EDD AUDITS: GIVING THE EDD BOOKS AND RECORDS Part 2 of 2 Parts
By Robert S. Schriebman
This is Part 2 of a 2-part article dealing with giving the EDD copies of books and records in response to the EDDs standard form DE231TA. Many of the questions that I receive are centered on what documents to give the EDD and what documents and other information should be withheld. It seems that each person’s case is different, and there is rarely a “rule of thumb” when it comes to providing records for an EDD audit. The EDD has broad powers to examine your books and records and to require your appearance and testimony. The EDD has the right to examine third-party witnesses such as the workers treated as independent contractors. In its own right the EDD has about the same powers and the same responsibilities to conduct an audit as the IRS.
CUIC § 1085 and § 1092 require all employers to make business records available to the EDD during normal business hours.
In this article we will discuss the second category of documents requested by the EDD in its standard documentation request that is usually given to an employer about to be audited. The second category is entitled “Additional Records Required for Verification of Acknowledged Payroll.” I will also discuss a third category of documents – those documents useful to prove the work is an independent contractor.
These are the categories of documents sought to be reviewed by the EDD:
- Payroll records such as Payroll Journal, Individual Earnings Records, Payroll Summaries, etc.
- Federal Employment Tax Reports
- State Employment Tax Reports
Let us discuss the category of “Federal Employment Tax Reports.” Here the EDD asks for W-2s, W-4s, and the federal quarterly returns know as 941s. The EDD also wants to see the annual FUTA return, 940. Here it is important to keep in mind and focus upon the fact that this is a state examination. The EDD has its own versions of the 941 and the 940. Why is it necessary for them to review federal IRS returns?
When it comes to state employment tax records, the EDD is absolutely entitled to examine your copies of the DE9, DE6, DE7, DE678, and DE4 reports. These are totally relevant and must be given to the EDD – remember to give the EDD only copies. Never give any taxing agency original records; always photocopies.
There is a third category of documents that I believe is essential for you to give the EDD. These are any documents that show that your workers are indeed independent contractors. If you withhold presenting this category of documentation you will not provide an adequate defense and you can be certain that the EDD’s audit efforts will result in an assessment. Make sure you give the EDD copies of business cards, invoices, advertising, references to websites or copies of yellow page type advertising. If a worker is required to be licensed or certified, such as a massage therapist, make sure the EDD has a copy of that license or certification.
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.