ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SHOULD YOU GO-IT-ALONE WHEN DEALING WITH THE EDD?
By Robert S. Schriebman
This article will discuss the risks associated with doing it yourself when it comes to both EDD audits and potential personal-level assessments.
EDD Audits – Going It Alone
It is not uncommon for me to be retained in the middle of an EDD audit that clients thought could be handled on their own. There are at least three common threads of experience when this happens. The first common thread is the desire of the client to say and do things that he/she believes will convince the EDD auditor that there should never have been an audit in the first place. This is akin to a form of a fictional parent-child relationship, wherein the employer becomes the child, and the EDD is the parental figure. The auditor often facilitates this fantasy by coming off as super friendly to the employer such as addressing the employer on a first-name basis. It is akin to the auditor saying, “Hi Frank, I’m here from the EDD and I am going to help you!” This metaphor shows a common tactic used by the EDD. The child side fantasizes that if he/she gives the EDD everything they ask for, along with logically explaining why workers were treated as independent contractors, the auditor will fully understand and issue a no-change audit.
The second thread involves an employer, wishing to be fully cooperative, will have given the auditor potentially damaging information and documentation, and allow the auditor to conduct a fishing expedition with no restraints. A common example is giving the auditor total access to books and records including credit card statements that the auditor can use to attribute additional compensation based upon credit card payments.
In reality – much damage has been done. When the auditor sees that the employer has not filed payroll tax returns, the auditor will expand the audit from the usual 12 quarters or 3 years back to a maximum 8-year audit period. So much for being super friendly with the auditor!
The third thread occurs when the employer realizes that the friendly, all-telling approach has now become a disaster. The decision is made to bring in an EDD tax professional. At this point, a fantasy develops in the mind of the employer. Hiring the tax professional will make all this go away, and the tax professional will deal with the auditor as though the past disclosures and the giving of damaging documentation never occurred.
A knowledgeable EDD tax professional can only do so much to avert this train wreck. The employer has unreasonable expectations, but the professional is not a magician, nor can the professional take back what the employer has previously told the auditor and the professional may not be able to erase the damage done from giving the EDD too much documentation.
The most likely end result of bringing in a tax professional late in the audit process is the reality of a potentially harsh EDD assessment. These types of assessments have another common thread – penalties. Some of the common penalties are as follows:
- Failure to Register Penalty
- Late Report Penalty
- 1126 Assessment Penalty
- 1127 Negligence Penalty
- Worker information return penalty (Part 1)
- Worker information return penalty (Part 2)
The EDD does not pick and choose which one of the above penalties to apply – the EDD assesses all of the penalties at the same time.
Getting Caught Between a Rock and a Hard Place – The DIY Tough Guy Approach
Let’s look at the other end of the DIY spectrum. This is the employer who has taken the position of being uncooperative with the auditor. He/she is a “tough guy” and vows the EDD is not going to push him/her around. This person believes that not responding to the audit notice or withholding information and documentation will force the EDD to go away. This is known as the ostrich syndrome. Taxing agencies such as the IRS and EDD know very well how to deal with this type of taxpayer. The auditor will make a few attempts to work with this employer. Being unsuccessful the auditor will issue an estimated assessment that is usually much higher than one based on an actual audit of books and records. An estimated assessment cannot be settled and must be taken before a judge who may order the employer to cooperate with the EDD or will just issue a judgment based on the estimated assessment, because the employer has not been cooperative in the audit process.
At this point in time the employer sees the light and hires a EDD tax professional. Again, the professional is not a magician and has to undo all the previous ill-will and damage. This usually results in substantially higher professional fees with no assurances that the assessment will be lowered.
CUIC § 1735 Personal Level Assessments
The EDD has a statute for assessing responsible persons individually for the payroll taxes owed by the entity such as a corporation or an LLC. The so-called responsible person has exposure for every dime owed by the entity and not paid. Going it alone here can be a disaster. These types of assessments are usually made by EDD collectors whose job it is to determine whether those persons running the company should be personally assessed. The EDD is tricky and smart. They send out a series of contact letters and if you respond you are automatically a target for an assessment. A knowledgeable tax professional will determine and advise you on the best approach. Sometimes a collector will not issue these letters and instead will telephone the prospective target and conduct an interview. Naturally the targeted individual will want to “explain” to the collector why he/she should not be assessed and will always give out a ton of damaging information thinking they are putting their best foot forward and totally convincing the collector why they should not be assessed. What is really happening here, through the eyes of the EDD, is a fishing expedition to determine the two key elements for a successful assessment: responsibility and willfulness. A knowledgeable representative will keep the targeted individual far away from the collector and offer no damaging information.
If the EDD collector elects to make a personal-level assessment, failure to timely file a petition will allow the assessment to become final and subject to collection. A competent and experienced tax professional will file a timely petition and give you your options such as going for a settlement or a hearing before an administrative law judge. A settlement may be preferable to a judge hearing and reduce the assessment because the professional will point out to the EDD its hazards of litigation. This may result in a substantial reduction of the personal level assessment.
Going-it-alone has huge risks. The employer is walking through a potential minefield. It is a huge mistake to expect that the past damage will be undone. If you find yourself in this position, don’t expect your representative to be a magician and to waive a magic wand to make your mistakes vanish. The employer has big exposure. Expect to pay the EDD if you have misclassified workers or you have not received reasonable compensation from your corporation or LLC.
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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