The EDD and you: worker classification, SUTA dumping and audits among issues to watch in '07.

• Author: Counts, James C., II
• Position: EDDNEWS - Employment Development Department, State Unemployment Tax Act

It's tax season, the only time of year during which some CPAs actually see some clients. So this might be your only opportunity to discuss some important issues from the Employment Development Department.

MISCLASSIFICATION OF WORKERS

The nature of work is changing rapidly in this country, so it's not surprising that the biggest issue facing businesses today is the proper classification of workers as either employees or independent contractors.

More than 40 percent of EDD audits result from workers filing claims for unemployment insurance benefits when no wages were paid by the business while the worker was employed there.

In such cases, the EDD will open an audit to determine if the business has misclassified the worker and will scrutinize all of the business' independent contractors--not just the one who inappropriately filed for unemployment insurance benefits. If the business has misclassified workers, the EDD has the authority to audit the last three years if quarterly DE-6s were filed and to audit the last eight years if not filed.

WHAT CAUSES EDD AUDITS?

Various situations that can trigger an EDD audit. One of the biggest reasons is that the EDD identifies a particular industry that it believes is misclassifying workers and audits businesses in that industry.

For example, the EDD is auditing nearly all companies in the courier industry that are paying workers as independent contractors rather than employees. As of Nov. 30, 2006, 353 businesses in that industry have been audited. Of those, 254 have been assessed a total of $40.8 million in tax, interest and penalties.

In the current fiscal year, about 400 more courier businesses will be audited. In some cases, the EDD is working with criminal investigative agencies at city, county, state and even federal levels to pursue criminal prosecution. Also, the EDD has joined other agencies, such as the IRS, Franchise Tax Board, Department of Industrial Relations, Department of Justice, Department of Insurance and State Compensation Insurance Fund (SCIF) in pursuing these audits.

The EDD receives audit results from the IRS, FTB, BOE and SCIF and sometimes uses them to determine if an EDD audit is necessary. The EDD also may review Form 1099 filings for potential abuses by businesses.

The good and bad news is that lack of sufficient funding from the Legislature prohibits the EDD from conducting all of the audits for which they get leads. What does this mean? Since the EDD can't pursue all its...