Ask The California Employment Tax And Payroll Tax Attorney – Ignoring The Terms In An Edd Settlement Contract – Bad News
By Robert S. Schriebman
I have settled many EDD audit matters in my career. So far, I can say that my clients have lived up to the terms and conditions of these agreements. In times of reflection, I contemplate what may happen to an employer who ignores the terms and conditions of a settlement agreement and is reaudited by the EDD. The specific provision I have in mind is that portion of the agreement requiring the treatment of questionable workers as future W2 wage earners. The specific provision reads as follows:
“Beginning ______, 2023 and continuing thereafter, XYZ, Inc. agrees to report amounts paid to workers engaged by or for XYZ, Inc. who perform services of the types that issue in tax case number 1234567, and pay the applicable employment taxes on those amounts.”
You will find this provision in each and every EDD settlement agreement. The provision is far from clear and does cause confusion for the employer. In a typical EDD audit, there will be workers who should have been clearly classified as W2 wage earners. There usually are one or two individuals who are clearly independent contractors, such as outside consultants, and those having established businesses. The rest fall into a grey area where the employer is prudent to start treating them as employees. Most EDD audits fit this pattern and the audited service recipient makes a good faith effort to comply with the provisions in the agreement.
The Risks of Ignoring Settlement Agreement Terms
What happens if the employer or service recipient signs the agreement, pays the settlement amount, and continues to do business as usual? What are the risks of being reaudited by the EDD after reaching a settlement? Very few EDD settled cases get a second audit, but it can happen.
Suppose the business is reaudited. Suppose further that the auditor finds the employer did not live up to the terms and conditions of the original settlement agreement. There will be a new assessment with perhaps harsh penalties such as the negligent penalty, worker information return penalties, and in an egregious case, one or both civil fraud penalties.
May a Second Audit be Settled?
Recently a new client came to me for an EDD settlement. Unfortunately, my client neglected one small detail – the company was previously audited and settled the first audit with the EDD. I submitted a request for settlement for the second audit and was informed by the Settlement Office of the previous settlement and the fact that the employer did not live up to the terms and conditions of the prior agreement. The EDD Settlement Office refused to entertain a second settlement. What does this mean? It means that the employer will either have to fully pay the assessment or undertake a judge hearing on the merits before the CUIAB. The employer is now caught between a rock and a hard place.
A settlement agreement is a contract between the employer and the State of California. The EDD takes these contracts very seriously. In the event of a reexamination by the EDD, it is vital to point out to the auditor that the settlement agreement was not breached and the expenditures may be for reimbursements, or made to individuals having their own businesses and not under the control of the employer. The new ABC Test under AB5 and AB2257 will be critical in future examinations.
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 50 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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