ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SUCCESSFULLY ABATING EDD COMPLIANCE PENALTIES
By Robert S. Schriebman
Compliance penalties are those imposed by the EDD for the late filing and/or late payment of quarterly and annual payroll tax returns.
Recently, I had a telephone conference with an EDD auditor assigned to examine my client. This was an entrance interview where the auditor begins the audit process by asking a series of basic questions. Some of those questions were set forth for your review in Article 591. During the conference, the auditor expressed his concern about the many penalties incurred by the employer for compliance failure during 2020 and 2021. He asked me to consult my client to determine if there was any way the auditor could remove or abate all or a portion of those penalties. I was very impressed with the concern this particular auditor showed.
After the audit conference, I contacted my client to request that he prepare a written explanation of why the company’s returns were consistently late and underpaid. All requests for penalty abatement must be in writing when presented to the EDD or IRS. My client responded with a sad story of corporate in-fighting and changes in ownership. After reviewing his presentation, I did not believe there were sufficient grounds for abatement under the circumstances presented to me.
In order to abate a compliance penalty, there must be reasonable cause. All California taxing agencies, including the EDD base their standards for abatement by following the guidelines historically set by the IRS. This article will take a brief look at the criteria necessary to establish reasonable cause.
Establishing Reasonable Cause
When it comes to abating compliance penalties, where do you start? I start by examining the US Supreme Court’s Boyle case Boyle v US, 469 US 241 (1985). The Court stated that the standard for establishing reasonable cause is proof that one conducted his/her affairs as a reasonable business person would do so. From this standard, the IRS developed several standards or criteria they use and publish in the Internal Revenue Manual as follows:
- Death, serious illness or unavoidable 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 the taxpayer of erroneous oral advice from the IRS.
- Receipt by the taxpayer of erroneous written advice from the IRS.
Corporate in-fighting and internal management issues do not constitute grounds for reasonable cause.
For more information on penalty abatements, see IRS Tax Penalty Handbook by Robert S. Schriebman published by CCH in 1994. There are also several articles on this website that discuss penalty issues.
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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