ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW TO REMOVE AN EDD OR AN IRS PENALTY
By Robert S. Schriebman
When it comes to EDD and IRS penalty assessments, things can get complicated quickly. Both the EDD and the IRS have many penalties and some code sections have multiple penalties and multiple penalty rates. Take the EDD, for example, they have over 14 different penalties. A typical EDD audit, excluding fraud penalties, can have as many as 5 different penalties. When these penalties are added together their collective amounts are larger than the underlying tax portion of the assessment.
In this article we will discuss the latest IRS Tax Tip dealing with penalties and I will also integrate into the discussion suggestions for abating EDD penalties as well.
In late June the IRS issued Tax Tip 2018-100 giving the public a very brief overview of common penalties and how these penalties may be removed or abated.
IRS Penalty Relief
Tax Tip 2018-100 lists 3 of the most common penalties:
- File a tax return
- Pay on time
- Deposit certain taxes as required.
A complete discussion of the IRS penalty structure and grounds for abatement are set forth in the Internal Revenue Manual and specifically Chapter 20. You can access the Internal Revenue Manual online.
First Time IRS Penalty Relief
If you can prove to the IRS that you have a history of compliance, going back at least three tax years, you can request First Time Penalty Relief. This relief usually applies to failure to timely file a return or failure to make a timely payment. The relief for failure to file a return applies to both income taxes and payroll taxes. If you are requesting relief for the penalty for timely failure to file, you must be able to show that you previously filed returns and have filed a timely current extension.
The IRS Tax Tip makes a suggestion that you should try to save your “first time violation” waiver by first claiming that the penalty should be abated due to reasonable cause. This allows you to effectively keep your “get out of jail free” card.
The EDD does not have a first time penalty relief program.
Most IRS and EDD penalties may be abated if you can prove reasonable cause. Reasonable cause is not specifically defined. There is virtually no statutory language and just a couple of hints under the regulations pertaining to IRC § 6651, which make reference to the exercise of ordinary business care and prudence.
When it comes to abating penalties, where do you start? If you are dealing with the IRS you will probably be dealing with an IRS collector known as a Revenue Officer. You can verbally discuss penalty abatement with the Revenue Officer, but IRS procedures require you to put your request in writing. If the Revenue Officer turns your request down you must file a written appeal promptly; within a matter of days. (I advise waiting no more than 15 days to file a written appeal.) The appeal can be given to the Revenue Officer.
Some of the grounds for reasonable cause are as follows:
- Death, serious illness or avoidable absence;
- Fire, casualty, natural disaster or other disturbance;
- Inability to obtain necessary records;
- Lack of funds;
- Ignorance of the law;
- Error or forgetfulness on the part of the taxpayer or a subordinate;
- Reliance by taxpayer on the advice of a competent tax advisor;
- Receipt by taxpayer of erroneous oral advice from the IRS;
- Receipt by taxpayer of erroneous written advice from the IRS.
After you file your written appeal, you will eventually receive an appeals hearing. That hearing may result in whole or partial abatement of penalties.
IRS auditors routinely put the accuracy-related 20% penalty after the taxes have been determined. You make a written request to the auditor to remove the penalties based on reasonable cause. If t he auditor refuses your request, you are welcomed to have a conference with the auditor’s manager. If your request is still turned down, you can appeal the audit assessment with the IRS Appeals Division. When IRS audits are completed, taxpayers routinely receive written instructions for filing appeals.
EDD Penalty Abatement Procedures
When it comes to EDD penalty abatement procedures there are almost none. You should ask your assigned auditor to abate penalties and this request should be in writing. Most likely you will be turned down at the auditor level. You should then go through the chain of command by requesting a conference with the agent’s immediate supervisor. If that fails, you should file a petition with the CUIAB and seek a settlement through the EDD’s Settlement Unit. Most settlements will abate the penalties and focus on resolution on a percentage of the tax portion of the assessment.
The assessments of penalties from both the EDD and the IRS have become so common they are made virtually automatic with each type of tax assessment. My personal advice has consistently been, “Never take a penalty lying down.” Get up and fight it. If you don’t demand penalty abatement, it’s not going to happen.
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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