ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD AUDITORS AND EDD COLLECTORS – WHAT’S THE DIFFERENCE? – PART 2
By Robert S. Schriebman
Most governmental taxing agencies, the IRS and EDD included, function in a like manner. That is to say, you can draw an imaginary line down the middle and broadly divide their functions into two main categories: the examination function and the collection function. You can also erect an imaginary wall between the functions. The examination function or division operates separate and independent from the collection function or division.
The field of EDD collection activity and procedures is vast. One can literally write a book about them. I did! In fact I wrote the only two books ever written about EDD collection practice and procedure:
- California Tax Collection Practice and Procedures
- California Taxation Practice and Procedure
Both books were published by Commerce Clearing House (CCH).
In this Part 2, I will discuss the role of the typical EDD Tax Collector. Never underestimate the power and reach of any tax collector especially an EDD Collector. Most tax professionals and the public in general are ill informed when it comes to the function and powers of an EDD collector. When an EDD collector is properly doing his/ her job no judge in the land can stop the process.
The Central Collections Division is responsible for the collection of tax accounts receivable and benefit overpayments in an automated, mass-processing environment.
The EDD’s tax collector is called a Tax Compliance Representative or “tax rep.” The emphasis in the title is on the word “compliance.” Tax reps take compliance very seriously. They are instructed to use vigorous but legal collection activities in an effort to collect the delinquent tax liabilities in the shortest possible time.
THE EDD COLLECTOR
Perhaps the most striking difference between the collection functions of the EDD, when compared to the IRS, is the absence of any type of “collection due process” in EDD collections. Since about the year 2000, the IRS has had an elaborate and effective system of allowing taxpayers to contest the deficiency against them, or to work out a collection alternative such as an installment payment arrangement, without the fear of enforced collection action. The IRS also has in place a structured system for the abatement of most IRS penalties – the EDD no such thing.
There are essentially two broad categories of the collection process: voluntary collection and enforced collection. Voluntary collection occurs when the tax debtor pays the bill without being forced to do so. EDD enforced collection is swift and often without warning. Enforced collection by the EDD usually involves one or more continuous bank account levies and the recording of a Notice of State Tax Lien. The taxpayer does not have an opportunity for any type of pre-collection hearing and often enforced collection occurs without any prior written notice. Enforced collection can also involve the arbitrary issuance of quarterly estimated Notices of Assessment solely out of thin air. This usually happens when the taxpayer has not filed quarterly payroll tax returns. When this happens, the EDD will require the filing of actual quarterly returns even if these returns show nothing but zeros.
The all powerful EDD collector engages in the following primary functions:
1. Enforced collection action – usually one or a series of bank account levies without warning; the collector can also issue a wage garnishment, known as an “Earnings Withholding Order for Taxes.” (EWOT)
2. The filing of a Notice of State Tax Lien.
3. The issuance of quarterly Notices of Assessment based upon internal information from previously filed returns or estimations.
4. The issuance of correspondence to potentially responsible individuals for unpaid corporate or LLC deficiencies. This correspondence requests that the designated individual contact the EDD collector.
5. CUIC § 1735 assessments against potentially responsible individuals.
6. Establishing monthly installment payment agreements.
7. Determining whether to withhold collection action based upon hardship.
8. Evaluating Offers in Compromise.
9. Determining transferee liability and/or successor assessments.
10. Determining alter-ego assessments.
Impact of the EDD Employers’ Bill of Rights (EBR)
The EDD’s EBR has been in effect for over twenty years. It can be found in CUIC §§ 1231-1237. A large portion of the EBR is devoted to taxpayers’ rights in the collection process. Of primary importance are provisions relating to seeking professional advice before meeting with an EDD collector. The EBR also has provisions for entering into installment agreements and the submission an Offer in Compromise. However, the EBR also has tough provisions relating to enforced collection as follows:
- Filing a Notice of State Tax Lien against your real and personal property
- Issuing you a Notice of Levy.
- Issuing a warrant to seize and sell business and/or personal assets.
As a matter of policy, the EDD will not seize or sell the primary residence of a tax debtor.
- Issuing an EWOT (discussed above)
- Filing of criminal charges
- The right to request a waiver of penalties
When compared to the several versions of the IRS Taxpayers’ Bill of Rights, the EDD version leaves a lot to be desired.
The EDD Collector Gets Leads from the EDD Auditor
Earlier I mentioned CUIC § 1735 assessments. These are personal assessments for unpaid corporate level and LLC level unpaid deficiencies. It is not the EDD auditor who goes after the so-called responsible individuals – that’s the job of the EDD collector. However, the EDD auditor provides leads for the collector through provisions in the Audit Report (AR). Most ARs require the auditor to gather information for possible 1735 assessments. Some of the questions set forth in the AR are the following:
- Who managed and directed entity operations?
- Who determined what bills would be paid?
- When business expenses (including rent, utilities, other taxes, loan payments, or wages to corporate officers and members) were paid with corporate/business funds?
- Who signed these checks?
- Who will have the authority to authorize payment of the assessment?
Relatively speaking, there are very few 1735 issued assessments. EDD collectors work hard and they have many cases. Most 1735 assessments occur when a taxpayer responds to an EDD inquiry concerning potential exposure to a 1735 assessment.
Negotiating an Installment Payment Arrangement
Most EDD collectors are willing to grant a taxpayer an installment payment arrangement. This is especially true for sole proprietors and partnerships. However, for corporate level arrangements, the EDD collector often requires that potential responsible persons fill out a “Corporate Questionnaire” that is, in reality, total exposure and admission to being assessed pursuant to CUIC § 1735. But you can’t get a corporate level payment arrangement unless and until the questionnaire is completed, signed and submitted.
Pursuant to CUIC §§ 1731-1733, any purchaser of a business can be liable for the past unpaid EDD taxes of that business if steps are not taken to protect the new purchaser from this exposure. While the EDD makes every effort to collect the deficiency against the original debtor, the new purchaser has exposure. The new purchaser is liable up to the purchase price paid for the business. This can occur if the purchaser or the seller fails to obtain a release certificate from the EDD while the transaction is in escrow. A wise purchaser will insist on obtaining a Clearance Certificate from the EDD prior to the close of escrow.
EDD collectors can be all powerful. They can disregard a new corporate entity if they believe that the corporation was formed primarily to evade debts owed by the prior corporation. No formal procedure such as a new Notice of Assessment need be issued. If the EDD believes that the new corporation is an alter-ego it can issue the same account number to the new entity to proceed to collect the tax debt by going after the new entity. Alter-ego pursuits are generally a last-ditch effort by the EDD and are used when the deficiency is substantial. The key element necessary to establish alter-ego collection is the ownership and control of the new corporation the same individual or group controlling the old corporation.
Transferee liability means that the liability for taxes owed by the original debtor is transferred to third persons who are the recipients of income and assets of the tax debtor, rendering the original tax debtor unable to pay its EDD debt. By way of example, on July 24, 2018 the Ninth Circuit decided the case of Stone et al v. Commissioner of Internal Revenue 2018 2 USTC ¶50,346. In that case individual shareholders of a defunct corporation were held personally liable for millions of dollars in corporate level unpaid federal income taxes. They received money that rendered the corporation unable to pay the IRS.
Transferee liability is a collection tool and can be used by an EDD collector to go after shareholders, officers, and other responsible persons for raiding and plundering the assets of a corporation rendering it essentially hollow and unable to pay its EDD debts.
I know a thing or two about dealing with IRS and EDD tax collectors. Over the course of my law practice I have written 20 books and hundreds of articles dealing with the collection process at the state and federal levels. There is one main rule that I believe is of primary importance in dealing with tax collectors: yes, they love money, but it is every bit as important that you timely communicate with them and keep your word.
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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