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ASK THE EDD LAWYER – HOW TO PROTECT YOUR BUSINESS FROM EDD WORKER INFORMATION RETURN PENALTIES (WIRP)

By Robert S. Schriebman
2017

Introduction

Worker Information Return Penalties (WIRP) are found in the California Unemployment Insurance Code (CUIC) at sections 13052 and 13052.5.  These are penalties issued by the EDD when an employer fails to issue W2s or 1099s or issues inaccurate forms. While section 13052 imposes only a $50 penalty per violation, section 13052.5 imposes a penalty that is currently 12.3% of the compensation not reported. While the penalty should only be used in the most extreme case of violation, the EDD routinely issues these penalties as a "knee jerk" reaction to virtually every violation without looking into the employer’s motive. The penalty is imposed for unintentional clerical errors. In reality these penalties have become terrorist weapon in the arsenal of EDD penalties.

Why Does the EDD Assess the WIRP?

EDD auditors seem to have a special love affair with penalties. There are currently 13 different penalties available to EDD auditors as opposed to basically 2 penalties used by IRS auditors, i.e., the Accuracy Related Penalty and the Civil Fraud Penalty. The most common EDD penalty is the Negligence Penalty assessed pursuant to CUIC § 1127.

When conducting an EDD audit, most agents seem to find one or more of the 13 penalties to assess.  WIRPs are assessed usually when the employer fails to issue a W2 or a 1099.  The EDD agent reviews the general ledger or check register to see if the compensation paid to worker Jones matches the W2 or 1099. If the agent finds that Jones received $60,000 in compensation, but the W2 or 1099 shows only $50,000 paid to Jones, the auditor will most likely assess a WIRP on the $10,000 compensation not reflected on the W2 or 1099.  The penalty will be $50 per violation per worker as well as about $1,230 for the unreported difference.

Suppose worker Jones was treated as an independent contractor and issued a 1099, but the EDD agent finds that Jones should have been classified as a W2 wage earner. The compensation paid to Jones matched that reported on the 1099. There were no accounting errors. Will the employer be assessed the WIRP due to the misclassification? No. As long as either an accurate W2 or 1099 was issued to Jones, and timely filed with the IRS, there will be no WIRP.  Is that the end of the employer’s penalty exposure?
No.  Most likely the auditor will be compelled to find some penalty or penalties to assess. Most likely the auditor will assess a penalty for not reporting Jones on quarterly payroll tax returns and will also assess the Negligence Penalty – not fair!

EDD Now Attacks the Employer On the Issue of Timely Filing W2s, W3s, 1096s, and 1099s

Recently I have encountered an EDD tactic that needs to be called to your attention. It’s important because it is an EDD ambush! The EDD is now challenging employers to prove that they timely filed worker information returns.  Most attorneys and accountants are very careful when filing tax returns. Nowadays IRS and FTB tax returns can be filed electronically. When these returns are so filed, the computer prints out an acknowledgment and proof of the electronic filings. However, worker status returns such as W2s, W3s, 1096s and 1099s are sent to the IRS through the mail with little thought given to proof of mailing. I was involved in an audit where the EDD agent wanted to assess the WIRP for 2016 W2s and 1099s. It was a potential major headache, but the accountant was smart enough to have sent the returns to the IRS by certified mail. He had a "round stamp" that showed the returns timely deposited at the post office.

It is fairly easy to prove that income tax returns were timely filed even if they were not round stamped. You can order account transcripts from either the IRS or the FTB. These transcripts will show the date the return was received for filing. Not so with W2s, W3s, 1096s and 1099s.  There are no transcripts you can order.

Protecting Your Business from WIRP Assessments Caused by the Timeliness of Filing Worker Information Returns

You can count on the EDD to challenge the timely filing of worker related information returns especially W2s, W3s, 1096s and 1099s. There is big money is WIRP assessments. I pity the poor employer who will not be able to prove that these information returns were timely filed. Protect yourself. File these returns in a way that you can prove the timeliness of their filing. You can use carriers, such as FedEx and UPS because they issue tracking information. So does the USPS. Send the returns by certified mail with return receipt requested and retain the small green form your records (Form 3800). Have the post office round-stamp the 3800 to prove the date of mailing. The date of mailing is the date of filing. However, this is not good enough! Make sure you also retain a copy of a letter of transmittal that shows that you are sending the specific information returns. Put the tracking number on the transmittal letter so everything is tied in together. This way the EDD will not attack your Form 3800 or your FedEx or UPS tracking data as not being able to prove the contents of the envelope. Today you cannot be too careful.

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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.

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