ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – YOU DO NOT HAVE TO GIVE THE EDD EVERYTHING THEY ASK FOR!
By Robert S. Schriebman
When you are notified by the EDD that you are being audited, you will receive the following documents:
- Inquiry Concerning Records
- Pre-Audit Questionnaire
- A long list of “required” documentation
EDD audits are becoming more intrusive. Auditors not only want each and every document listed on their pre-printed form but also are requesting even more. This article will discuss whether the EDD is entitled to each and every document they believe is required.
The law allowing for the inspection of an employer’s books and records is set forth in CUIC §§ 1085 and 1092.
CUIC § 1085 merely states that an employer is required to keep truly accurate records of all workers and their status including wages paid to each worker.
CUIC § 1092 states that every employer shall furnish to the EDD, upon demand, a sworn statement of the matter set forth in CUIC § 1085. An employer’s records relating to workers and their compensation shall be open to inspection by the EDD at any time during normal business hours.
Both the letter and spirit of these two statutes gives the EDD the right to inspect ordinary and necessary records relating to workers whether these workers are employees or outside contractors. The timeframe for these inspections (audits) is governed by the statute of limitations set forth in CUIC § 1132.
EDD Minimum Required Records
According to EDD Publication DE 231 TA, the EDD takes the position that it is entitled to the following records as a minimum:
- Check registers, check stubs, canceled checks and bank statements
- General ledger and general journal
- Annual income statement and balance sheet
- Cash payment records
- City business license, liquor license, CDTFA number, partnership agreement, or Articles of Incorporation
- Federal/State income tax returns
- 1096 and 1099 Forms, W3 and W2 Forms, W4s
- Payroll records
- Federal quarterly payroll tax returns (941) and FUTA returns (940)
- California payroll tax returns, DE 9 and DE 9C
The Fourth Amendment of the US Constitution
On December 15, 1791, Congress enacted the Fourth Amendment dealing with searches, seizures and warrants. The Fourth Amendment states the following:
“The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
When we think of the Fourth Amendment, our thoughts usually go to criminal activities, search warrants and Congressional Hearings. But, the Fourth Amendment is very broad and also covers civil intrusions, such as state and federal tax audits. Does the Fourth Amendment have anything to do with EDD audits? Yes. Over the years, both state and federal courts have interpreted the Fourth Amendment vis-à-vis tax audits to be governed by the standard of relevancy. There is a constant battle between the meaning of relevancy and the taxing agency’s feeling of entitlement.
In my practice I have found over the years that EDD auditors feel an entitlement to each and every document on the above list solely because it says is listed! When I ask an auditor to explain the relevancy of their request, I am always presented with “the list” as final authority.
My Christmas List
When I was a young child, I always made a list of what I wanted Santa to bring me. One of the items I listed was a Lionel train set. Christmas came and went but no train set. When I expressed my disappointment to my father, he would gently tell me, “Bob, just because you made a list does not mean that you are entitled to anything.”
Relevancy and the US Supreme Court
The Fourth Amendment standard applicable to administrative investigation, such as an EDD audit, requires that any requested documentation and information be “relevant” to the audit process. The information sought must be reasonably relevant to the audit process, and this means that it is not plainly immaterial or irrelevant to the purpose of the EDD’s examination. In 1943 the US Supreme Court decided the case of Endicott Johnson Corp. v Perkins, 317 US 501, the Court stated that the Fourth Amendment is satisfied if documents are specifically described and relevant to a lawful authorized inquiry. In 1964 the US Supreme Court revisited the issue in US. V Powell, 379 US 48. The Court stated that the governing principle is always relevancy, and that the government is requesting documentation and information not already in its possession.
Relevancy and the California Supreme Court
The relevancy standard governs California taxing agencies. The records request must be relevant to the government’s inquiry, and that the demand not be too indefinite. Brovelli v. Superior Court, 1961 56 C2d 524. The information sought must be “reasonable relevant to the intended investigation.” 1980 Younger v. Jensen, 26 Cal 3rd 397.
Taking into account the totality of the Fourth Amendment as interpreted by the US Supreme Court and the California Supreme Court, one has to revisit the EDD’s list of required documentation under the light of relevancy. Most of the documentation sought by the EDD in its list is totally proper, but many of the so-called required documents violate the relevancy test that we all must live by. This is why it is vital that you have professional experienced representation when you are being audited by the EDD.
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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