Appeal of EDD Audits

First presented to the:
Annual Meeting of the California Tax Bar
and The California Tax Policy Conference

       Dennis Brager, Esq.*       
 

I.       Typical Issues

 

A.     Employee v. Independent  Contractor.

 

B.    Unreported Employee Wages

 

C.    Personal Responsibility under  Unemployment Insurance Code ("UIC") Section 1735.

 

1.      Any officer, major  stockholder, or other person, having charge of the affairs of a corporation,  association, registered limited liability partnership or foreign limited  liability partnership, or limited liability company employing unit, who  willfully fails to pay contributions ..., shall be personally liable for the  amount of the contributions, withholdings, penalties, and interest due and  unpaid by such employing unit. The director may assess such officer,  stockholder, or other person for the amount of such contributions, withholdings,  penalties, and interest.

 

2.      Differs from IRC Section 6672  penalty in that responsible persons must pay tax, interest and penalty assessed  at the corporate level; not merely the trust fund portion.

 

II.     Appeal Before an Administrative Law Judge

 

A.     Filing a Petition.

 

1.      A petition for review or  reassessment must be filed within 30 days of service of a notice of assessment  or denial of claim for refund. An additional 30-day period may be granted by the  administrative law judge upon a showing of good cause. If a petition is not  filed within the 30-day period, or within the additional period of time granted  by the ALJ, the assessment or denial of claim for refund is final at the  expiration of the period. UIC section 1222.

 

2.      A petition is deemed filed on  the date it is sent in writing to the applicable office of the appeals board or  department branch office. It may be mailed, shipped by express service common  carrier, electronically transmitted or physically delivered. California Code of  Regulations, title 22 (herein after "22 CCR __ ", sections 5000(gg) and (zz).

 

3.      Notices which are subject to  petition for reassessment or review may be served by the EDD either personally  or by mail. Service by mail shall be made pursuant to section 1013 of the Code  of Civil Procedure, under which the time for filing a petition is extended five  days if the petitioner is within the state, 10 days if outside the state but  within the country, and 20 days if outside the country. UIC Section 1206.

 

4.      The Notice is effective when  it is personally delivered or when it is placed in the mail and addressed to the  employing unit or the person at his or her address as it appears on the records  of the EDD. UIC Section 1206.

 

5.      If a petition was filed beyond  the time period allowed by UIC Section 1222, but the petitioner establishes that  service of the assessment was not effected upon the petitioner until a date  later than that testified to by the EDD, the date service was effected upon the  petitioner shall be used to determine if the petition was timely under UIC  Section 1222. CCR 22 Section 5052(e).

 

6.      Contents of the EDD Petition.   22 CCR section 5008(b):

 

a)     the name of the petitioner;

 

b)     the employer account number;

 

c)     the mailing address of the  appellant, petitioner, or board appellant;

 

d)     the name and mailing address  of any representative filing the appeal, petition, or board appeal;

 

7.      An appeal, petition, or board  appeal may include:

 

a)     any telephone number of the  appellant, petitioner, or board appellant;

 

b)     any electronic address of the  appellant, petitioner, or board appellant;

 

c)     the date or case number of the  underlying department action, decision, or order;

 

d)     a concise statement of reasons  for the appeal, petition, or board appeal;

 

e)     any request for language  assistance or special accommodation; and

 

f)       the signature of the  appellant, petitioner, or board appellant, and the date signed.

 

B.    Suspension of the late payment  penalty. Assessments become delinquent if not paid before they become final, and  subject to a penalty of 10%. UIC Section 1135. Sections 1222 and 1224 provide  that assessments become final (and delinquent) after 30 days from an assessment  date, or on a petitioned or appealed case, within 30 days of an Administrative  Law Judge or Appeals Board decision date. As a result the filing of a petition  has the effect of giving the taxpayer a penalty free period during which the tax  can be paid.

 

C.    Preparation for a Hearing  Before an Administrative Law Judge

 

1.      Request and review the audit  file. Upon request by a party, at a charge of $5, the EDD shall provide that  party a copy of any or all documents in a case file. 22 CCR Section 5010(e).

 

2.      Review the EDD Answer to the  Petition

 

3.      Review Statutory Employee  Classifications

 

a)     Corporate Officers. UIC  621(a).

 

b)     Agent or commission driver

 

c)     Traveling or city salesman

 

d)     Homeworkers

 

e)     Unlicensed Workers. UIC  621.5(a)&(b); UIC Section 13004.5(a)&(b)

 

f)       Artists and authors.

 

4.      Review EDD industry specific  publications

 

5.      Review precedent decision  cases

 

6.      Review common law tests

 

a)     Primary Factor.  Although there is no one factor  which determines an individual's status, the most important factor is the right  of the principal to control the manner, mode, method and means of performing the  details of the work Isenberg v. California Employment Stabilization  Commission (1947) 30 Cal. 2d 34, 180 P. 2d 11. The courts have stated that  it is not necessary that actual control be exercised, but only that the right of  control exist to constitute an employer-employee relationship Baugh v. Rogers  (19 44), 24 Cal. 2d 200, 148 P. 2d 633.

 

(1)  In Empire  Star Mines Company. Ltd. v. California Employment Commission  (1946) 28 Cal. 2d 33, 168 P. 2d  686 , the California Supreme Court stated that strong  evidence in support of an employment relationship is the right to discharge at  will, without cause.

 

b)    Secondary  Factors. The California Supreme Court in Tieburq v. California Unemployment  Insurance Appeals Board (1970), 2 Cal. 3d 471 P. 2d 975; 88 Cal. Rptr. 175  adopted the following factors taken from Section 220 of the Restatement Second  of Agency that are to be evaluated in addition to the control factors.

 

(1)  Whether or  not the one employed is engaged in a distinct occupation or business;

 

(2)  The kind of  occupation, with reference to whether, in the locality, the work is usually done  under the direction of a principal or by a specialist without supervision;

 

(3)  The skill  required in the particular occupation;

 

(4)  Whether the  employer or the workman supplies the instrumentalities, tools, and place of work  for the person doing the work;

 

(5)   The length of time for which  the person is employed;

 

(6)   The method of payment, whether  by the time or by the job;

 

(7)  Whether or  not the work is part of the regular business of the employer;

 

(8)  Whether or  not the parties believe they are creating an employer-employee relationship; and

 

(9)  W hether the principal is or is not in business.

 

c)     If it cannot be determined  whether the principal has the right to control the manner and means of  accomplishing a desired result, the EDD states that the following factors will  be taken into consideration in order to make that determination. 22 CCR Section  4304-1

 

(1)   Whether or not the one  performing the services is engaged in a separately established occupation or  business.

 

(2)   The kind of occupation, with  reference to whether, in the locality, the work is usually done under the  direction of a principal without supervision.

 

(3)   The skill required in  performing the services and accomplishing the desired result.

 

(4)   Whether the principal or the  person providing the services supplies the instrumentalities, tools, and the  place of work for the person doing the work.

 

(5)   The length of time for which  the services are performed to determine whether the performance is an isolated  event or continuous in nature.

 

(6)   The method of payment, whether  by the time, a piece rate, or by the job.

 

(7)   Whether or not the work is  part of the regular business of the principal, or whether the work is not within  the regular business of the principal.

 

(8)   Whether or not the parties  believe they are creating the relationship of employer and employee.

 

(9)   The extent of actual control  exercised by the principal over the manner and means of performing the services.

 

(10)          Whether the principal is or is  not engaged in a business enterprise or whether the services being performed are  for the benefit or convenience of the principal as an individual.

 

d)     Additional explication of the  above factors are set forth in 22 CCR Section 4304-1.

 

7.      Address penalty issues  separately

 

8.      Address statute of limitation  issues separately

 

9.      Prepare and file a pre-trial  brief or memo of points and authorities

 

D.    Witnesses.

 

1.      Locate and interview all  witnesses, e.g.:

 

a)     Workers whom the EDD has  obtained statements from;

 

b)     All principals of the  business; and

 

c)     All management employees

 

2.      An administrative law judge  may order the taking of interrogatories and depositions inside or outside the  state, upon such terms and conditions as may be just. 22 CCR Section 5059(k).

 

3.      Subpoena witnesses for the  hearing. An ALJ shall issue a subpoena or a subpoena duces tecum upon proper  application of a party. 22 CCR 5058(b).

 

a)     In order to have an ALJ issue  a subpoena duces tecum or a notice to attend with documents you must submit a  declaration under penalty of perjury. The Office of Appeals has a declaration  form, or you may prepare your own. The declaration must include the following  information:

 

(1)   Whether you are requesting a  notice to attend with documents or a subpoena duces tecum;

 

(2)   The hearing date and the case  number;

 

(3)   The name and addresses of the  person who has the documents;

 

(4)   A specific description of the  documents requested;

 

(5)   A statement that the person  possesses or controls the documents requested; and

 

(6)   Why the documents are  necessary.

 

b)     Delivery of a subpoena or  subpoena duces tecum is made by delivering a paper copy to the witness in person  a reasonable time before the hearing. A paper copy of any application for  subpoena duces tecum shall be delivered with a subpoena duces tecum. Any natural  person may deliver a subpoena or a subpoena duces tecum. 22 CCR 5058(g).

 

c)     A witness who complies with a  notice to attend, a notice to attend and produce, a subpoena, or a subpoena  duces tecum, is entitled to the fees and mileage provided a written demand is  submitted to the administrative law judge at the hearing or filed not later than  10 days after the date on which the witness participated in the hearing. If not  so claimed within that time, no fees or mileage shall be allowed. 22 CCR 5058(j)

 

E.     Stipulation of Facts.

 

F.     The Hearing.  Testimony shall  be taken only on oath, affirmation, or under penalty of perjury. Each party  shall have these rights:  (i) to review the case file; (ii) to call and examine  parties and witnesses; (iii) to introduce exhibits; (iv) to question opposing  witnesses and parties on any matter relevant to the issues even though that  matter was not covered in the direct examination; (v) to impeach any witness  regardless of which party first called the witness to testify; and (vi) to rebut  the evidence against it. 22 CCR 5059(c) and (d).

 

1.      Interpreters. The EDD will  supply interpreters free of charge. 22 CCR Section 5063.

 

2.      Rules of Evidence.

 

a)     Any relevant evidence shall be  admitted if it is the sort of evidence on which responsible persons are  accustomed to rely in the conduct of serious affairs. 22 CCR Section 5059(e),  i.e. hearsay is permitted.

 

b)     Rules of privilege are  applicable. 22 CCR Section 5059(f).

 

c)     Practice Tip. Bring four  copies of all documentary evidence. One for the judge, one for the EDD, one for  the witness and one for yourself.

 

3.      Hearings are open to the  public. 22 CCR Section 5059(n).

 

G.    Post Trial Brief. The  administrative law judge may grant written argument, and, if so, shall inform  the parties of the time and manner by which it shall be filed and served. 22 CCR  Section 5064.

 

H.    The Decision. The  administrative law judge shall promptly issue the decision, and the EDD shall  promptly serve it.  The decision shall set forth the statement of facts, the  reasons for decision, the decision, and the date served.  The statement of facts  shall be based exclusively on the evidence of record in the proceeding and on  matters officially noticed in the proceeding.  If a factual determination is  based substantially on the credibility of a witness, the statement of facts  shall identify any specific evidence, including the observed demeanor, manner,  or attitude of the witness, that supports the determination.  A penalty may not  be based on a guideline, criterion, bulletin, manual, instruction, order,  standard of general application, or other rule unless it has been adopted as a  regulation. 22 CCR Section 5065.

 

III.  Hearings Before  the California Unemployment Insurance Appeals Board (the "Board")

 

A.     The Board consists of 7  members. Five are appointed by the Governor, and one each is appointed by the  Senate Rules Committee and Majority Leader for four year staggered terms of  office. It is an independent office, and not responsible to the EDD.

 

B.    Appeals of adverse decision of  an ALJ are made to the Board.

 

1.      Appeals must be filed with 30  days of the ALJ's decision. UIC Section 1224

 

2.      An oral hearing may be  requested.

 

3.      Generally new evidence will  not be accepted. See 22 CCR Section 5102. However an application to present new  or additional evidence may be filed within 10 days after service of a board  appeal. 22 CCR 5102(a).

 

C.    Briefs

 

IV. Superior Court  Cases

 

A.     Prerequisites for a suit

 

1.      Payment of Tax, Interest, and  Penalties for the entire assessment period, i.e. all quarters.  UIC section  1178(d); Masi v. Nagle, 5 Cal. App. 4th 608, 7 Cal. Rptr. 2d 423 (3rd  Dist 1992).

 

2.      Filing of claims for refund

 

a)     Every claim for refund must be  in writing and must state the specific grounds upon which the claim is founded.  CUIC §1179.

 

b)     No special form is required. A  claim may be submitted to the EDD in the form of a letter or the taxpayer can  use the basic refund form, Form DE-938. If the taxpayer chooses the letter  format, the request must contain a statement of request or demand along with the  following information:

 

(1)   Specific ground on which the  claim is founded;

 

(2)   Period(s) covered;

 

(3)   Amount(s) claimed; and

 

(4)   Date(s) of payment.

 

c)     Claims must be filed within  the later of:

 

(1)   Three years from the last day  of the calendar month following the close of the calendar quarter for which the  overpayment was made;

 

(2)   Six months after an assessment  levied by the EDD becomes final; or

 

(3)   Sixty days from the date of an  overpayment to the EDD. UIC Section 1178

 

d)     Upon denial of the claim by  the EDD a Petition for Review must be filed with an ALJ within 30 days.

 

(1)   If the EDD fails to take  action within 60 days after a refund claim is filed the taxpayer may consider  the claim denied and file a petition with an administrative law judge. UIC  section 1222.

 

e)     Adverse determination of an  ALJ's decision must be filed with the Appeals Board within 30 days. UIC Section  1224(a).

 

(1)   If the administrative law  judge fails to serve notice of the decision on a petition for review of denial  of a claim for refund or credit within 60 days after a petition is filed, the  petitioner may consider the petition denied and file an appeal with the appeals  board.

 

f)       Suit must be brought within 90  days after the service of the notice of the decision of the Appeals Board upon  the denial of the refund claim. UIC Section 1241(a). If the Appeals Board fails  to serve notice of its decision on the appeal within 90 days after an appeal is  filed, the claimant may consider the claim denied and may bring an action  against the director. Id.

 

(1)   The EDD may, in writing,  extend for a period of not exceeding two years the time within which such action  may be instituted if written request for such extension is filed with the  director within the 90-day period. UIC Section 1241(a).

*Dennis Brager, Esq., is a State Bar Certified Tax Specialist in Los Angeles. A former IRS senior trial attorney, Mr. Brager now devotes his efforts exclusively to helping clients resolve their tax problems with the IRS and California State tax agencies. Services include negotiating Tax Debts, Tax Fraud Representation, Tax Litigation, Tax Audit and Appeals Representation,  Tax Preparer Penalty Mitigation, Payroll Tax Audits, and California Sales Tax Problems. He may be reached at 800.380.TAX LITIGATOR.
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