ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SHOULD YOU GIVE THE EDD AN AUDIT STATUTE EXTENSION?
By Robert S. Schriebman
Whether you are audited by the IRS or the EDD it is a common practice for the auditor to request that you sign a form extending the statute of limitations for assessment on a specific year or a specific payroll tax quarter. This article will take a look at the type of extensions requested by both the IRS and the EDD. We will also discuss whether you have an opportunity to request concessions from the auditor in exchange for granting a statute extension. If you grant the extension, the IRS and the EDD will have a specific additional amount of time to issue an assessment for the specific tax year or payroll tax quarter.
Unfortunately, many auditors act like they have an absolute right to be granted a statute extension. This is nothing more than a ploy to get you to sign an extension. Let’s be clear – the IRS and the EDD do not have an absolute right to any extension. It is up to the taxpayer, you, to decide whether or not to grant the extension. A statute extension is matter of grace from your end.
Types of IRS Statue Extensions
The IRS has two types of statue extensions. The first type is Form 872. This is the most common extension form used by the IRS. This form gives the IRS a specific future date to issue an assessment. For example, suppose you are audited for the tax year 2016. Assuming you filed your return timely, by April 15, 2017, the normal audit time expires April 15, 2020. The IRS auditor may request an extension until October 15, 2020 or even April 15, 2021 to complete the audit and issue an assessment, if any.
The second example, and the one the IRS does not like to talk about, is Form 872A. This grants the IRS an unlimited time. Why would you sign such an extension? Because you can terminate the time limit by giving the IRS Form 872T, that terminates the audit statue within several months. In other words, you control the time frame.
The EDD Statute of Extensions
The EDD has only one type of statute extension Form DE 1977. This form is used on a quarter by quarter basis. For example, the first quarter of 2017 will expire by April 30, 2020. If the audit is delayed, or the auditor is running behind time, you will be asked to sign an extension for that quarter until a specific date in the future such as June 30, 2020.
Things You Need To Know Before Granting a Statute Extension
As I mentioned earlier, granting an extension is up to you. Never get conned into believing that you must grant an extension. Secondly, you have the right to request certain concessions from the auditor. For example, you and the auditor can agree, in writing, that no penalties will be assessed for the quarter in issue. You may also agree that certain workers shall be acknowledged as independent contractors. Always get the deal in writing.
The closer the EDD quarter is to the audit expiration date the more desperate the EDD auditor becomes to seek an extension. This may provide you with leverage you did not have before.
You do not have to accept the date the auditor wants on the extension form. For example, as I mentioned above, the auditor wanted until June 30, 2020 to issue the NA. You have a right to say, “No, I want the extension to expire on May 31, 2020.” I have often been successful in shortening the auditor’s deadline.
It is not uncommon, especially with an EDD auditor, to be told that no concessions will be granted and no deal will be made for your granting an extension. You may also be threatened by the auditor that if your do not grant the extension, the auditor will be forced to issue a Notice of Assessment (NA) for the specific quarter in issue. I have learned not to be intimidated by threats of receiving an NA. Many times it is too late for the auditor to issue an NA because it takes time to process the NA and it must go through several hands before it is finalized and issued. If the NA is issued, the chances are the auditor will have done a shoddy job and the assessment may be full of holes and subject to attack.
Implied Covenant of Good Faith And Fair Dealing
A statue extension is essentially a contract. You agree to grant the extension and the EDD agrees to issue an assessment on or before the expiration date of the time period stated in the extension. In all contracts there are certain implied promises. These are called implied covenants. Statute extension is no exception. It is implied that the EDD will use its best efforts to perform an objective and professional examination within the letter and spirit of the Employers’ Bill of Rights. If the auditor simply takes your extension and does nothing to complete a professional examination, the auditor has not done his/her job. The auditor has broken the implied promise of good faith. In that case, you may argue that the statue extension was not negotiated in good faith and should be disregarded. A judge may agree with you and lower the assessment.
Whether it is the IRS or the EDD granting a statute extension is your call. Do not let any auditor tell you that you have no choice but to sign the form. Go for it – ask for concessions or ask that the extension time be shortened. Monitor the auditor to make sure he/she is doing a proper job and not letting the case gather dust because you granted an extension.
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.
Web Site Article 396