ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – CUIC § 1735 ASSESSMENTS – DODGING THE BULLET
By Robert S. Schriebman
I received a call from a young attorney. He was concerned for his client’s individual exposure to an upcoming audit of the client’s now defunct corporation. He asked if the EDD will move forward in auditing a company no longer in business. He was also asked me if the EDD will assess his client individually once the EDD learns that the corporation is currently in a position where it cannot pay any corporate level assessment.
The young attorney’s concerns were genuine, and I respected his professionalism in looking for ways to insulate the corporate president’s personal exposure.
I hope this article addresses his very valid concerns.
CUIC § 1735 – An Overview
Most of you, reading these articles, know a thing or two about the IRS’ Trust Fund Recovery Penalty. Any responsible person within a corporation, LLC, trust etc., who is responsible for payroll tax compliance and uses funds ear-marked for the IRS to pay business creditors or workers wages can be held individually liable to the IRS for “trust fund” portion of withholdings. See IRC § 6672. Roughly, this amounts to about 60% of withholdings. The EDD also has a similar provision and holds the responsible person for the entire corporate level liability. This is a true 100% exposure – dollar for dollar.
EDD Audits of Defunct Entities
It has been my experience, and I am only speaking for myself, that the EDD will indeed audit a recently defunct company. EDD audits look for many things. Audits look for misclassified workers, and payroll tax compliance. For example, do the W2 wages and 1099 disbursements match what is on 1099s and W2s? Do the records match what is on quarterly and annual payroll tax returns? The EDD auditor, when conducting his or her examination, is not overly concerned with the corporate taxpayer’s ability to pay. This is left to the people in Collection.
So the answer to the young lawyer’s first question is “yes” the EDD will conduct an audit and usually will not drop or discontinue the audit solely based upon the taxpayer’s ability to pay.
Will the EDD Auditor Assert a CUIC § 1735?
The typical EDD auditor, that I have encountered in my practice, is not concerned with the assessment of individual level liability if the entity is defunct. The auditor’s priorities are to conduct the audit and determine if an assessment is appropriate. True, in the audit report there are sections relating to the potential target of a CUIC § 1735 assessment.
CUIC § 1735 assessments are usually left to the Collector. If the taxpayer wants an installment agreement, the Collector will usually demand that a Corporate Questionnaire accompany the financial statement. This is virtually a confession.
Some Collectors will routinely send out letters requesting potential targets to contact them for an interview. Two letters are usually sent. In my practice I have found that those responding to the letters wind up with a CUIC § 1735 assessment. I think there is a lesson here.
Payment of the Assessed Deficiency
The best way to avoid a CUIC § 1735 personal level assessment is for the entity to pay the assessed deficiency. For defunct entities, payment may be problematic.
In my many years of experience I have learned that if the government wants you badly enough they will find you. The same is true with an EDD CUIC § 1735 assessment. Surprisingly, an overwhelming number of potential assessment targets never get assessed. There is no one sure way of dodging the bullet.
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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