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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE ASSESSMENT OF EDD FRAUD PENALTIES

By Robert S. Schriebman
2020

Introduction

What does it take to be on the receiving end of EDD fraud penalties? Before answering this question, it is important to understand that when it comes to tax audits, whether by the EDD or the IRS, there are both civil and criminal fraud penalties. Civil penalties do not get the publicity that criminal penalties get. Perhaps the most famous criminal tax fraud penalty of all time was the case of Al Capone. Capone was jailed not because of his criminal activities but because he failed to declare his income on his federal tax return. Criminal fraud penalties, assessed by the EDD, are prosecuted by either the District Attorney or the Attorney General. Criminal charges involve either fines, jail time, probation, or a combination of all three. By far the most common fraud is civil fraud. While this does not involve criminal prosecution, civil fraud involves stiff monetary fines. For years the employer will be on the EDD’s radar. The next audit could result in criminal prosecution!

In the Unemployment Insurance Code, fraud penalties are found in § 1128. There are two fraud penalties, §§1128(a) and 1128(b). They are assessed for failing to file returns, or filing false returns with the intent to evade payroll taxes. Each fraud penalty is 50% of the amount of tax assessed. Both penalties are usually assessed. In addition to the assessment of these two fraud penalties, the EDD will also assess many more penalties including a negligence penalty as well as worker information return penalties. All of the penalties will add up to almost four times the amount of the underlying taxes assessed.

One of the more unpleasant “dividends” of being assessed EDD fraud penalties, is that a post-assessment settlement is out of the question. The EDD’s Settlement Unit, as a matter of policy, will not entertain settlements where fraud penalties are involved.

What type of activity on the part of the employer will cause the assessment of fraud penalties and all the other penalties that go along with the assessment?

An Example of What It Takes To Be On The Receiving End of Fraud Penalties

An example crossed my desk recently. A Southern California restaurant owner had been audited by the EDD, and assessed a large assessment consisting of two fraud penalties, a late report penalty, a wage item penalty, the negligence penalty and two worker information return penalties. The penalties and interest combined were close to over 4 times the amount of the underlying tax! During the audit, the employer continuously lied to the auditor. There were lies about when the business started operations and the number of employees. Employees working at the restaurant were paid partly in cash and partly by check. Over a three-year period, there were close to 100 such incidents. The W2s that were issued and filed with the IRS were false, reporting only check payments. No cash payments were reported. Quarterly payroll tax returns filed with both the IRS and the EDD were grossly understated to reflect only check payments. No cash payments were reported and no payroll taxes paid.

I was surprised that the EDD did not criminally prosecute this employer. I believe I can accurately predict that if the employer’s corporation does not pay the assessment, the EDD will not hesitate coming after responsible individuals to see to it that the taxes with all penalties are paid in full.

Conclusion

Many small businesses, especially restaurants, are having a tough time during this pandemic. EDD audits are down. EDD auditors, since March have devoted their time to help process UI claims., sometimes working over 10 hours a day, 7 days a week. But there are signs that auditors are slowly returning to their primary jobs of conducting field audits. There is great temptation to be competitive and this may mean, for some, to conduct their affairs like the restaurant example above. I’d like to give them some advice based upon my experiences. I started my tax practice handling IRS and FTB audits. I was also doing tax planning. Some of my clients would ask, “If I do this, or I do that… what are my chances of being audited?” It was clear they wanted to play the odds. I always responded as follows, “If you get caught by the tax man, and you are audited, the chances are 100%!” I never liked those odds.

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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 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 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.

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