ASK THE EDD ATTORNEY WHAT ARE THE HIDDEN DANGERS IN THE EDD STANDARD QUESTIONNAIRE?HOW CAN THESE HIDDEN DANGERS IMPACT YOU PERSONALLY?
By Robert S. Schriebman
● Please read articles 145 and 146 before you read this article. ●
In articles 145 and 146 we reviewed actual EDD interview questions asked by EDD auditors when conducting an audit. We discussed the US Supreme Court Powell decision and the standards of relevancy that are required in any tax audit, especially an EDD worker status audit.
Article 146 set forth five key questions that are required to be asked by every EDD auditor. Those questions are numbers 22 – 26, and they are set forth below:
22. Who managed and directed entity operations?
23. Who determined what bills would be paid?
24. What business expenses were paid with corporate/business funds?
25. Who authorized these payments?
26. Who signed these checks?
What do these questions have to do with the determination of whether a specific worker is an employee or independent contractor? Nothing. The purpose of these five questions is to determine who will pay the assessment bill if the corporation or LLC under examination fails or refuses to pay the eventual assessment.
The EDD Audit Report
Let me give you a little insight into a typical EDD agent Audit Report (AR). Section “G” of a typical AR is entitled “Responsible Corporate Officer/Individual Liability during the audit period.” Section G requires the auditor to answer the following questions:
Who managed and directed entity operations?
Who determined what bills would be paid?
What business expenses (include rent, utilities, other taxes, loan payments, or wages to corporate officers and members) were paid with corporate/business funds?
Who authorized these payments?
Who signed these checks?
Who will have the authority to authorize payments of the assessment?
With the exception of the last question in AR Section G, do you see how the questions in the audit questionnaire (Articles 145 and 146) are basically the same?
If the EDD assesses a corporation or an LLC, and that entity fails or refuses to pay the EDD assessment, the EDD has the right to tag you, the human, for every penny that is owed by the entity! The EDD and IRS have had a long standing information sharing arrangement between them. Not only does the responsible individual run the risk of an EDD assessment if the entity does not pay, but the IRS can also enter the scene, conduct an audit, and also issue a “me, too” assessment against both the entity and the persons responsible for handling that entity’s day to day fiscal affairs.
Key EDD Code Sections
California Unemployment Insurance Code (CUIC) Sections 1735 and 1735.1 are the weapons available to the EDD to go after responsible individuals whose corporations and LLCs fail or refuse to pay their EDD assessments. These sections “pierce the corporate veil” and allow the EDD to personally assess those individuals who are ultimately responsible for treating true employees as independent contractors. CUIC § 1735.1 deals with those responsible persons who pay workers cash under the table in violation of CUIC § 1128.1. Every tax dollar, every penalty dollar, and every dollar of interest owed by the corporation can come back to haunt those who ran the company during the audit period.
Statute of Limitations
CUIC § 1132 governs the time that the EDD has for making assessments against the responsible individual(s). If the entity filed returns, the time limit is about three years. If no returns were filed, but there was no fraud involved, the time limit is about eight years. If the EDD determines that fraud was involved, there is no time limit.
The determination of whether or not to assess responsible persons for corporate or LLC unpaid assessments is usually delegated to EDD collectors. If the collector determines that the entity has failed or refused to pay the assessment that collector must make a determination regarding the issuance of a personal-level assessment.
Here Comes the IRS
The EDD and IRS have long-standing information-sharing arrangements. This does not mean the IRS will automatically enter the scene. The IRS has the right to audit and assess business entities such as corporations, partnerships, LLPs and LLCs for payroll tax non-compliance. The IRS also has the right to go after responsible persons pursuant to IRC § 6672. This statute states in substance that any person required to collect, truthfully account for, and pay over payroll taxes who willfully fails to collect these taxes may be personally liable. It is very hard to get out of this exposure by pointing the finger at someone else within the company. Whatever you say in your defense usually goes in one ear of the IRS and out the other. Never try to defend yourself without proper representation.
Your worst nightmare can actually happen. Your corporation or LLC can be audited by both the EDD and IRS at the same time and they can each issue an independent assessment – that is two assessments. Both the EDD and IRS can assess you personally for entity level unpaid payroll taxes – that is two more assessments. Think of it – these are four separate assessments!
This article started out by setting forth official EDD questions that agents are required to ask when conducting an audit. Those questions make their way into an official EDD Audit Report. Corporate and LLC assessments as well as personal level assessments may result if you are not careful in answering what appear to be harmless questions. If you feel that you cannot answer these questions without exposing yourself to personally, get professional help before you meet with an EDD auditor.
An EDD attorney, 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 lawyer, Robert S. Schriebman 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.
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.