ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – BEWARE OF HIDDEN TRAPS WHEN NEGOTIATING EDD INSTALLMENT PAYMENT ARRANGEMENTS – PART 1
By Robert S. Schriebman
This is Part 1 of a 2-Part Series that will discuss potential hidden traps when you negotiate a monthly installment payment arrangement with your assigned EDD collector. You could be signing a confession that will allow the EDD to assess you personally in the future. You may not be able to effectively defend yourself in a CUIAB hearing to determine if you are personally liable pursuant to CUIC § 1735.
The inspiration for this article came about from reading an administrative sales tax decision published by The Office of Tax Appeals in the matter of Gholamrez Shafzand. The sales and use tax unit of the State of California is now known as the California Department of Tax Fee Administration (CDTFA). The Department assessed Mr. Shafzand personally for unpaid corporate level sales tax deficiencies as the responsible officer for Renzo’s Bar and Grill (Renzo). When he attempted to argue that he was not the responsible officer, the Department introduced into evidence a Responsible Person Questionnaire that Mr. Shafzand signed when he entered into an installment payment arrangement on behalf of Renzo for unpaid sales taxes. Eventually Renzo defaulted on the arrangement leaving Shafzand totally exposed. Poor Mr. Shafzand was trapped by what was essentially a prior confession.
After reading the Shafzand case it occurred to me that the EDD sets the same trap for employers seeking an installment agreement for unpaid corporate or LLC level taxes.
This article will discuss in 2 parts how the EDD’s installment payment process operates, and how unwary people place themselves in harm’s way in the event the corporation or LLC defaults on making monthly payments. I will discuss the concept of duress and how it plays a part in this process. I will also go over the hidden traps in the EDD’s Corporate Information Questionnaire.
EDD Installment Payment Arrangements – Going Through the Hoops
You owe the EDD. This may be the result of an audit assessment or a self-assessment caused by filing quarterly payroll tax returns and not fully paying or being late on your compliance. Your account has been assigned to an EDD collector who has notified you by letter and threatened to undertake enforced collection action and record a tax lien against your company. To avoid these pending disasters you have contacted the collector to negotiate an installment payment arrangement. Before getting to the bottom line, you have to jump through several hoops including the submission of a financial statement together with 6 months of bank statements and other required documents.
If you are an officer of a corporation or LLC, in addition to the above documentation, you will be asked to complete a Corporate Information Questionnaire. When it comes to the Questionnaire there is no room for negotiation. You have to complete it, sign and date it. It’s simple – if you want to make monthly payments, the Questionnaire is a must. You are caught between a rock and a hard place – if you do not negotiate an installment arrangement, and submit the Questionnaire, you will be facing bank account levies without warning. You are not advised by the EDD collector to seek legal counsel before signing anything. It’s either the EDD’s way or the highway. The trap has been set!
Figuratively speaking, the EDD puts a gun to your head when it comes to the Questionnaire. You can’t get an installment agreement without it.
Potential Future Exposure
The EDD, like the IRS, has provisions for ignoring the corporate or LLC entity and assessing the individuals behind the scenes personally for unpaid employment and withholding taxes. Let’s look at the IRS version and the EDD version.
The IRS is found in IRC § 6672. This section has been around for decades. It used to be called the 100% Penalty, but it was not a penalty at all. It was an assessment of tax. Today it is known as the Trust Fund Recovery Penalty. Even with a new name, it is still a tax assessment and not a penalty.
IRC § 6672(a) states that any person required to collect, truthfully account for, and pay over any tax, who willfully fails to do so, will be personally assessed. There are two elements composing the assessment that the IRS must prove: responsibility, and willfulness. The amount of the assessment is roughly 60% of what is owed by the corporation or the LLC.
The EDD version is found at CUIC § 1735 and essentially says the same thing as its IRS cousin. The primary difference between the two assessments is that when it comes to the EDD, the targeted individual will owe every dime owed by the corporation or the LLC.
CUIC § 1735 assessments are usually done by EDD collectors, not by auditors. If you are a target you will receive a series of letters from the collector inviting you to “come in and discuss things.” If you are foolish enough to do so, or if you believe that you are so charming that you will be able to convince the EDD collector of your innocence, you are making a serious mistake. You will eventually receive a certified envelope containing a Notice of Assessment in your name, “as a responsible person for XYZ, Inc.” Like an audit Notice you must timely file a petition with the CUIAB to challenge the assessment.
You Are Caught In a Trap
Remember when you wanted that installment arrangement? Well, as part of that arrangement you completed and signed the Corporate Information Questionnaire. During your CUIAB hearing that Questionnaire will be introduced into evidence essentially as your confession. The judge will ask you if recognize the Questionnaire and if the signature is yours. When you answer “yes” to both these questions, the judge has no choice but to rule against you. You have been caught in a trap of your own making.
In Part 2 we will look at the admissions set forth in the Questionnaire and discuss the legal concept of duress. Could this be a valid defense for you to assert in a judge hearing? I will also review important points raised by the judge in the Shafzand case mentioned earlier in this article.
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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