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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 2

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.

In Part 1 we discussed the duties and responsibilities of those individuals within the corporation or LLC who make the decisions to pay the rent, utilities, etc., before they pay payroll taxes. These individuals are prime candidates for personal level assessments.

In this Part 2 we will look at specific targeted questions asked by the EDD in order to find and assess responsible persons. If the EDD collector is not sure whether the CEO or the CFO should be assessed, the collector will not play favorites. Both individuals will be assessed. Most of these types of responsible person assessments involving more than one person wind up being "finger pointing" contests between the chosen candidates. The EDD refuses to get into the middle of the fray.

Key Probes by the EDD.

The following questions were taken from official EDD internal documents verbatim. They are presented here so that you can be prepared to defend yourself against a potential EDD assessment.

  • WAS STATE DISABILITY/PERSONAL INCOME TAX WITHHELD?
    Comment:
    For those companies who treat their workers as independent contractors this is a key question. Even if SDI was not withheld the worker applying for these benefits will still get them.
  • WAS IT PLACED IN A TRUST ACCOUNT?
    Comment:
    Very few industries are required to have a workers’ trust account. A key example would be an agency that hires domestic workers. However, most businesses are not required to have a segregated worker trust account.
  • WHO PREPARED THE QUARTERLY TAX RETURNS/DEPOSITS?
    Comment:
    The person who merely prepares and files a company’s quarterly return is not necessarily a responsible person for assessment purposes. However, the person responsible for making required deposits may be a qualified target. It’s the people who handle the money who are prime suspects.
  • WHO SIGNED RETURN/DEPOSITS?
    Comment:
    Signing your return makes you a person of interest but by itself does not mean you are responsible. Signing checks, however, is a different matter.
  • WHO SIGNED PAYROLL CHECKS?
    Comment:
    This question and the ones that follow are the key target questions asked by both the EDD and the IRS. Signatures on payroll checks are solid documentary evidence. These persons are high level potential targets.
  • WHO SIGNED BUSINESS CHECKS?
    Comment:
    This question, like the one above, is a key target inquiry. People who sign checks, especially in small companies, are usually the ones who have control over the day to day fiscal affairs of the company.
  • WHO HAD THE FINAL WORD AS TO WHAT BILLS WOULD BE PAID?
    Comment:
    Remember, both the EDD and the IRS are looking for the people within the organization who have the say so on the day to day fiscal affairs of the company.
  • WHO WAS THE SIGNATOR(S) ON THE ACCOUNT?
    Comment:
    While both the IRS and EDD actually issue responsible person assessments for anyone whose signature appears on a bank signature card, this fact alone does not establish control over the day to day fiscal affairs of the company.
  • NUMBER OF SIGNATURES REQUIRED?
    Comment:
    I assume this question relates to checks that require more than one signature. Please see my response above.
  • WHO MANAGED AND DIRECTED OPERATIONS?
    Comment:
    Once again, both the EDD and the IRS look for those individuals who control where the money is going and how it is to be spent.
  • WHO HIRED/FIRED EMPLOYEES?
    Comment:
    This question does not really go to responsibility of day to day business fiscal affairs. I do not know why it is asked.
  • WHO SUPERVISED THE EMPLOYEES?
    Comment:
    A supervisor can and usually does have control of money. And control of money is a prime factor in who gets assessed.
  • WHO NEGOTIATED CONTRACT/BUSINESS TRANSACTIONS?
    Comment:
    This question is tied to the next question. If money is borrowed from a lending institution to be used to pay down taxes and it gets diverted, there is potential for personal assessment.
  • WHO NEGOTIATED AND GUARANTEED LOANS?
    Comment:
    Please see the comment to the above question.
  • WHAT BUSINESS EXPENSES (INCLUDING WAGES, LOAN PAYMENTS, OTHER TAXES) WERE PAID AFTER THE LIABILITY BECAME DUE?
    Comment:
    I do not recommend a long response to this question. If the EDD is conducting a probe into the affairs of the business, it makes no sense to stick your neck out for them to cut off your head! I usually leave this question blank and let the EDD collector conduct his or her own investigation which in reality rarely happens. Answering this question is like a TV cop drama – anything you say can and will be held against you.

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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.