ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE EDD’S NEGLIGENCE PENALTY – HOW TO BEAT IT
By Robert S. Schriebman
Most EDD employer-worker status audit assessments carry along with the usual tax portions, a negligence penalty. For most EDD auditors the inclusion of the negligence penalty is virtually a knee-jerk function. Not much thought or analysis is used by the auditor. The auditor just includes the negligence penalty as a matter of course. This article will discuss the EDD’s negligence penalty and give you a few suggestions on how to stop the auditor from assessing it.
The EDD Negligence Penalty
CUIC § 1127 sets forth the negligence penalty. The internal EDD standard is that the penalty should be assessed due to the filing of a deficient return or report when the employer was negligent or intentionally disregarded the law. The negligence penalty used to be calculated at 10% of the tax portions of the assessment (UI, DI, ETT and PIT). Recent legislation has upped the penalty to 15% effective 2014. The IRS used to have a separate negligence penalty but that was changed several years ago by the creation of the accuracy related penalty. The IRS standard is negligence or disregard of the rules and regulations or any substantial understatement of income tax (IRC § 6662).
Application of the EDD Negligence Penalty
The EDD applies the negligence penalty if the auditor believes that the employer improperly classified a worker or workers as independent contractors ad hoc without getting any professional advice. At the initial stages of the EDD audit, auditors are now asking if and when the employer sought professional advice about how to classify certain workers. This is the most popular reason why the negligence penalty is added to the assessment. Occasionally the penalty will be applied because of poor record keeping or the lack of cooperation in the audit process by either the employer or the employer’s representative. But, this is the exception and not the rule. Often the negligence penalty is assessed in lieu of any fraud penalty – the employer did not cross the line into willful misconduct.
How to Beat the Negligence Penalty
The best way to beat the negligence penalty is to keep your books and records in good order. The second way is to be proactive and to inform the auditor at the beginning of the audit that you sought and received professional advice on how to classify workers. The professional advice can come from an attorney, a CPA, or an enrolled agent. Merely telling the auditor that you classified your workers as contractors because the guy down the street did the same, or your industry follows a common practice, is not going to win the day for you.
CUIC § 1127 imposes a 15% negligence penalty. Interest is also added to this penalty. Most EDD auditors assess the penalty without bothering to ask the employer why the worker was classified as an independent contractor. When you receive the Notice of Assessment, you will most likely see the negligence penalty. This is unfair because the auditor never discussed anything with you. Things are changing with the EDD. Some auditors are now asking about professional advice at the beginning of the examination process; but not all auditors. Therefore, it is incumbent upon you to be proactive and to inform the auditor, during the initial stages of the audit, that you received professional advice from attorney Jones or accountant Smith when you first went into business.
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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