Been there, done that: dealing with the EDD and FTB.

• Author: Williams, Leonard W.
• Position: CaliforniaTax

A couple of things are reasonably well known when it comes to dealing with California's Employment Development Department.

First, the EDD is heavily engaged in attempting to re-categorize workers from independent contractors to employees.

Next, probably more than one-half of EDD audits arise when someone who's been carried as an independent contractor applies for unemployment, SDI or workers' compensation. When the worker files a claim, the EDD responds, 'Funny, we don't have any payroll records for you; we'll look into it.' That's a "gotcha" for the business that's been paying the worker.

Most CPAs tell clients whose workers clearly are employees, but who want to be paid either as independent contractors or "paid in cash," not to touch those arrangements with a 10-foot pole. You can be certain any such individual knows exactly where to find the unemployment, SDI and workers' comp offices if the relationship sours.

During the claims process, EDD interviewers will ask claimants whom they "work for." If the claimant states that they work for Company X, then the gotcha process continues. If the claimant says that they are in business for themselves, then the process ends because the claimant isn't an employee. This is a bit of semantics, because some CPAs in public practice say that they "work for" their clients, but the point is clear.

Another listserve participant shares an EDD tale in which a client received a pre-audit questionnaire, completed and returned it. The EDD responded that it would pass on an audit. However, the EDD sent a second questionnaire with different questions, with the obvious intent that perhaps new responses would provide grounds for an audit.

Apparently, EDD gets data from FTB and IRS indicating if payments reported on a 1099 show up on the payee's Schedule C. It's an EDD audit indicator. Form 1099 payments that don't show up on a Schedule C do result in an IRS CP-2000 notice to the payee and a parallel FTB notice.

How Do You Deal With an FTB Notice That Your Client's Tax Balance Due Hasn't Been Paid?

Assuming that you--or your client--have filed the return and the FTB has received it, but the FTB has no record that the payment was received, you usually have two choices.

The first one is easy: If the client has the cancelled check, then send the FTB a copy of the cancelled check, a copy of the FTB notice and a memo saying, "Here's a copy of the cancelled check; please correct your records accordingly."

The second...