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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – ARE THERE EMPLOYER PENALTIES FOR FAILING TO HONOR AN IRS OR EDD WAGE LEVY?

By Robert S. Schriebman

2018

Introduction

As an employer you may be confronted with an IRS or EDD wage levy known as a wage garnishment. The IRS routinely issues Form 688-W (Notice of Levy on Wages, Salary, and Other Income). The FTB and EDD issue an "Employee Earnings Withholding Order for Taxes" (EWOT). In large business organizations these wage garnishments are honored without question, but in smaller companies, these garnishments tend to be ignored or the employer pretends never to have received them in the mail.

Are there any penalties imposed upon the employer for ignoring these wage garnishments? Tax cases are rare, but on August 13, 2018, the US District Court in Florida issued a decision severely penalizing the employer for looking the other way. This article will discuss the recent IPS Orlando LLC decision, 2018-2 USTC ¶50,377, (Aug.13, 2018). We will also look at California law to determine if civil penalties are imposed on employers for failing to honor an EDD EWOT.

The Internal Revenue Code, specifically § 6332(d) states that an evading employer can be fined not only for the amount of wages not paid over to the IRS, but, an additional stiff penalty as well.

The IPS Orlando Case

Dean Snyder (Dean) owed the IRS about $28,000. He received a series of notices demanding payment, but apparently ignored them. Dean worked for IPS Orlando LLC (IPS). Eventually, the IRS sent a wage garnishment to IPS demanding that IPS withhold a certain amount from Dean’s future paychecks, and remit those amounts to the IRS until Dean’s debt was paid in full. The IRS sent Dean’s employer Form 668-W, the standard wage garnishment notice. IPS chose to ignore the garnishment and to continue paying Dean his full wages. The IRS picked up on IPS’ failure and eventually sent a Revenue Officer to look into the situation. IPS informed the revenue Officer that their failure was simply due to a "clerical error." This admission told the Revenue Officer that IPS did indeed receive the notice (the notice was sent to IPS via certified mail).

The Revenue Officer did not like IPS’ response and referred IPS to the US Attorney who filed a court case against IPS in the US District Court in Orlando, Florida. The judge was not happy with IPS either. The judge took the position that IPS flatly ignored the IRS wage garnishment and imposed the maximum penalties under the law.

Pursuant to IRC § 6331(a): if any person liable to pay any tax refuses to do so, he or she may be subject to enforced collection action, such as a wage garnishment and a tax lien. This law applied to Dean. However, IRC Sec 6632 states that any person in possession of property subject to a levy or wage garnishment shall surrender the property. An employer failing to honor a wage garnishment is liable not only for the wages that should have been paid over to the IRS, plus interest, but also to a 50% penalty for failing to honor a levy or garnishment without reasonable cause (IRC § 6332(d)). If there is a bona fide dispute concerning the amount of the property to be surrendered, pursuant to a levy, that is one thing; but, if there is no dispute, and the wages are clearly owed to the IRS, the penalty may be imposed.

The judge imposed the maximum 50% penalty against IPS together with interest and back wages. Ouch!

As you can see from the IPS case federal law has some real teeth in it.

Penalties to Failure to Honor an EDD Levy

If IPS was a California employer and was served with an EDD wage garnishment, would the EDD be able to penalize IPS for ignoring the wage garnishment? Well, no!

The laws concerning an employer’s responsibility for honoring or failing to honor an EDD levy are found in the Code of Civil Procedure and specifically Sections 706.070-.084. The specific rules relating to employer penalties are found in subsection .075(d). This section states, "The employer is not subject to any civil liability for failure to comply with subdivision (b). Nothing in this subdivision limits the power of a court to hold the employer in contempt of court for failure to comply with subdivision (b).

Apparently the Legislature, failed to put any teeth into the law, other than taking the employer to court for contempt.

The Loan Arranger

It is not illegal for an employer to make a loan to an employee. Some employers, especially in very small companies, try to get around a wage garnishment by loaning an employee money instead of paying wages to that employee. Perhaps they have been advised that loans are not wages and therefore, not subjected to an IRS or EDD wage garnishment. Some employers will continue to pay wages that are just below the amounts exempt from garnishment by law. IRS and EDD collectors are not fooled by this ploy, but, at the same time, find it difficult to attack a valid loan.

Any loan made to an employee first must be based upon a valid business reason. For example, if the employee is not using the loan proceeds to pay off a debt, fix-up the house, or acquire an asset, the loan clearly looks like a substitute for wages. Any loan, to be valid, should have supporting documentation such as a promissory note and supporting corporate minutes. The loan should also have scheduled repayments that can be clearly documented. If the loan is a phony, beware of IRC §6332(d) imposing a 50% penalty. It is uncertain what the EDD can do to attack the loan other than take the employer to court through the Attorney General.

Conclusion

I have mentioned the following maximum in other articles, "the Government understands the legitimate role that a representative plays in the collection process. However, you never want to ‘piss off’ the tax collector." Once you do this, it is almost impossible to restore your reputation. It is always a mistake to play games with the system. As a representative, you are only as effective as your word is good. Wage garnishments and other proper enforced collection action must be respected and honored. You are perfectly welcome to try to stop enforced collection by any proper means. Having said this, I do not recommend any type of ploy that tries to get around proper collection action.

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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. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

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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