How to handle an EDD Audit Part 2 – Spidell’s California Taxletter (July 2009)
HOW TO HANDLE AN EDD AUDIT
By Robert S. Schriebman
Questions You Need To Ask Before Contacting the Auditor
In Part 2 we will discuss preliminary questions that you need to ask your client and yourself before you contact the EDD auditor.
The first question to ask your client is whether or not your client was incorporated during the period covered by the audit. The EDD preliminary audit notice will inform your client of the audit period – what quarters are involved. If your client was not incorporated, any resulting EDD status determination will be directly assessed against your client. He or she will be personally liable; a husband and wife will have joint and several liability. A status audit is the most common type of EDD audit these days and involves the central issue of whether workers are employees or independent contractors. If your client was incorporated during the period covered by the audit, the corporation, as a separate entity will be liable. Your client will not be personally liable. It will be up to the EDD, at some time in the future, to make the determination whether to issue an assessment against those individuals whom the EDD believes were “responsible persons”.
The second question to ask your client is whether or not quarterly EDD and IRS employment tax returns were filed during the audit period. This question is critical because it will determine just how far back the EDD and the IRS may examine books and records. We will discuss the IRS at a later time. Let’s focus on the EDD.
In the EDD code there is only one statute of limitations for assessment and it governs everything the EDD does. That section is California Unemployment Insurance Code Section 1132 (you can refer to this code as CUIC). Whether the EDD makes an assessment against your client as an individual, corporation, or both, it must do so within the language of this code section.
What are the statutes of limitations for assessment? Let’s start with the basic rule: If your client has filed quarterly EDD employment tax returns, the statute of limitations for assessment is anytime up to three years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued or within three years after the deficient return was file, whichever was later. If your client has failed to file returns because all workers had been treated as independent contractors, including the owners of the corporation, the statute of limitations for assessment is anytime up to eight years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued. This is an important difference between EDD and IRS rules. Under IRS rules, if no return is filed, there is no statute of limitations for examination. If the EDD suspects fraud, whether or not a return has been filed, there is no statute of limitations for assessment.
BEWARE: Often the EDD will begin its examination on periods that have expired pursuant to CUIC Section 1132. You have the duty in effectively representing your client to inform the auditor that the statute of limitations for these periods has already expired and, therefore, your client does not have to go through the inconvenience and expense of reproducing records for an already expired quarter or two. During the audit you must be constantly diligent about the statute of limitations. Why? EDD audits can drag out for a long time and it is not uncommon for the statute of limitations to expire on one or more quarters during the audit process.
In the next installment we will review the EDD’s Inquiry Regarding Records as well as the Pre-Audit Questionnaire and we will learn that the EDD often asks for returns, records, documents and information that it has no right to request and you have no duty to provide.