This office does not handle:

  • Unemployment Insurance Benefits (UI)
  • State Disability Issues (SDI)
  • Worker Compensation Issues
  • EDD Overpayments

Over 50 Years In Practice
Over 500 Articles

Ask The California Employment Tax And Payroll Tax Attorney ‐ Is It Possible To Obtain Innocent Spouse Relief In An Edd Cuic Section 1735 Assessment? ‐ Part 2

By Robert S. Schriebman



This is Part 2 of a 2-part series. This article should be read in conjunction with Part 1 (Article 359). This series of articles will attempt to provide a framework for effectively obtaining innocent spouse relief when the EDD pierces the corporate or LLC veil and issues an assessment against the so-called responsible person individually. The authority for the EDD to disregard the corporate or LLC entity and assess responsible persons individually is set forth in CUIC § 1735.

A CUIC § 1735 assessment is a true “100% penalty” compared to the IRS version of the Trust Fund Recovery Penalty (TFRP) at only about 60% maximum of the underlining entity assessment. With the IRS you have the “Trust Fund” and “Non-Trust Fund” portions. The individual is not personally liable for the entity non-trust fund portion. Nor is the individual personally liable for 940 FUTA assessments. Accrued interest on the TFRP does not begin to run unless and until the individual assessment is made and recorded on the IRS books.

Traditionally innocent spouse relief has been limited to IRS and FTB joint income tax issues. Innocent spouse rules are generally not available in EDD employment tax issues.

A general discussion of IRS and FTB innocent spouse rules are set forth in Article 359.

The Finger-Pointing Contest

Potential targets of both EDD 1735 assessments as well as IRS TFRP assessments, can easily point to others within the corporation or LLC as being the “real” responsible person. And the so-called “real” responsible person will usually point the finger of blame back at the accuser. Both the EDD and the IRS know this defense very well. That is why the EDD and the IRS will make a “shotgun” approach to the assessment. They will assess anyone whom they believe may have had some control over the entity’s fiscal affairs. If your signature appears on the bank signature records; if you sign checks; if you signed quarterly and annual payroll tax returns; and if you made the decision to pay the rent or the employees instead of paying the EDD – you can count on being a target for the CUIC § 1735 assessment.

An Innocent Spouse Gets Targeted and Assessed

In small corporations and LLCs, so called ‘mom and pop’ operations, a potential innocent spouse most likely will be assessed by the EDD for the CUIC § 1735 assessment. He/she may have helped do the books, occasionally signed checks, or signed payroll tax returns. The real day-to-day fiscal affairs of the business were decided by the other spouse. In a situation where the marriage is stable and long-lasting, these unfortunate assessments are not contested, and the assessment is paid. However, when the couple becomes separated or divorced, the CUIC § 1735 assessment may fall upon a truly innocent spouse.

How to Build a CUIC § 1735 Innocent Spouse Defense

Most EDD collectors considering a CUIC § 1735 assessment do very little real investigation. They are overworked and want to get the file off their desk. This is why many of these types of assessments are summarily made and based upon fragments of information in the collector’s possession. For example, if your client is an officer or director, he/she is a target for the assessment. Collectors are not very interested in the defense and arguments you wish to make. Therefore, when you read this section put yourself in a hearing room before an administrative law judge.

Innocent spouse rules and defenses are not sexist. Most of the time, we picture in our minds a female client. But, innocent spouse defense is available to men as well as women. While every case is going to be different, there are several basic sets of strategies and questions that should be asked an innocent spouse in order to present a credible defense.

In this article I’m going to present sets of questions dealing in marital status, background, spousal abuse, as well as, the day-to-day operations of the business.

Framework Questions

A. General Background and Knowledge (Your objective is to establish a physical separation of the spouses and ignorance of EDD laws.)

  • Date of marriage
  • Date of separation
  • Date of divorce
  • Current addresses of both spouses as well as the respective addresses during the periods of EDD non-compliance.
  • Client’s education or absence of education and knowledge of tax law and specifically EDD payroll laws.

B. Involvement in EDD Payroll Compliance (Your objective is to show that your client was not involved in EDD payroll tax compliance.)

  • Who prepared payroll tax returns in issue?
  • Did client review these returns?
  • Did client sign payroll returns?
  • When returns were filed, did client know of any errors or false statements in those returns?
  • Did client sign payroll checks?
  • Did client make electronic payments?
  • Was client aware that funds were not available to pay taxes?
  • Who made the decisions in the company about how money was spent? For example, who paid the bills, or made decisions about paying creditors?
  • Was client aware of any funds or other company assets transferred out of the company for personal matters? (i.e., buying a car, expensive jewelry, expensive vacations)
  • Does client have the ability to pay the CUIC § 1735 assessment?
    • – Present a personal EDD financial statement such as EDD Form DE 926
    • – Show that client is unable to pay assessment.

C. Is Client an Abused Spouse? (Your objective is to show your client being fearful or unduly influenced or submissive.)

  • Was client physically harmed or threatened? (How about children or other family members?)
  • Was their sexual abuse?
  • Were you afraid to disagree with your spouse?
  • Did your spouse threatened to withhold money for food, clothing, or other basic needs?
  • Did your spouse refuse to allow you to make any financial decisions?
  • Did your spouse abuse alcohol or drugs?
  • Describe the abuse you experienced including when it began and how it affected you, your children or other members of your family?
  • Explain how the abuse affected your ability to properly report employee compensation or pay the correct amount of payroll taxes?
  • Did you seek protection such as a restraining order?
  • Documentation:
    • – Police report
    • – Medical reports; doctor’s letter
    • – Injury photographs
    • – statement from third-party witnesses
    • – psychological or psychiatric counseling.

D. Day-to-Day Fiscal Affairs of the Company (Your objective is to show who ran the daily business affairs of the company.)

  • What was your job title and how were you associated with the business?
  • Who determined the financial policy for the business?
  • Who directed or authorized the payment of bills and the payments to creditors?
  • Who prepared payroll tax returns?
  • Who signed the payroll tax returns?
  • Who signed payroll checks?
  • Who authorized the making of payroll tax deposits?
  • Who authorized the payment of EDD payroll taxes?
  • Who knew payroll taxes were not paid?
  • Who authorized payroll payments to employees?
  • Was your signature on the bank signature records?
  • Did you sign checks?
  • When did you sign checks?
  • During the time the EDD taxes were not paid, were any other business financial obligations paid, such as, rent, utilities, loans, payments to vendors, etc.
  • When and how did you first become aware of unpaid EDD taxes?
  • What actions did you attempt to try to pay the EDD?
  • Who handled EDD contacts such as phone calls, correspondence, or visits by EDD personnel?
  • Were discussions ever held by stockholders, officers, or other interested parties regarding non-payment of EDD taxes?


The above questions and strategies are by no means exclusive or conclusive. As I said earlier, every client’s case is going to be different. Therefore, the above questions are only a framework or skeleton – something to build upon. However, I believe that you will be able to put together an effective defense for your client and turn rules limited solely to income tax deficiencies usable for an effective employment tax defense in response to a CUIC § 1735 assessment.


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 367