Practical tax tips: independent contractors, E-filing and more.

• Author: Williams, Leonard W.
• Position: California tax

The drumbeat continues regarding California's Employment Development Department and independent contractors.

Many TaxTalk participants have been relating their experiences with EDD auditors who are seeking to re-classify clients' independent contractors as employees--and collect large amounts of employment-related taxes, along with penalties and interest.

The most rudimentary advice is to familiarize clients with the rules regarding who qualifies as an independent contractor. But since theory and practice frequently diverge, the matter frequently doesn't come up until the client's annual tax return is being prepared, by which time there's a full year of noncompliance, and about one-third of the year during which the return is being prepared.

Here is what CPAs should convey to their clients regarding the documentation they should maintain in the event of an EDD audit of independent contractors:

1. Invoices on the independent contractor's letterhead or equivalent.

2. The independent contractor's business card.

3. A Yellow Page or business section listing for the independent contractor.

4. An executed independent contracting agreement.

5. A list of the independent contractor's other customers.

6. A copy of the trade or professional license (if one is required) for the type of work being performed.

Notifying the FTB of the Results of an IRS Audit

Someone recently posted a darn good question regarding a final settlement reached with the IRS on a 1998 return. Since the California statute had run out, the questioner hoped to skip notifying the FTB, but he had qualms about that and posted a question about what to do.

The answer: If the FTB isn't notified within six months, or an amended return is not filed, the statute never runs out. (See CA Rev. & Tax Code Sec. 19060).

As for notifying the FTB, one CPA proffers this cost-effective method: Simply send the FTB a copy of the Revenue Agent's Report, with a cover memo saying, in essence, "Here is a copy of what the IRS did; please assess the tax and send a bill." Then he checks the FTB's calculations.

Compulsory E-filing

This is no longer news, but there will be various nuances coming along prohibiting certain returns from being e-filed.

Here is one that was posted by a CPA who does a lot of multi-state returns for entertainers: California will not accept a return for e-filing with more than three Schedule Ss. So many of this CPA's clients, who often have 10 Schedule Ss in their returns, can't e-file...