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ASK THE EDD ATTORNEY – WHAT DOES THE EDD WANT TO KNOW BEFORE YOU ARE PERSONALLY ASSESSED FOR CORPORATE (LLC) BACK TAXES? – PART 1

By Robert S. Schriebman

February 25, 2015

INTRODUCTION

If you control the day to day fiscal activities of a corporation or an LLC, you may be a target for personal assessment for corporate owed payroll taxes in the event the corporation or LLC fails to pay its delinquent payroll taxes. The EDD often looks behind the corporation or LLC to find out who pulled the financial strings and allowed the corporation or LLC to fall behind on its quarterly tax liabilities. Pursuant to California Unemployment Insurance Code (CUIC) Section 1735, the EDD is authorized to assess "responsible persons" if a corporation or LLC fails or refuses to pay its back payroll taxes. The decision to assess the so-called responsible person is usually made by an EDD tax collector. EDD auditors rarely if ever make these types of decisions.

If an EDD collector is looking to "pierce the corporate veil" and go after specific targeted individuals, the EDD will send a series of letters to potential responsible persons asking them to come forward and identify themselves.

This article, the first of a two part series, will discuss the key questions EDD collectors ask when determining who is a responsible person for corporate or LLC level delinquent payroll taxes. In Part 1 we will discuss general liability and review basic questions posed by the EDD. In Part 2 we will get very specific with the questions put forth by the EDD to determine who is a target for a CUIC 1735 assessment.

Duties Owed by Responsible Persons for Corporate or LLC Payroll Tax Compliance

Both the IRS and the EDD have laws allowing responsible persons to be individually assessed for corporate level taxes. However, the percentages assessable by the IRS and the EDD are different. For example, the IRS usually assesses about 60% of the overall corporate liability against a targeted individual. With the EDD however, the exposure is 100% of the corporate level liability. In other words, every dollar of tax, penalties, and interest owed by the corporation will fall upon the targeted assessed responsible person.

Anyone who has control over the day to day fiscal affairs of a corporation or LLC has the duty to collect, account for, and pay over quarterly payroll taxes in an accurate and timely manner. This is at the heart of both the EDD and IRS versions of responsible person assessments. Individuals such as the CEO and CFO are prime targets. If your signature is on the bank signature card, but you never signed checks, you may also be a potential target. The EDD looks for those individuals who have signed checks for mundane expenditures such as rent, utilities, supplies, and the purchase of equipment. These checks are tell tale signs of persons who have made the decisions to make these expenditures even while payroll taxes are owed. Both the IRS and EDD demand that the taxes be paid before the rent is paid.

The EDD Wants to Know

If the EDD collector chooses to focus on you as a potential responsible person, pursuant to CUIC § 1735, you will be asked many questions. Here we will set forth the basic ground questions asked by the EDD. In Part 2 we will get more specific.

The EDD is going to want to know whether the corporation is active or inactive. If the corporation ceased doing business the EDD will want to know when that occurred.

As far as basic personal information goes, the EDD is going to ask you these questions:

  • Your name, your title within the corporation, and your social security number.
  • The EDD will ask you the percentage of stock that you own as well as the percentage of stocked owned by other persons in the corporation. The EDD will also request your social security number as well as the social security numbers of other officers, directors, and key employees.
  • The EDD will want to know how long you have been affiliated with the corporation or LLC and will also ask you to provide the same information for other officers, directors and key employees.

These questions are basic background questions. They have nothing to do with the control of the day to day corporate or LLC fiscal affairs.

In Part 2 we will discuss the key questions asked by the EDD to make a final determination on who will be assessed the 100% corporate exposure.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure", both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure", both published by Commerce Clearing House.