ASK THE EDD ATTORNEY – I AM BEING AUDITED BY THE EDD. WHAT DO I DO FIRST?
By Robert S. Schriebman
An audit is a stressful process. If and when you are being audited by the EDD, you are caught in the middle of an EDD probe. It is difficult to take a giant step back and take a look at the audit process objectively and to focus upon those things you need to do first. This article will discuss a few basic but important pointers that I hope will be of help to you by not only calming your anxiety, but to help you avoid making one or more costly mistakes.
The tips below are not meant to be all inclusive. EDD audits can be complicated and time consuming. Over the years I have counseled many people who were under great stress. Some of these people have called over the phone with their questions and their fears, and others have come into the office for representation and consultation. The following tips represent real-world advice that I have learned over the years. I would like to share them with you.
Tip No. 1
Read over the initial audit documents very carefully. Determine if there is a deadline set by the EDD to respond to the initial audit notices. Carefully review the pre audit questionnaire to determine if there is any information that you believe may hurt you if disclosed. You must be truthful and honest with the information and documentation that you provide to the EDD.
If the documentation you received requires you to call and make an appointment, respond immediately. If you need more time to prepare or you wish to seek professional advice, let the appointment secretary know what you wish to do. One of the most important things in any audit is timely communication.
Tip No. 2
Review the EDD “Employer’s Bill of Rights.” You may obtain a copy of this document by going to the EDD web site. It is also known as EDD Form DE195. While most of the “rights” concern the post-assessment process of an EDD assessed deficiency, there is one very important right concerning courteous and timely service. The EDD has interpreted this provision to allow a taxpayer the right to seek independent professional advice. Even if you have a set appointment for your EDD audit, you have a right to postpone this appointment while you seek the advice of one or more professional practitioners. Never be rushed into an audit!
Tip No. 3
Review the EDD’s Document Request. This is Form DE231TA. This is a standard form that is included in the initial audit package. The EDD requests quite a bit of documentation and information. They follow the philosophy that if you do not ask, you do not get. The EDD may ask for documentation that you are not obligated to give them such as IRS tax returns. They often ask for documentation that they already have, especially under the category “State Employment Tax Reports.” The EDD wants you to provide these documents because it takes them longer to get them internally. Documents such as check registers, cancelled checks, and bank statements can be burdensome and costly to produce especially when it comes to check documentation because very few banks return your original checks to you. For many EDD audits this information and documentation is irrelevant.
At the top of the Document Request form there are dates showing the period of examination; for example, 10/01/2010-09/30/2013. When you assemble your documentation and information, pay particular attention to the audit period. Do not give the EDD records prior to 10/1/2010, or records beyond 9/30/2013. You may open yourself up for a more extensive audit with a potentially larger assessment.
Tip No. 4
Do not assume that just because you are a good and honest business person the EDD will believe your story, and all will go well with the audit. There is rarely a week that goes by when I do not get a call from a very upset person trying to argue with me that all he or she needs to do is go down to the EDD and explain why workers have been treated as independent contractors, and the audit will go away. The job of the EDD is to bring in money into California’s treasury. They have their own point of view about industry practice. The EDD may have an agenda to reclassify workers in your industry as employees on a state-wide scale so that the generation of additional tax revenue will be substantial. Sitting down with the EDD and explaining your position is very much like a child trying to explain to a parent why he or she got caught with their hand in the cookie jar. While the parent may listen and forgive, that is not the job of the EDD. The EDD auditor is not your friend.
Tip No. 5
See a professional tax advisor before you meet with the EDD, give any documents to the EDD, or make any statement that will be used against you. A consultation with a professional may mean the difference between audit success and a potential economic disaster. EDD laws are complicated, and they are often issues of tax procedure that you need to know to protect yourself. Make the investment – it is worth it!
Tip No. 6
I have been handling tax audits for many years, both California and IRS. I have learned a thing or two about the audit process that I would like to pass along to you as follows:
- Don’t be an ostrich. All audit notices require you to contact the taxing agency in a timely manner to make an appointment. If you ignore this deadline you send a signal to the EDD that you are an uncooperative taxpayer. Call the EDD to set up an appointment or to inform them that you are seeking professional advice and need to postpone the initial audit conference.
- Be prepared. If you are going to handle the audit yourself go into the audit with the proper documentation and backup information. Never give any government agency original documents – copies only.
- Organization is the key to success. Present your information and documentation in an organized fashion on a worker-by-worker basis. Have a separate folder for each worker with proper documentation in that worker’s file.
- Don’t think the EDD audit a fool. Your auditor is a trained and experienced professional. Give him or her credit for having as much smarts as you have – enough said.
- Know your weak points. Be upfront with your EDD auditor. If you have treated some workers as independent contractors who really should have been employees, admit it.
- Know when to keep your mouth shut. There is no law or moral edict requiring you to volunteer potentially dangerous information to the EDD auditor.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
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 and 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.