The EDD’S Statue of Limitations For Audits

By Robert S. Schriebman

All California taxing agencies have a statute of limitations for assessment. Each agency’s rules are different. Therefore, it is a mistake for anyone to assume that the statute of limitation for assessment for California personal income tax is the same for sales tax and the same for employment tax assessments. Likewise, it is also erroneous to assume that the statute of limitations for timely filing refund claims and refund suits are also the same. For the EDD, the rules for the time limit for making assessments are set forth in Unemployment Insurance Code Section 1132. Except for the case of failure without good cause to file a return, fraud or intent to evade any provisions of the Unemployment Insurance Code, a Notice of Assessment must be issued within three years after the 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 a late return is filed, whichever period expires later. An employing unit may waive this limitation period or may consent to an extension. If fraud is determined, the statute of limitations for issuing an assessment is eight years from the time measured as described above.

Know this: The EDD historically is not as meticulous in protecting an assessment period as is its counterpart at the IRS. Assessments are made on a quarterly basis, unlike an income tax return where the assessment is made on an annual basis. It is not uncommon for an EDD auditor to make an appointment to conduct and examination, spend a few hours reviewing various books and records only to leave the examination and call back for a follow-up appointment after the lapse of several months. If these appointments are postponed, it is not surprising to find that several assessment periods have become statute-barred.

The statute of limitations for examining a quarterly return can be voluntarily extended beyond the basic three-year period by the employer-taxpayer signing an extension. The decision whether or not to sign an extension can have immediate and far-reaching effects. Moreover, such decision can also be a tremendous tactical tool if you know how to use it properly.

The EDD can never force you to extend the statute of limitations for any period under examination. The EDD can harass, threaten, and stand on its head – but if you choose not to extend the statute of limitations, there is absolutely nothing the EDD can do except to issue a Notice of Assessment. This is true even though the EDD examination is incomplete and the auditor wishes he or she had an extra six months or so to complete the job.

Let’s discuss whether or not to extend the statute of limitations to a specific date by signing the EDD extension form. Most people sign the form and most tax advisors advise their clients to do so without giving the matter a great deal of thought. Remember, you are doing something you do not legally have to do and you can ask for certain concessions from the EDD in order to grant them additional time. For example, you may request, and have the EDD agree, not to assess any penalties. If the examining agent refuses to grant any concessions whatsoever, why should you sign an extension giving him or her more time? You may have no benefits at all and everything to lose!

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.