ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW TO GET A GOOD AND FAIR SETTLEMENT WITH THE EDD – PART 1 – THE AUDIT PROCESS
By Robert S. Schriebman
This is Part 1 of a 2-part series. This first part will discuss the audit process. The second part will discuss the settlement process.
Having recently celebrated 50 years of the practice of tax law, I look back on the many years of my representing clients in matters involving EDD audits and EDD settlements. In this article I would like to pass on to you what I have learned about achieving effective results in the audit process.
A Good Settlement Starts With A Good Audit
Lesson I Have Learned
Is there really such a thing as a “good” audit? All audits have one thing in common – stress. The ideal audit involves a “no change.” This means that the auditor has effectively blessed the way you do business and no assessment is forthcoming. This is a rare event indeed! Don’t count on it.
Some of my professional colleagues share the same opinion about EDD auditors that many employers have also voiced. It is the belief that most EDD auditors have made up their minds about the end results of an audit before the audit begins. That is to say that a common complaint from professionals and lay-employers has consistently been that no matter how they argue with the auditor, things go in one ear and out the other. The audit will not change his/her position. This is especially true with occupations that do not require a professional license or certificate – janitors, unlicensed subcontractors, farm workers and the catering industry. From all these comments and observations I have come to the conclusion that a good audit begins with controlling your temper and anger at the process. You may not like your auditor, but you cannot change the auditor assigned to your case. As an old rock n’ roll song advised, “Love the one you’re with.”
The next lesson involves audit cooperation. By this I mean avoiding the appearance of gamesmanship, stalling, and delays in the production of requested documentation and information. Don’t stall, don’t play hardball, and don’t withhold appropriate relevant information and documentation. Here we have a fine line about what to give the auditor and what to retain. All audits have their unique features and no two audits are the same. When an audit starts, you will receive basic documentation including “Inquiry Concerning Records,” “Pre-Audit Questionnaire,” and “Information/Document Request.”
The “Inquiry Concerning Records” informs you of the audit, gives you contact information and a 14-day response deadline. In reality you can get more time than the 14 days stated. You always have the right to meet and confer with a professional advisor. I have yet to see anyone penalized or prejudiced in any way for taking more than 14 days to schedule the actual audit. If you plan on seeking professional advice just call the EDD and tell them. They will give you the additional time you need. With regard to the Pre-Audit Questionnaire, it is always a good idea to get professional feedback before it is completed and returned to the EDD.
Required Documentation and Information
The primary controversy in virtually every EDD audit is what documentation is really required by the auditor. It is impossible in this short space to instruct or advised anyone on the legalities of producing documentation and information. I have many articles on this website that discuss what the EDD has a right to examine. The best advice I can give you is to consult with a professional advisor experienced in EDD audits. Just about every audit will require the production of W2s, 1099s, business licenses, and California income tax returns.
Many auditors will request that a taxpayer-employer prepare accounting related presentations and summaries including basic financial statements (balance sheet, and profit and loss statements). You should know that you are not required to prepare extraordinary financial disclosures and financial statements. Auditors are entitled to existing documentation at the time of the audit. You are not required to make their job easier or to prepare any type of presentation that has the remotest possibility of placing you in a financial corner.
The documentation requested by an EDD auditor must be relevant to the objectives of the audit. In addition the auditor has no business requesting documentation and information that the EDD already has in its files. For example, the latest request from EDD auditors is to request copies of the 3 years (12 quarters) of EDD payroll tax returns. This request, in my opinion, is improper. These returns are already in the EDD system.
Whenever I am confronted by an unusual request by the EDD, I turn to the US Supreme Court 1964 Powell Decision (US v. Powell, 379 U.S. 48). This decision involved an IRS summons request, but its holding is valid for any governmental request for documentation and information. The two most important factors in Powell is whether the information sought is relevant or not already in the government’s possession. There is nothing wrong with your requesting the EDD to explain to you why the information and documentation requested is relevant to the audit.
Seek The Advice of An Experienced Professional
At this point in this discussion, the best advice I can give you is to meet and to confer with an experienced professional who has extensive EDD audit experience. Spend the time necessary to seek this person’s counsel. Be open and honest in what you disclose and pay the price for the advice.
EDD Audits Are Expanding
My experience now tells me that auditors are taking a shotgun approach to the audit process by asking for anything and everything. An EDD audit centers on worker status issues, and issues of proper compensation. An EDD audit is not an FTB audit. Auditors have no business going into issues of what is or not income and what constitutes ordinary, necessary, and reasonable business expenditures.
Don’t Play Games With The Auditor
EDD auditors have quite a bit of power in the audit process. The deck seems to be stacked against the employer-taxpayer. Here is why playing games or being uncooperative with the auditor can backfire. Understand that most auditors have a heavy case load. They do not have unlimited time for any audit. They have pressure from managers to complete the audit efficiently, move the file off the desk, and conduct the next audit. Gamesmanship can lead to the auditor issuing an estimated assessment. This is not good. An estimated assessment is bad all around. It cannot be settled. You have to take the matter before an administrative law judge (ALJ). The ALJ also has a heavy case load. He/She is not interested in helping resolve audit problems, especially when told that the taxpayer-employer has not been cooperative. The ALJ will require that the matter be sent back to the field for an actual audit, or that you concede the assessment and pay it. You will be forced to undergo a re-audit that might involve additional quarters and a higher assessment. You also run the risk of additional penalties and interest.
EDD audits are stressful. The EDD these days appears to have an objective of expanding the traditional requests for documentation and information. Giving the EDD too much can hurt you. Failure to cooperate in the audit process may lead to an estimated assessment that cannot be resolved administratively. There is great risk of a larger assessment and additional penalties.
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 40 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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