.
Is the business fulltime, year-round or seasonal?
Bob’s Comment: Here the auditor is looking for a worker’s commitment to the business. Workers who are engaged in year-round employment tend to be classified as common law employees, even though they are treated as independent contractors. On the other hand, seasonal workers may work for others during the year. Much depends upon the nature of the work and the skills involved. For example, workers engaged in seasonal agricultural work such as fruit pickers, are found to be employees because their work does not require great skill, education or training. This question can also be related to “gig” workers. I am finding that an increasing number of workers can be classified as gig workers and independent contractors. This area can get complicated, especially as the trend to hire gig workers is gaining in popularity.
How often is payroll paid?
Bob’s Comment: Workers who are paid on a regular basis such as weekly or bi-monthly tend to be treated as common law employees by EDD auditors. How often an employer has a payroll, and the workers on that payroll will be carefully reviewed by the auditor. One of the ways the auditor reclassifies contractors as employees is governed by the timing of payments. A regular pay schedule to an independent contractor is very suspicious to the auditor. EDD audits generally begin by the examination of only one year. When the auditor discovers “questionable items” the audit will be expanded to a minimum of 3 years or 12 payroll quarters. For example, if the auditor sees that 1099 workers receiving weekly compensation over the period of several months, this will constitute a questionable item and cause the audit to be expanded.
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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