ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – YOU, THE EMPLOYER, ARE UNDER NO DUTY TO DO THE EDD AUDITOR’S HOMEWORK
By Robert S. Schriebman
In previous articles I have informed you that EDD audits are becoming more expansive and EDD auditors more aggressive in the documentation and information they are demanding. This article is not the place to discuss what documentation and information should generally be provided and which should be withheld. Suffice it to say that you are required to provide documentation and information that has historically been deemed relevant, necessary and reasonable. On the other hand, you are not required to do the auditor’s work. Having said this, you must be aware that auditors are now pushing the envelope and asking the employer to take extraordinary measures to make the auditor’s job easier.
Don’t be fooled. Your cooperation is no assurance that your EDD auditor will express his/her appreciation by not assessing penalties or seeing things your way when it comes to your treatment of workers as independent contractors.
When the auditor obtains W2s, 1099s, and relevant portions of general ledgers, they will perform many different functions with that raw data. For example, the typical EDD auditor will test the amounts stated as payments to W2 wage earners and 1099 recipients to determine if the payments set forth in the general ledgers jibe with those forms. If the ledgers show that workers were paid more than was stated on the W2 or 1099, there will be additional assessments in taxes and Worker Information Return Penalties. The auditor will also use this information to compute the usual taxes set forth in the Notice of Assessment and accompanying schedules.
These days find auditors carrying heavy case loads and they are under time pressure from management to complete their assigned audits on schedule. What do many auditors do? They try to get you, the employer, to their work for them.
Let me make it clear, you are only obligated to give the auditor ordinary, necessary and relevant source documentation. You are not obligated to prepare schedules, and other presentations examples of which will be discussed in this article.
You Are Not Obligated to Do the EDD Auditor’s Homework
Let’s look at a few examples of what is currently being demanded of you the employer that you are not legally obligated to do.
Preparation of Financial Statements
When the auditor initially contacts you, he/she will demand quite a long list of documentation and information they feel you are required to provide them. One thing that stands out is the request that you furnish updated Profit and Loss Statements and Balance Sheets. Why the auditor feels that this is relevant causes me to scratch my head. Most businesses these days are either an LLC or incorporated. EDD auditors always request copies of the last three years of filed tax returns. They even request tax returns yet to be filed! Corporate returns already have year-to-year Balance Sheets and the return itself is its own Profit and Loss Statement.
You are under no legal obligation to have your accountant prepare fresh updated financial statements for the auditor. Keep in mind that auditors are constantly on “fishing trips.” Don’t take the bait.
Detail Payroll Journals
A recent EDD auditor demand for client documents stated the following request: “Provide a detailed payroll journal for the year 2018 showing all tax withholdings/deductions for each employee per pay period.” I sent the auditor original entry documents setting forth all of this data. My client was not required to spend resources with its CPA firm to provide a detailed payroll journal. The auditor can do this on his/her own; why should my client have to do the auditor’s homework?
You are not required to recreate or prepare any new presentations that were not part of your original source documentation at the time you were initially notified of the EDD audit.
Copies of All Checks for the Audit Periods (12 Quarters)
The EDD likes to go after general contractors. In a recent audit, the auditor requested copies of all canceled checks for the past three years. This illustrates another unreasonable demand by today’s EDD auditor. Assuming that you even get copies of checks these days, the only checks relevant usually relate to compensation paid to employees and 1099 recipients. Other checks written for rent, utilities, inventory, etc., do not need to be produced.
The Super Project
Here is perhaps the most outrageous request received yet. The EDD auditor conducted an examination of my general contractor client. Like most contractors, the employer engaged the services of many subcontractors. We gave the auditor the usual documentation, but he wanted my client’s accountant to do his work. Here was his demand:
“Prepare an Excel schedule for each year of the audit period, that contains each 1099 recipient and corresponding transactions that leads to the total using column headings: Date, Check # or EFT, Bank Account, Name of Recipient, Amount.”
RIDICULOUS! All audits are burdensome to the employer, but no request by an EDD auditor shall be overly burdensome.
I called the auditor and explained to him that we are not required to prepare any type of schedule or presentation that did not already exist on the day that the employer was notified of the audit. To my surprise he agreed with me! He also told me that the above request would help him get through the audit process quicker. Our job as counsel is to provide appropriate audit documentation and information.
EDD audits are expanding with a goal of greater employer transparency. Overworked EDD auditors now expect employers to provide a helping hand in making their job faster and easier. This will create tensions in the future and hard decisions may have to be made by the employer public as to just how much they wish to cooperate.
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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