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legalgems, Lawyer
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Edd audit question, california, no, no

Customer Question

edd audit question
JA: Because laws vary from state to state, could you tell me what state is this in?
Customer: california
JA: Have you talked to a lawyer yet?
Customer: no
JA: Anything else you think the lawyer should know?
Customer: no
Submitted: 2 months ago.
Category: Legal
Expert:  legalgems replied 2 months ago.

What is the question please?

Customer: replied 2 months ago.
A buddy and I started a small store together. We put in equal amount of money at the beginning. Since I have a decent full time job, he took the responsibility to man the store where I would only come in over the weekend to help a bit. We started the business in 2012, but sales was not good. We were really good friends, and he needed the cash, so we have decided that he would pay me back for the money I have put into the store and the remaining sales revenue would go to him. 2013-2015, business started to get better, and in 2015 I was having a job transitioning, so I actually took some money to compensate for the time I have helped. At end of 2015, we were audited by EDD, I'm not sure why, but I guess as part owner I'm considered a statuary employee. EDD took the 4-5000 dollars I have receive in 2015 and extrapolated back to 2012 saying that I have received that much money every year, and thus the company owes 1099/W2 wage reporting. We have kept a very sloppy ledger for this since we didn't really expect/consider me as a paid employee. There is an electronic schedule/calendar that roughly marked out the days I came to help him but that's about it.
The CPA who does the company's tax every year decided to handle the audit, and we agreed to it. However, the CPA was not very attentive to the case, so we missed the final review session and did not see the report until the auditor sent the notice that the audit was completed and the final report came out. The auditor's report indicated that the company owes me W2 or 1099 taxes, which amounts for ~$7000 in penalty. We have asked for a post audit conference with the auditor and her supervisor to explain the situation, but they did not want to make any changes, in the meanwhile, the CPA's aggressive approach at the meeting may have pissed off the auditor.Now the CPA has filed an appeal to the state court, and we are waiting to hear back. Although happy, we are actually ok to pay this tax now. My concern is the business confirms this tax payment, will IRS audit my personal tax files? If they merely send me a notice to pay the owed income tax (tax for ~$20,000 accumulated from 2012-2014 with penalty?) I have no issue. My concern is that my grand parent passed away in Asia a few years ago, and I have received a few hundred thousand in inheritance. Since this occurred abroad, I did not document this in my tax return when it happened. Furthermore my aunt and uncles have loaned me some money during the economic downturn to purchase real estate which are rented out right now.
So I do not want to get into another complicated situation of being audited by the IRS very thoroughly and have to answer a lot of questions. Bot***** *****ne question is, what is the risk level of being audited by IRS if I just pay the EDD tax (vs. drag it on which is also really tiring). Do you recommend that I drag it on with the appeal case? If the answer is drag it on, do you recommend for me to hire a tax attorney? If the answer is the risk is low, just pay it, do I need to withdraw the case from the system (or how do I settle the case)?
Expert:  legalgems replied 2 months ago.

Thank you for your patience. So the EDD does have a "IRS Exchange Agreement" whereby they provide the results of the audit to the IRS; this can definitely trigger a personal audit, especially if the audit resulted in personal income. Some CPAs will amend the tax return to include the excluded income, to "head off" an audit so to speak;

Also I am not sure if you are aware, but there is a system called the automated underreporting program where the computers will compare information from third parties (ie employers, financial institutions, etc) to determine if the tax payer is underreporting. So for example, if the interest earned on an account would indicate there is a large sum of money (larger than one would expect based on earned income) that can raise red flags.

So while the odds of an average person being audited is low (1/119 for a paper audit; 1/330 extensive audit) there are red flags such as self employment, audits by other agencies, etc and once those red flags are triggered it greatly increases one's odds.

I would strongly encourage you to hire a tax attorney (there is a specialty called LLM which means the individual has the standard JD and a masters in tax law). Link to the state bar referral:

Regardless of paying the EDD tax, the results will be shared with the IRS so they will have that information.

If one pays the fines, the attorney would file a motion to dismiss for the appeals case.

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Information provided is for educational purposes only. Consultation with a personal attorney is always recommended so your particular facts may be considered. Thank you and take care.

Customer: replied 2 months ago.
The income from rental has been reported as income tax. Since I am not audited directly rather the "employer" is audited, will this raise the risk level? Also after audit closing, how will CPA agitate the auditor affect anything?
Expert:  legalgems replied 2 months ago.

The employer being audited will result in the individual being issued a 1099 or W2 which can then result in an audit especially if the individual's tax return is not amended;

It depends on the auditor-most professionals will take care to not agitate them, precisely because they are human and they may be more aggressive towards a case that personally offended the auditor.

Expert:  legalgems replied 1 month ago.

Hi- just checking in to see if you needed clarification on any of the above information. If so please post here (there is no additional charge for this) and I will do my best to get you the requested information.

Thank you!

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