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LOWERING YOUR EDD ASSESSMENT USING PERSONAL INCOME TAX (PIT) ADJUSTMENT STRATEGIES Part II

By Robert S. Schriebman

This is Part II of a 2-part article discussing the abatement or removal of the personal income tax (PIT) portion of a potential EDD assessment. This article will discuss the use of two forms:

DE 938P – Claim for Adjustment or Refund of Personal Income Tax
DE 6028P – PIT Abatement Declaration

Before discussing the use of these two forms let us recap some of the basic information stated in Part I.

You have been audited by the EDD. The auditor has issued to you a Proposed Notice of Assessment (PNA). The PNA invites you to attend a hearing with the auditor and his or her supervisor in order to discuss the audit before a final Notice of Assessment is issued. The PNA is composed of three parts – the tax portion, penalty portion, and interest portion. This article will discuss only the tax portion and present strategies for lowering the personal income tax or PIT portion of the PNA.

You might want to take advantage of the pre-assessment conference in order to convince the auditor that the personal income tax portion of the assessment is inaccurate and should be reduced. The purpose of this article is to point you in the right direction toward achieving your goal of convincing the auditor that the PIT portion of the assessment has been overstated.

A WORD OF CAUTION:

I do not recommend attending a pre-assessment conference with the goal of convincing the auditor that the workers reclassified by the EDD as employees should remain as independent contractors. Not only is this usually a waste of time but you often wind up making statements that should not be made, and that may be used against you should you elect to contest the EDD's assessment on the merits.

The Tax Portion of the PNA Has Four Parts

The tax portion consists of four parts – unemployment insurance (UI); employment training tax (ETT); state disability insurance (SDI); and personal income tax (PIT).

The PIT is usually the largest of the four parts of the tax portion. I have seen the PIT range from about one third of the total assessment to almost seventy-five percent. Sometimes you can reduce or even eliminate the PIT portion by adopting the strategies set forth in this article. In Part I we will discuss the strategies of recalculating the PIT based on worker's W-4/DE 4 and recalculation of PIT based on single with zero allowances (S-0).

DE 938P – Claim for Adjustment or Refund of Personal Income Tax

The DE 938P form used to be the standard abatement form prior to 2010, when the new PIT abatement declaration streamlined the PIT abatement process. Today it is used only when the employer has failed to issue W-2s or 1099s. The use of this form puts the employer at a disadvantage especially in a business where there is a high turnover of workers such as the construction, nursing registry, or domestic worker industries. An employer rarely, if ever, is able to obtain a 100% response to the use of this form.

The DE 938P form is a two-column form. The left hand column is completed by the employer, and the right hand column is completed by the employee. It is very important that the employee sign the DE 938P form. Many workers are intimidated when asked to sign the form because they believe, wrongly, that the EDD will contact them or audit them.

The DE 938P form does not relieve the employer from penalties for failure to withhold employment taxes or from certain portions of interest on the PIT assessment.

Interest will be recalculated and lowered when the employee certifies that he or she paid estimated taxes or annual income taxes to the Franchise Tax Board (FTB).

The use of this form is internally problematic. The EDD must contact the FTB to manually verify that the worker filed income tax returns and paid his or her taxes. The process takes a long time to complete, and the results are rarely accurate in reducing the PIT portion of the employer's assessment.

In summary, the DE 938P form is a pain for both the employer and the EDD. Use of the PIT Abatement Declaration discussed below is much simpler for everyone.

DE 6028P – PIT Abatement Declaration

The use of the PIT Abatement Declaration form is a streamline process that began in mid 2010. If an employer has timely filed W-2s and 1099s this form can be used in resolving and settling a current EDD audit. Very often the PIT portion is the largest single element composing the Notice of Assessment. To eliminate the PIT and save the relatively high amount of the PIT portion saves everyone time and money. Form 6028P is a one-page declaration where an owner, partner, or corporate officer certifies by checking a few boxes that W-2s, 1099s, or K-1s were timely filed with the IRS and the FTB. The form does not have to be notarized. You simply sign and add your address and telephone number. When the EDD receives the declaration they will contact the IRS and FTB to verify the information on the form.

Interest will be abated on the overall assessment proportionally when the PIT Declaration is accepted by the EDD. Previously assessed penalties for the failure to timely file W-2s and 1099s will also be abated.

A WORD OF CAUTION:

Do not think the EDD is stupid. When you sign this declaration you do so under penalty of perjury. Filing a false declaration can get you into serious trouble. If you did not timely issue and file W-2s, 1099s, or K-1s, use the DE 938P form discussed above or try the other abatement methods discussed in Part I.

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©Robert Schriebman 2013.

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.