Ask The California Employment Tax And Payroll Tax Attorney – Taking A Fresh Look At EDD Personal Level Assessments Pursuant To Cuic § 1735 – Part 2
By Robert S. Schriebman 2020
Introduction
This is Part 2 of a 2-Part series that will take a fresh look at assessment procedures involving CUIC § 1735.
COVID-19 has brought havoc to the business community. I cannot think of one business that has not been affected. Many small and medium sized businesses have suffered terribly and many have gone under. All of this does not bode well for the individual owners and shareholders of these businesses. Prior to the pandemic, many corporations and LLCs were audited by the EDD with resulting assessments. Those businesses that are not either on the CUIAB hearing calendar or in settlement negotiations, most likely are in the process of collection. When the collector finds that these entities are no longer viable or are defunct, the collector will consider issuing 1735 assessments against management and other responsible individual targets.
This website has no shortage of articles dealing with CUIC § 1735. In 2020, there were a number of cases from the Office of Tax Appeals (OTA) imposing personal liability for unpaid corporate or LLC sales and use taxes. The elements for personal level assessments between the Revenue & Taxation Code (R&TC) and the CUIAB are similar. While the parallels between the two codes allow a valid comparison, I believe that there are substantial differences. These differences were brought home to me recently. A client was individually assessed by the EDD for corporate deficiencies going back 8 years! The usual 1735 assessment involves 12 quarters or 3 years. The 8-year individual assessment was issued more than 10 years from the earliest designated year in the original corporate level NA. Needless to say, I was perplexed by the EDD’s seeming ability to issue an assessment covering a period of over 10 years when its rules specifically state that the maximum period is 8 years unless fraud is present. There was no fraud assessed against this particular client.
In Part 1, I discussed the basic elements of CUIC § 1735. In this Part 2, I will discuss how the EDD issues a personal level assessment and the time limits for doing so pursuant to CUIC § 1132. Was the 10-year plus assessment by the EDD legal?
How Do You Know If You Have Been Personally Assessed?
The EDD usually sends out certain signals that warn potential targets of a 1735 personal level assessment. These assessments are not usually made by auditors. In the auditor’s written report there are sections where the auditor attempts to determine potential targets and sets forth recommendations for 1735 assessments. But that is usually as far as it goes. The overwhelming majority of these assessments are determined by and made by the assigned individual collector. Most collectors will send out a series of letters to potential targets advising them that they are being considered for assessment. These letters request that the targeted person contact the collector to discuss his/her exposure. This is a trap for the unwary! Those who respond get assessed – there’s lesson here!
What Does a 1735 Assessment Look Like?
If the EDD decides to issue an assessment, it prepares a special version of the NA. the NA is not addressed to the company; it is addressed to the individual and sometimes says, “John Jones as responsible person for X, Inc.” Some NAs only list the individual i.e., “John Jones.” The NA will then specifically state, “Notice of Assessment – Section 1735 of the California Unemployment Insurance Code.” The NA will be sent by certified mail.
Time Limits for Assessment
The EDD code has one primary statute of limitations provision for issuing assessments. CUIC § 1132 provides a basic 3-year or 12-quarter assessment time frame. Additional assessment time is allowed for fraud and the failure without good cause to file a return. Occasionally the EDD will go back 8 years if the employing unit has not filed quarterly or annual payroll tax returns. This extended assessment period has historically been applied to the construction industry, especially when unlicensed subcontractors are hired and no returns have been filed.
Recently, I came across an NA issued to a responsible person for an 8-year corporate level assessment. The NA was issued 2-1/2 years after the most recent quarter set forth in the NA. In other words, more than 10 years went by before the EDD issued the personal level NA. I was disturbed by what I saw on several levels. I want to share these thoughts with you.
Who Is the Taxpayer?
There are two different taxpayers in a 1735 assessment scenario. The initial taxpayer is the corporation. In the example above, it was issued an 8-year period NA. The second taxpayer is the individual and that individual involves a separate and distinct assessment. Unless the two assessments are done at the same time, the EDD is not allowed to piggy-back or boot-strap the entire corporate level assessment against the individual. If the EDD waits years to assess the individual, that assessment should not carry each and every quarter initially assessed against the corporation or LLC. The assessment period against the individual should be governed by the language of CUIC § 1132 and should only be a 3-year assessment and not an 8-year assessment. The petition filed by the individual should raise the defense of the underlying 8-year assessment as statute barred.
The individual is a separate and distinct taxpayer. The transgressions allegedly committed by the corporation or LLC in the original assessment should not be visited upon the individual automatically. This is especially true if the targeted individual had no control over the fiscal affairs of the corporation or LLC in the past. The targeted individual should not be held responsible for the debt of the corporation or LLC if funds were not available to pay the original assessment.
Conclusion
The EDD bears the burden of proof whenever it seeks to issue a CUIC § 1735 assessment. These types of assessments are issued by collectors who do not have the time or the resources to conduct a full investigation before the assessment is issued. This is the major difference between an IRS Trust Fund Recovery Penalty assessment where the assigned Revenue Officer is required to conduct a full investigation by gathering documentary evidence such as cancelled checks, bank signature cards, loan documents, a personal interview, and contact information prior to issuing the IRS version of a 1735 assessment.
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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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