ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FREQUENTLY ASKED QUESTIONS – NEW ENTRANCE INTERVIEW QUESTIONS – PART 2
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.
Describe the business operations (services, products, customers)
Bob’s Comment: The type of business raises a red flag to the auditor. Certain businesses are big targets for big assessments because the EDD, through experience, knows what to look for. The construction industry is a huge “cash cow” for the EDD because many general contractors don’t follow the rules. They hire unlicensed subcontractors and treat them as independent contractors in violation of the Labor Code and the new rules set forth in both AB-5 and AB-2257. Likewise, domestic worker agencies and nurse registries are also prime audit targets.
Current number of employees and what services do the workers render the company?
Bob’s Comment: It is not the number of employees that matters to the EDD. What matters is the type of work performed by employees compared to the type of work rendered by independent contractors. If the work is identical the contractors will be reclassified as employees.
Please explain the nature of services the independent contractors provide to the company. If there is a sample contract between contractor and company, please provide.
Bob’s Comment: When describing the work done by contractors, it is important to keep the description simple – one or two words. In the commercial world it is vital to have a written contract, but the EDD pays almost no attention to these contracts no matter how well they are drafted. This is why it is impossible to write a bullet-proof – EDD- proof – independent contractor agreement.
Does the company have any branch offices, related affiliates or engage in any other business ventures?
Bob’s Comment: Affiliated businesses and branch offices allow the EDD to conduct a “horizontal” audit wherein all workers from all entities are reviewed to determine if any reclassification is required with a corresponding large Notice of Assessment.
Does the owner have any other business registered with the department?
Bob’s Comment: The comments made above regarding a horizontal audit apply here too.
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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