Ask The EDD Lawyer – When You Owe The EDD, FTB, Or BOE – Should You Leave California?

By Robert S. Schriebman

June 10, 2015

 

Introduction

I recently received an inquiry on my website from someone located outside of California. The writer wrote the following:

“I was contacted by the FTB about a tax debt from 1998 and 1999. I am trying not to file bankruptcy over this debt but I cannot determine what my standing is with respect to the statue of limitations.”

Should you leave California if you are in debt to the EDD, FTB or BOE? This question assumes that you have no deep roots in California and that you are mobile. However, as you can see from the above website inquiry, leaving California may not remove you from the target of an aggressive tax collector unless you take basic steps to protect yourself from enforced collection action such as a Notice of Levy on your out of California bank account.

In this article we will look at some unusual situations that have caused people with tax debt to consider moving not only out of California but out of the country as well. We will also discuss another common inquiry that I receive on a regular basis concerning California bank account levies on out-of-state resident’s bank accounts.

To Leave California Or Not To Leave?… That Is The Question

When I was working with the late Senator William Roth (Roth IRA fame) in his quest, as Chairman of the Senate Finance Committee, to reform the IRS, he asked me if I knew of anyone who was forced to leave the country because of collection pressure from the IRS. I told him about a 1994 decision by a federal judge of the Southern District of New York, who advised a young man to leave the country! The good Senator could not believe his ears. What follows is the sad case of Nathan Unger.

In 1994 Senior District Judge Whitman Knapp of the Southern District of New York heard the sad tale of Nathan Unger. Unger, a bright young man, with a fresh MBA in hand, was the Chief Financial Officer of a marketing and advertising agency, and was one of three people with signing authority for the company’s bank accounts and payroll checks. The company got behind on its IRS payroll tax liabilities and eventually went out of business. Young Mr. Unger was targeted by the IRS as a responsible person for the Trust Fund Recovery Penalty (TFRP) pursuant to IRC Section 6672. Judge Knapp had no choice but to rule in favor of the IRS and hold Mr. Unger personally responsible for unpaid corporate-level payroll taxes. The debt was more than $1,000,000. There was no way Unger could pay this huge bill, and payroll taxes are not dischargeable in bankruptcy. Judge Knapp said something that I have never heard a judge say: he advised Nathan Unger to leave the U.S. and to try to start his life all over again!

In my career I have seen many “Nathan Ungers.” I have seen young people, fresh out of MBA school, who are hired as a CFO or Treasurer by unscrupulous experienced thieves who are experts at draining a corporation of its assets and cash flow while leaving a naïve youngster holding the bag for EDD personal exposure for unpaid corporate-level payroll taxes. Should that highly educated young man or woman leave California?

The BOE has similar rules of exposure for unpaid sales and used taxes. With both the EDD and the BOE there is no statute of limitations for the collection of personally assessed corporate-level taxes. The only bar to collection of EDD and BOE taxes is a provision in the California Constitution removing the debt after 30 years.

The 1998 and 1999 FTB debts mentioned in the introduction have a 20 year collection statute of limitation. The IRS collection statute of limitations is only 10 years.

The picture is clear: when you owe the State of California, it’s a life sentence for many unsuspecting people. If you happen to have the misfortune of having an unreasonable and aggressive EDD, FTB or BOE tax collector assigned to your case, you have a formula for tyranny. Many people, who have no deep roots in California have “voted with their feet” and have left the State.

The Long Arm Of The California Tax Collector

If you find yourself in the unfortunate position of owing the EDD, FTB, or BOE more money you could ever hope to pay you may consider collection alternatives such as an Offer In Compromise (OIC) or a Chapter 7 Bankruptcy. All three California tax agencies have OIC programs. However, OICs are designed for people who can afford to pay them, but not everybody has this ability. Chapter 7 may discharge old income tax and sales tax debt, but no discharge is possible for EDD debt.

I often receive emails and phone calls from people residing outside of California who are taken by surprise when their bank account is levied by the EDD, FTB or BOE. How does this happen? If you have a bank account with a bank that has its headquarters in California it is easy for the EDD, FTB or BOE to serve a Notice of Levy at the bank’s headquarters. Your account at that bank will be subject to seizure regardless of the fact that you reside in another state and have your account physically within that state. On the other hand, if you do business with a bank that is strictly local, California will have a hard time taking your money.

Conclusion

I cannot be presumptuous like Judge Knapp in the Unger case discussed above. I cannot tell you if or when you should leave California if you owe the EDD, FTB or BOE. If you have made the decision to leave the Golden State make sure you take the steps necessary to protect your assets and your money from the grasp of a California tax collector. The smart thing to do is to seek legal advice from an experienced tax attorney in your new place of residence on what to do to insulate yourself from aggressive tax collection.