ASK THE EDD LAWYER – GETTING INTO TROUBLE WITH THE EDD PART 1
By Robert S. Schriebman
February 24, 2016
This is Part 1 of a two-part series that will discuss the areas that I have found in my practice to be the cause of employer misery if you happen to be unlucky enough to draw an EDD audit. EDD audits are becoming more frequent. The EDD has hired and is currently training many new auditors. The unfortunate world view of most of these auditors is negative when it comes to employer compliance with the tax laws and the California Labor Code.
In the past several months I have received calls from employers throughout California and have been on the receiving end of some very bad practices from these people. I have turned down representation because I truly believed that there was little or nothing I could do by way of “damage control” because of the improper business practice or plain negligence of these individuals.
In Parts 1 and 2 I will discuss with you what not to do in your business practice to cause the wrath of the EDD and possibly the IRS as well.
How Employers And Their Professional Representatives Are Getting Into Trouble with The EDD Before The Audit Begins
Failing To Give Workers W2s or 1099s
There are over 14 penalties an employer can incur in an EDD audit. Two of the most severe penalties deal with either the total failure to give workers W2s or 1099s, or giving these workers false W2s or 1099s. These are known as Worker Information Return Penalties. We have discussed these penalties in several articles on this website. The first penalty is CUIC §13052. This is a penalty of $50 per individual per year. Relatively speaking this is not a severe penalty. However, this penalty piggy-backs onto its companion penalty under CUIC § 13052.5. This penalty can be a whopper! The penalty goes up periodically depending upon several factors including the rate of inflation. Currently the penalty is about 12.3% of the gross wages paid per worker per year.
These penalties are very harsh because they must be paid first before they can be challenged administratively by way of settlement or at a judge hearing. All other EDD categories of assessments can be contested before they have to be paid. If the EDD issues a Notice of Assessment you can file a petition with the CUIAB. You then have an option of going for a settlement or taking the matter before a judge. You do not have to pay any money until the matter is ultimately resolved. Not so with Worker Information Return Penalties. As soon as Notice of Assessment is issued you will get a bill from the EDD and a call from a collector demanding full payment!
False W2s or 1099s
I recently received a disturbing call from a Northern California owner of several dry cleaning establishments. He received his notice that he was going to be audited by the EDD. After some discussion he confessed that the W2s and 1099s given to workers were lower than the actual compensation paid to these workers in 2013, 2014 and 2015.
If you have given your workers phony W2s or 1099s you will be charged these penalties for the difference between the correct compensation and that stated in the phony forms. Most employers who undertake this dangerous practice know what they did. However, if an honest mistake has been made, your EDD auditor may look the other way and not assess these penalties.
It was clear from this telephone conference that the employer had established a pattern of yearly deception. He paid fewer payroll taxes than he really owed to both the EDD and the IRS. I told this person that he will be lucky to only be given Worker Information Return Penalties. He has cheated two governmental agencies – the EDD and the IRS. Both agencies share information. This employer has exposed himself to both negligence penalties and fraud penalties, not to mention criminal exposure for filing false payroll tax returns. There also is a possibility that his state and federal income tax returns are also fraudulent.
Clearly the owner of the dry cleaning business saved a few dollars over the years by cheating. The taxes, penalties, interest, as well as professional fees for representation, as well as making restitution to the EDD and the IRS for the costs of their investigations most likely will bankrupt this individual.
By the way, I refused to take his case.
What does “backdating” mean? If I am audited by the IRS or FTB and my deductions for vehicle mileage or travel and entertainment are challenged, is it permissible to reconstruct my mileage logs and credit cards statements in an attempt to convince the IRS or FTB auditor to allow these deductions? Yes, it is permissible to create a current reconstruction so long as it is clearly labeled “Reconstructed for Purposes of Audit.” It is not proper to attempt to pass off your reconstruction as an original contemporaneous document.
When dealing with the EDD issues come up concerning credit card expenditures as additional compensation. Another big issue with the EDD is whether monies taken out of the business were loans instead of compensation.
Many times a client who is trying to convince the EDD that a loan was taken from the business has no basic documentation to evidence that loan. The client asks if it is permissible to currently create corporate minutes, a promissory note, and other related documents in order to prove the existences of a loan. The answer is clear – absolutely not! Loan documents must be prepared at the time the loan is taken out. Backdating documents exposes one to harsh fraud penalties and the risk of criminal prosecution.
In part 2 we will discuss getting into trouble with the EDD during the audit process.
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.
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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