Ask The Edd Attorney What Are The Questions That The Edd Auditor Will Ask And How Should I Respond?
By Robert S. Schriebman
I recently received some inside EDD information on a worker-status audit I am handling for a client. This information consisted of twenty-six standardized questions given to me by the assigned EDD auditor. I am passing these questions on to you with some suggestions on how they should be answered.
Before going into this “Q&A” I am going to discuss some general rules that are very important when the EDD asks questions or makes demands for the production of documentation. Questions and demands by the EDD that you turnover certain books and records must be made pursuant to standards of relevancy. I get too many demands from EDD auditors that my clients turnover their books and records that are not only burdensome to produce but are not truly relevant to the purpose of the examination. These EDD auditors have been asking for these records for years without giving any thought to whether their request is or is not appropriate.
In 1964, the U.S. Supreme Court issued its famous Powell decision 379 U.S. 48 (1964). The case involved an interpretation of Code § 7602. This is the basic administrative summons provision of the Internal Revenue Code. The Powell case did not permit the IRS to go on a “fishing expedition.” That is to say, it did not give the IRS carte blanche to look over all of the taxpayer’s books and records in the hope that something could be found. The IRS must have a specific set of records or a specific reason before a summons can be validly issued. These rules apply to any taxing agency including the FTB, BOE, and the EDD.
The Powell decision gave us four key elements to determine whether or not the demands of any taxing agency are proper. These key elements can be applied to EDD audits in the same way they were applied to IRS audits. Each element must be met in order for the EDD to make a valid request for information and documentation:
- The IRS audit investigation must be conducted pursuant to a legitimate purpose. The usual EDD employee versus independent contractor audit is usually done pursuant to the EDD’s right to investigate worker’s status and the proper treatment of workers under the tax and labor laws.
- The questions or documentations sought must be relevant to that legitimate purpose. In other words, will the information sought throw light upon the legitimate EDD inquiry?
- The information the EDD wants must not already be in its possession. Tax auditors lose things. When they do they want you to resend them the information or documentation. This is a judgment call on your part. Choose your battles carefully.
- The EDD needs to take the required administrative steps before a subpoena. The issuance of a subpoena is a rare event. When this does happen it usually means that a taxpayer is very uncooperative or has been unresponsive. If you get a subpoena, be smart – call an attorney. You may have exposure for serious and several EDD penalties.
For more information on the Powell case see my book entitled How To Practice Before The New IRS, Commerce Clearing House, 1999
With the Powell case in mind, let us look at these official EDD audit questions:
Caveat: It is important to keep your answers accurate but short and succinct. When a person is being audited there is a risk of saying too much. Remember, the “tax man” is not your friend.
1. When did your business commence operation?
Sample answer: January 1, 2010
2. What is the nature of your business?
Sample answer: Licensed general contractor for residential construction
3. What type of license do you need to operate this business?
Sample answer: California State General Contractor’s License
4. What are your business hours?
Sample answer: We are semi retired and only work half days: 7:00 a.m. – 7:00 p.m.
5. What type of payments do you accept?
Sample answer: Checks only.
6. What is the entity type? If corporation, who are the corporate officers? Who is the corporate officer on payroll?
Sample answer: California corporation. Jack G. Brown is the sole corporate officer and the officer in charge of payroll.
7. If not on payroll, how were you able to maintain standard of living? Who advised you that you do not need to be reported on payroll?
Sample answer: Not applicable.
Caveat: If you have a problem answering this question seek the advice of competent legal counsel immediately. The wrong answer to this question can be potentially dangerous.
8. Do you have any other locations? If yes, please provide address(s).
Sample answer: No other location
9. Please explain the structure of the company. Chain of command.
Sample answer: Jack G. Brown is the sole corporate officer. (Under California small corporation law a single individual can be all corporate officers i.e., president, secretary, and chief financial officer.)
10. What type of accounting system do you maintain? Cash or accrual; computerized or manual posting; inside accountant or outside accountant.
Sample answer: The corporation is on the cash basis of accounting. We use a computerized accounting system.
11. Can you explain how a check posts in your accounting system? Example, a check for an expense – is it manually written and posted to the system or do you input the information in the system and then print it out? Does the paycheck post the same way?
Sample answer: A hand written check is printed on a “carbon” copied ledger sheet. Our internal bookkeeper posts the check entries onto our internal computerized system. At the end of the month these sheets and our internal computer data are given to our CPA firm to categorize for our general ledger. Payroll checks are handled the same way.
12. How many employees do you engage? What types of services do they perform?
Sample answer: We have one receptionist and one internal bookkeeper. These individuals are W-2 employees together with the sole corporate officer, Jack G. Brown. The corporation hires licensed sub contractors . The sub contractors’ licenses are checked annually to make certain they are current.
13. How often do you pay your employees?
Sample answer: Employees are paid twice a month on the 1st and 15th of each month.
This concludes Part 1 of this 2-part article. In Part 2 we will review questions 14 – 26.
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.
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