ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – FREQUENTLY ASKED QUESTIONS – NEW ENTRANCE INTERVIEW QUESTIONS – PART 3
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 more intrusive interview questions.
If this is a C or S Corp, please provide information on the corporate officers, percentage of shares each own, and who is responsible for the day-to-day business operations?
Bob’s Comment: It is clear from this question that the auditor is seeking targets for personal level assessments pursuant to CUIC § 1735. Actually, it is not the auditor who eventually makes this determination. EDD collectors are usually the persons making the determination of personal-level responsibility. There are many articles on this website that discuss the elements necessary for a valid 1735 assessment. It is not only shareholders who are potential targets, but officers and key employees as well.
If it is an S Corp, does the corporate officers participate in a company sponsored health insurance plan or have their own? Please explain.
Bob’s Comment: There are many issues an auditor looks for when it comes to an audit of an S corporation. Officers owning more than 2% of shares must include as compensation health insurance premiums. The auditor will also look for K-1 distributions and issues of reasonable compensation. This is a complex area of tax law. The auditor will also request corporate records relating to credit card charges in order to determine if those charges constitute additional compensation.
Does the company use an outside bookkeeper/CPA? If so, how long have they been rendering services the company and what type of service do they render?
Bob’s Comment: This question is all about whether the employer sought professional advice and counseling to determine the proper treatment of workers. The auditor will want to know the name and contact information of the advisor and when the employer sought advice. Most employers have long forgotten who what and when. If the employer did not seek counseling most auditors will assess the negligence penalty of 15% to the assessment. Unfortunately, this penalty is often assessed even when the employer obtained professional advice – you can’t win.
Does the employer offer any benefits to its workers?
Bob’s Comment: The usual benefits such as vacation pay and sick pay do not raise additional compensation issues. However, providing meals and lodging may cause the auditor to assess payroll taxes on additional compensation.
Are there any business-related expenses paid in cash? If so, please provide a copy of the cash listing receipt.
Bob’s Comment: OH NO, CASH! – “Lions and tigers and bears – oh my!” Paying workers in cash is not illegal. However, significant cash payments worry auditors and cause them to suspect fraud at worst, or negligence at best. Some employers keep small amounts of cash on hand for reimbursement of fuel expenses and some meals. It is always best to keep a record of cash disbursements and their purpose. Restaurant businesses are always suspect.
This concludes the discussion of the EDD’s new Entrance Interview Questionnaire.
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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