ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE ABSENCE OF EDD AUDITOR ACCOUNTABILITY IN CURRENT EDD AUDITS
By Robert S. Schriebman
I have been dealing with EDD auditors throughout California for many years. For the most part, I have held them in high regard as being thorough and professional in their conduct in the examination process. They truly observe that portion of the Employers’ Bill of Rights that states, “You have the right to an impartial audit and a full explanation of the audit findings.” Both the letter and spirit of this statement has always meant to me that an employer-taxpayer is entitled to fair treatment and a level playing field. No assessment should be issued unless and until all relevant records have been examined and relevant questions asked by the auditor and truthfully answered by the employer-taxpayer, or the employer-taxpayer’s representative. No guess work and no assumptions made without the examiner exhausting all reasonable avenues of investigation. This makes for accountable EDD examinations. EDD auditors must be accountable to those whom they audit.
I am, therefore, saddened and disturbed that I have to inform my readers that I have witnessed truly irresponsible and biased anti-employer audit results within the past several months by several EDD Area Audit Offices (AAO). There now seems to be an absence of accountability at the EDD. In this article I am going to give you several examples that have caused me to lodge complaints at the highest levels within the EDD. Before doing so however, let’s review what is meant by “accountability.”
The Definition of Accountability
One cannot write an article about accountability without knowing its definition. To that end, I have researched four authoritative sources to determine exactly what is meant by “accountability”:
· Black’s Law Dictionary: “State of being responsible or answerable.”
· Webster Encyclopedic Dictionary: “The state of being accountable or answerable…responsible for a trust. Liable to be called into account, answerable to a superior.”
· Brittanica Dictionary: “Liable to be called to account, responsible. Capable of being accounted for or explained.”
· Oxford English Dictionary (OED): “The quality of being accountable, liability to give account of and answer for, discharge of duties or conduct, responsibility, amenableness…” “Pushing to its utmost extent the accountability of government to the public.”
Of all of the above definitions, I favor the OED version because it mentions governmental accountability.
To summarize, the simple definition of accountability is to acknowledge that our decisions and actions have consequences. We are responsible for those consequences. While it is human nature to point the finger of blame at others, ultimately we are responsible in the end. This is why EDD auditors must take responsibility for their actions during the examination process. In my opinion this means the following:
· Properly obtain from the employer-taxpayer all the relevant documentation necessary for each year under examination.
· All questions should be asked in advance of any proposed assessment.
· No assessment should be issued without first communicating with the employer-taxpayer or the duly authorized professional representative. A full and frank discussion should be had wherein the auditor explains the official position of the EDD and allows for a complete response and rebuttal. There are too many Notices of Assessment issued primarily upon assumptions on the part of the auditor, without giving the employer-taxpayer an opportunity to challenge those assumptions.
· No final Notice of Assessment should be issued unless and until a preliminary Proposed Notice of Assessment is first issued giving both sides an opportunity for a dialogue and resolution before a final Notice of Assessment is necessary.
· If the employer-taxpayer contacts the auditor after a Notice of Assessment has been issued, it is improper for the auditor to tell the employer-taxpayer not to be concerned because the EDD will take a second look at the matter. Instead the first thing that the auditor must tell the employer-taxpayer is to file a petition with the CUIAB first, to protect the employer’s rights, and THEN the auditor will take a second look at things. Too many naïve employer-taxpayers are lulled into a false sense of security and fail to timely file a petition only to be declared in default and subject to enforced collection by an EDD collector.
Recent Disturbing Examples of the Absence of Accountability in EDD Worker Status Examinations
Example #1: Violation of a Valid Power of Attorney
The EDD’s Employers’ Bill of Rights states the following: “You have the right to have someone, such as an attorney, enrolled agent, or accountant, present during the audit or to represent you in your absence.”
If you are an employer-taxpayer under EDD audit review, and you are represented by a professional who has filed a valid Power of Attorney with the EDD, you have the right to expect the EDD to honor that Power of Attorney. A Power of Attorney means that your attorney, CPA, or Enrolled Agent speaks for you. He or she becomes the employer- taxpayer during the examination process. The EDD must honor and respect that Power of Attorney so long as it remains in force. This also means that all communication from the auditor must go through your representative. If the auditor has questions, they are to be posed to your Power of Attorney. It is then your representative’s job to communicate with you, obtain the proper information, and to respond to the EDD auditor. It is the same process when it comes to the EDD’s request for documentation. Think of your Power of Attorney as a filter to prevent you from saying the wrong thing or not giving the EDD documents they are not legally entitled to receive.
It is totally improper for an EDD auditor to ignore or bypass the holder of a valid Power of Attorney. This is why I was very disturbed to learn that an EDD auditor ignored my Power of Attorney and started sending emails directly to my client, seeking answers to questions and requesting documentation that I would have refused to provide for several reasons. My client had no idea that the auditor’s conduct was a serious violation. The client also furnished the auditor documentation that I would have not provided in whole or in part.
I found out about this violation after several exchanges between the auditor and my client. My client finally thought it was a bit strange that the auditor was continually communicating directly with them, and notified me of the violation. When I learned about all this, I confronted the auditor as to why she ignored my Power of Attorney. The auditor refused to respond to me. I contacted her immediate superior who also failed to respond. I had no choice but to file a complaint with the Director of the EDD. The case is currently under investigation. In the meantime, however, the damage has been done.
Forcing An Assessment Against A Quarterly Deadline
Most EDD audits involve twelve to thirteen payroll tax quarters. Every payroll tax quarter has an audit expiration date. The calculation is set forth in CUIC § 1132, but in a nutshell, it is one month after three years from the quarterly filing deadline. As an example, the second quarter of the year 2016 expired at the end of July 2019.
An auditor facing an audit statute deadline has several options:
· The auditor can ignore the expiration date and extend the audit period for an additional quarter. In our example above, because the second quarter of 2016 expired in July, the auditor can start the audit from July 1, 2016 to June 30, 2019.
· The auditor can issue a Notice of Assessment for the expiring quarter only. This Notice may be based upon the examination of actual records or an estimation. If issued on an estimation, the employer-taxpayer has the right to seek a reduction by furnishing records, etc. after the Notice is issued.
· Request the employer-taxpayer or representative for an extension of the time for audit using EDD Form 1977. The auditor will usually request an additional 90 days to complete the examination for that quarter.
· Avoid telling the employer- taxpayer that the test year will only be one year. Inevitably, EDD auditors always find “irregularities” in that year and expand the audit into twelve or more payroll tax quarters. Tell the employer-taxpayer, honestly, that the audit will usually cover three years or twelve payroll tax quarters.
It is a disservice to the taxpaying public to force the issuance of a Notice of Assessment, without conducting a professional level objective examination, simply because the auditor is running behind time and is under pressure from management to complete the audit.
Example #2: Forcing An Assessment For Three Years When The Auditor Has Only One Year Of Records
This second example involves an employer-taxpayer who began the audit process on his own without professional representation. He gave the auditor one year of records only. I was retained to complete the examination and to represent my client for a post-assessment resolution. My client retained my services in mid-July 2019. I immediately contacted the assigned auditor by sending my Power of Attorney and a request that I be contacted for any additional documentation and information needed to complete the examination. I heard absolutely nothing from the auditor. As July came to a close, I was expecting a request from the auditor to extend the statute of limitations for examination for the second quarter 2016. Instead I received a Notice of Assessment, dated July 31, 2019 for the period beginning April 1, 2016 through March 31, 2019.
The auditor had records for only the year 2017, but issued an assessment for the years 2016, 2018, and a portion of 2019 without examining any records whatsoever!
The auditor never requested an audit statute extension for the second quarter of 2016, which I would have gladly given in the best interest of my client. I tried several times to reach out to the auditor for an explanation as to how a 3-year assessment could be based upon only one year of records. The auditor never responded. The auditor never took responsibility for making such an abusive assessment. There was no accountability from the auditor and none from management.
I have seen several cases recently where an auditor issued a three-year, twelve quarter assessment based upon documentation and information for only year.
In both matters, the auditor failed to ask for a statute extension that would have prevented the issuance of a Notice of Assessment based upon incomplete records.
Example #3: Forcing An Assessment When Up Against A Statute Deadline
A general contractor was being audited for issues relating to 1099s. The audit started in March 2019 and the usual records were provided including the answers the usual auditor questions. The employer-taxpayer’s controller was very responsive and thorough in responding to requests from the EDD. In mid-July 2019 the auditor prepared an elaborate spreadsheet and identified almost 150 named individuals receiving 1099s. The auditor requested copies of subcontractor licenses for each. We received this extensive response together with copies of licenses from the client and sent them to the EDD auditor by overnight delivery. On July 31, the auditor sent an email acknowledging the receipt of these documents and stated that she wanted to get the audit closed by the end of the day. At the same time, the auditor sent another email requesting copies of invoices from many of these subcontractors. I responded to the auditor by requesting that more time was needed to do a complete analysis; it would be unfair to my client to close the case prematurely.
In early August my client received a Notice of Assessment issued on July 31. Now, it takes quite a bit of time and several levels of review before a Notice of Assessment can be issued. The Notice cannot be issued on the same day the auditor represents the audit is being closed. This told me that the auditor had made an assessment decision days before July 31 and that I was being misled by representations that all of the documentation submitted would be carefully reviewed.
The auditor forced the assessment because the July 31 deadline was fast approaching. Thus, the audit was forced and not based upon a professional level objective examination. Obviously the additional documentation requested on July 31 arrived after the Notice was issued. All attempts to reach the auditor and management for an explanation and a request to reopen the audit received no response.
The auditor never took the time to request an extension of the statute of limitations for the second quarter of 2016. It would have been much easier and fairer to the employer-taxpayer to extend the examination statute so that all relevant documentation could be taken into consideration.
Neither the auditor nor management acknowledged accountability for this clear abuse of an employer-taxpayer under examination
Common Threads In the Above Examples
One common thread ran through all three of the above examples. All employer-taxpayers were general construction contractors. Was this just a coincidence? Unfortunately, in 2019 I have seen many examples of audit abuse in the construction industry. The second common thread is the refusal by the auditor and management to be accountable and to take responsibility for the results of the examination and how they treat anyone under audit.
Lessons to Be Learned
If you are under audit by the EDD, and you are represented by a professional with a valid Power of Attorney on file, be alert as to any contacts directly to you by your assigned EDD auditor. Do not give the auditor any information or documentation; instead notify your representative immediately if you are directly contacted by the EDD.
In today’s audit climate I do not recommend going it alone. It is very important for you to hire competent experienced professional representation if you are under audit. By “competent” I also mean that your representative must stand up to the EDD and be prepared to confront them if the auditor is abusing your rights under the Employer’s Bill of Rights.
EDD auditors and management must be accountable during the entire audit process and responsible for how they treat the employer-taxpayer under examination.
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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