EDD AUDITS: GIVING THE EDD BOOKS AND RECORDS Part 1 of 2 Parts
By Robert S. Schriebman
I get a lot of calls about EDD audits especially from accountants whose clients have confronted them with the harsh reality of an EDD audit to determine whether workers are truly independent contractors. Most of the questions centers on what type of records are required to be given to the EDD. The EDD has a standard form “DE 231TA” that requests available records for the period of the audit. Note the words “Available Records.” This has very special meaning. You are not required to give the EDD books, records, and documents that are not available to you. This does not mean, however, that one can hide relevant records and tell the EDD they are not available. Never give the EDD, or any government agency for that matter, original documents. Most likely these documents will be lost or destroyed after the audit, and you will never see them again. Dealing with the EDD demands honesty and being forthright. Gamesmanship has no place in an audit.
The EDD has broad powers to examine a taxpayer’s books and records and to require the appearance of the taxpayer-employer or third parties (CUIC § 1127). A typical controversy between the taxpayer and the EDD often centers on “Status Determinations” i.e., the classification of workers as employees instead of independent contractors.
I recommend that you go on the EDD website and download the audit manual. There you will find chapter IX “Fact Gathering and Status Determinations.” This is a good place to start when you want to know the powers of the EDD to get into your business affairs.
In this article we will discuss the first category of documents requested by the EDD in its standard document request that is usually given to an employer about to be audited.
The EDD Document Request has two broad categories of documents and information the EDD wishes to examine. CUIC § 1085 and § 1092 require all employers to make business records available to the EDD during normal business hours. Under the category “Minimum Required Records” the EDD asks for the following:
- Check Registers, Check Stubs, Canceled Checks, and Bank Statements.
- General Ledger and General Journal.
- Annual Financial Statements (Income and Expense statements, Balance Sheet, etc.).
- Cash Payments Records (pay out slips and vouchers).
- Federal and State Income Tax Returns.
- Form 1099 Series, Federal Information Returns and Worksheets.
This is quite an intimidating list. However, it is not as extensive as it may seem. If you copy the front and back of one business check for each quarter in issue, you usually do not have to give the EDD check registers, canceled checks, or check stubs. You have to be very careful here, and you have to keep in mind that this is an employment tax audit – it is not an income tax audit like the kind you go down to the IRS for. Therefore, the EDD is entitled to review checks, etc. that have to do with the employer-employee relationship. Checks such as rent, utilities, and office supplies are not relevant.
Relevancy is the key to any audit request by the EDD. Books and records that have nothing to do with employment related issues are not relevant. The U.S. Supreme Court in the decision of Powell v United State made that point very clear. The Powell v United State decision is binding on the EDD just like it is on the IRS.
I question the EDD’s right to examine business records that have nothing to do with payroll or employment issues. I have found over the years that the EDD understands this very well and does not pry into areas that do not concern its primary purpose.
When it comes to tax returns I question the EDDs entitlement to review federal income tax returns whether individual or corporate. I make it a practice of giving the EDD only California returns, but I do give them relevant payroll information such as 1099s and W-2s.
In Part 2 of this article we will examine the category entitled “Additional Records Required for Verification of Acknowledged Payroll.”
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.