Ask The California Employment Tax And Payroll Tax Attorney – EDD Settlements – A Dozen Things You Need To Know
By Robert S. Schriebman 2020
Introduction
I believe that a good settlement is better than a good lawsuit. Someone once said that a good settlement means that neither side is jumping for joy with the deal; I do not agree. I have resolved many EDD audits through the settlement process, and I consider most of them to have been a win-win. When you take into consideration the fact that settlements save the costs and uncertainties of an administrative law judge hearing coupled with the confidentiality of the deal – that will be discussed below, an EDD settlement may result in big savings to the employer-taxpayer; not to mention that the payment of the settlement is also tax deductible.
In this article I will present a dozen factors to take into consideration when considering going for an EDD settlement as a way to resolving your EDD audit or your client’s audit.
A Dozen Things You Should Know About an EDD Settlement
- What is an EDD settlement? An EDD settlement is a process that usually begins after an EDD auditor completes the examination and issues a final Notice of Assessment (NA). Upon receiving the NA, you must file a timely petition with the CUIAB. A separate unit within the EDD (known as the Settlement Unit) entertains a “let’s make a deal” process that may result in a significant reduction of the original assessment and the avoidance of a hearing on the merits before an administrative law judge.The process starts by the taxpayer-employer making an initial settlement proposal. The EDD will not approach you with a settlement deal.
- How do you make a settlement offer? Settlements are initiated by the employer-taxpayer submitting a settlement proposal. The proposal is submitted to the EDD’s Settlement Unit in Sacramento. All proposals must be in writing. There is no special format or form. A proposal can be as short or as long as you deem necessary.
- May you make a settlement offer during an audit? The audit must be completed and a Notice of Assessment issued by the auditor. You must also file a timely petition with the CUIAB as a precondition to submitting your proposal.
- May you make a settlement offer if my case is set for a judge hearing with the CUIAB? The submission of a settlement proposal is liberally allowed. You may make a proposal even though your case is calendared for a judge hearing. Once your offer is submitted to the Settlement Unit, they will contact the CUIAB to take your case off the hearing calendar. If you cannot resolve your matter with the Settlement Unit, your case will be put back on the hearing calendar, and a new hearing date will be set.
- If you did not timely file a petition with the CUIAB, may you still enter into settlement negotiations with the EDD Settlement Unit? Generally not. The Settlement Unit can consider your matter for settlement only if you have filed a timely petition or a judge hearing rules that your late petition is deemed timely filed. Otherwise, you will have to pay the assessment, file a timely claim for refund, and thereafter file a refund petition with the CUIAB. Things can get complicated.
- If your assessment is estimated, may you make a settlement offer? This is “iffy.” If an audit assessment is estimated due to the absence of documentation and/or lack of cooperation on your part, the Settlement Unit will not entertain the settlement and instead will reject your proposal and recommend you go back to the auditor to conduct a full disclosure examination. When, however small portions of the assessment have been estimated, the Settlement Unit may take on your case for settlement.
- Your Notice of Assessment contains fraud penalties, will the Settlement Unit take on your matter for settlement? Generally not. Fraud penalties or criminal prosecution will not be eligible for settlement.
- How long does it take to get a settlement offer? In the current pandemic environment, it is difficult to predict a timeline. Settlement proposals may take on the average over one year to resolve from the time your proposal was submitted.
- When you receive an EDD settlement offer, is it a “take it or leave it deal?” Settlement proposals are reviewed at several levels within the Settlement Unit. Your assigned Settlement Officer has thoroughly reviewed your case and EDD lawyers have taken into account the hazards of litigation for the EDD. Negotiations back and forth are the exception and not the rule.
- Are you allowed to make settlement payments in installments? Settlement payments may be made over an 18-month period without having to provide certain financial disclosures. More than 18 months is possible, but you will have to submit the following minimum documentation:
- Federal tax returns
- Profit and Loss Statements
- Balance Sheets
- Bank Statements
- Written statement of how the pandemic has impacted your business.
By law installment payment arrangements are subject to a 15% late payment penalty in addition to the settlement amount. Interest will be charged on the unpaid balance.
- Is your settlement with the EDD reported to the IRS? One of the positive considerations about accepting an EDD settlement offer is that the records of the settlement process are not available to the IRS.EDD audits that have not been settled, with all schedules and internal paperwork, are available for the IRS to review. After review, the IRS is free to conduct any type of audit permissible by law. The IRS can take the EDD’s findings and issue a “Me Too” assessment. IRS rates are higher than EDD rates. IRS assessments are usually larger than the EDD’s.
- If you accept an EDD settlement offer, is this any assurance that the EDD will not audit you in the future? There are no guarantees in life except death and taxes. When you settle with the EDD you will be required to sign a Settlement Agreement. Part of that agreement states that you agree to treat improperly classified workers as employees at a future date certain. If you ignore this provision, and continue to treat those workers as independent contractors, you will have serious exposure to EDD penalties if you are reaudited. You also run the risk of breaching your agreement and restoring the original assessment prior to settlement. It is not worth the risk!
Conclusion
In my practice I have found that the settlement process works to my clients’ advantage. I believe in the process. There are times when the EDD and the employer-taxpayer cannot arrive at a deal. In that case, the employer-taxpayer retains the right to have a judge hearing on the merits before the CUIAB. At this point in time, it is not clear just how either AB-5 or AB-2257 will impact the settlement process.
***
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.
Web Site Article 523