Ask The California Employment Tax And Payroll Tax Attorney – The New Version Of The Edd’s Entrance Interview Form Asks Disturbing Questions – Part 2
By Robert S. Schriebman
This is Part 2 of a 2-Part series.
A new client presented me with the EDD’s latest version of its Entrance Interview Questionnaire. Inreviewing the Questionnaire, I found several disturbing and potentially dangerous probing questions that I had not previously seen in older versions.
In Part 1, I discussed EDD probes relating to officer functions vis a vis personal exposure for unpaid entity level assessments and professional advice relating to establishing reasonable compensation. In this Part 2, I will discuss worker status determinations under the new ABC Test and officer compensation for corporations and LLCs.
To Answer or Not to Answer – That is the Question!
There is always a tension that arises when the EDD requests information either in the form of an email, questionnaire or worker interview correspondence such as postcards. Clients ask if they or their workers are legally required to respond. The answer is not always clear. One thing that is clear, however, concerns the short time deadlines EDD auditors put on employers and to demand a response within a matter of days. I always get the image in my mind of the high pressure used car salesperson. One always have the right to consult with a knowledgeable tax professional before meeting any EDD imposed deadline. This is straight out of the EDD’s publication Employers’ Bill of Rights.
There is safety in not responding but there is also a corresponding risk that failure to respond may yield dire consequences from the EDD. Looking at the world through an auditor’s lens, the employer-taxpayer is legally bound to respond because, according to the EDD, they have the right to examine books and records and ask their questions. From my point of view, however, the employer-taxpayer is not legally obligated to answer any EDD probe and one is not legally obligated to respond to the Entrance Interview Questionnaire. You are also not legally required to respond to the initial Pre-Audit Questionnaire that accompanies every EDD audit notice. The EDD cannot force you to answer any of their questions, whether in the form of an email, or a formally prepared Questionnaire. The EDD does have the right to compel the production of documents by use of a subpoena. Having said this, the EDD cannot enforce the subpoena if you refuse to respond other than bringing the matter before a Superior Court judge, which I have never seen done in all my years of practice.
Worker Status – Independent Contractor
Here is what the Questionnaire asks:
Did the employer consult with their CPA, another tax professional or the Department in regard to how to classify the Form 1099 recipients/subcontractors/outside service individuals engaged?
- If yes, with whom and when was this information received? Please provide their contact information. If the employer received advice in a written communication, please provide a copy of the written advice.
- If no, please explain what factors were considered by the employer to determine that the workers should be classified as independent contractors/subcontractors/outside service?
Beginning January 1, 2020, the ABC Test replaced the common law test to determine the status of workers as either employees or independent contractors. Since there is a change in test, did the employer seek advice from their CPA, another tax professional or the Department?
- Please provide the professional advice the employer received, if any, which resulted in their decision to classify the workers as independent contractors rather than employees beginning January 1, 2020.
- If the employer did not consult CPA, another tax professional or the Department, provide the basis for the employer’s decision to classify the workers as independent contractors rather than employees.
Has the classification of the workers as independent contractors been challenged by any other state or federal agencies? Has a challenge to a classification been made by a worker or on their behalf? Has there been litigation involving the classification of the workers in court?
Bob’s Take Away
All of these questions have but one purpose for the EDD – the assessment of the negligence penalty set forth in CUIC § 1127. In the past, most auditors accepted a verbal explanation that the employer was advised by either their attorney or CPA as to how to treat service providers who are not employees. Very few auditors demanded any type of a formal written opinion letter. Besides, many of my clients’ advisors were either retired or deceased. These questions tell me that a simple statement as to whether or not the employer had been so advised, may no longer be a get-out-of-jail free card.
The EDD Questionnaire wants to know if worker status has been challenged by the federal government. An IRS audit is enough to grant the employer safe harbor status for future determination pursuant to Section 530 of Revenue Act of 1978. The employer is granted safe harbor status even if the IRS audit has nothing to do with a worker status examination. However, here we have a conflict because the EDD does not recognize whether or not the employer has safe harbor status.
Corporate Officer Compensation
Part of the audit process is to discuss any questionable payments issued from the corporation to the corporate officer to verify if those payments were used for corporate business expenses or corporate officer’s personal expenses. Additionally, if services are rendered by the corporate officer, then a determination of reasonable compensation for the corporate officer is to be addressed.
Bob’s Take Away
The EDD uses the term “questionable payments” when assessing additional compensation for corporate as well as LLC shareholders/members. Here is where employers under audit make a huge mistake by going it alone. These employers give the EDD auditor all kinds of damaging information and documentation such as credit card statements. When trying to explain payments made by the entity, employers commonly say things they shouldn’t. Reasonable compensation issues are very complicated as explained in Part 1. Here is where professional representation by experienced practitioners really pays off.
The EDD’s new Entrance Interview Questionnaire has two parts. The first part consists of the form questions I discussed in Parts 1 and 2. The second part of the form, consists of personalized questions the auditor will ask you about the specific aspects of your business as well as asking for an explanation of so-called “questionable payments.” These can cover anything from payments made to outside service providers to personal expenses paid through business credit cards. Great care must be taken in answering these questions because once you put your answer in writing, you can retract them…and some of your answers could be dangerous confessions.
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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