ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE EDD’S 1735 ASSESSMENT – WHAT YOU NEED TO KNOW
By Robert S. Schriebman
The EDD’s 1735 assessment is a personal level assessment for unpaid corporate or LLC employment and withholding taxes (payroll taxes). CUIC § 1735 states, in substance, any officer, major shareholder, or other person, having charge of the affairs of a corporation or LLC shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid by such employing unit. The IRS version, set forth in IRC § 6672, is based upon the same principles. It is known as the Trust Fund Recovery Penalty (TFRP). The real-world difference is that while the IRS version is a larger dollar amount, the TFRP is only about 60% of the total owed by the corporation or LLC. The EDD’s version, while smaller in dollar amount, is a 100% exposure for every dime owed by the employing unit.
In this article, I will show you the usual ways that the 1735 assessment is levied on the targeted so-called responsible person. I will then discuss what you must do to avoid traps for the unwary.
How the EDD Goes About Issuing a CUIC § 1735 Assessment
When it comes to the EDD, auditors do auditing, but collectors do more than just collect. The job of the collector is to determine targeted individuals and to issue assessments against them as responsible persons. The typical EDD 1735 assessment is headed like this:
“John Jones, as responsible person for Ajax, LLC”
Note: If the Notice of Assessment (NA) is not headed in this manner, it usually is only an employing unit level assessment. You do not have personal liability yet, and may not at all. This can cause a lot of confusion and many people wind up sending their hard-earned money to the EDD when they actually have no personal exposure.
An EDD audit report, for a corporation or LLC, prepared by an auditor, has portions wherein the auditor gives his/her opinion on who should be the target(s) for the 1735 assessment. This does not mean that the assessment will automatically be issued. The person who makes the final determination is usually the assigned collector.
Enter the EDD Collector
The job of an EDD collector is not only the collection of corporate and LLC unpaid deficiencies. The collector also makes the determination to issue the 1735 assessment. The determination is made in several ways. The most common way is for the collector to send the targeted individual a series of letters informing the target that the EDD is considering issuing the assessment. The letters request that the targeted person contact the collector to discuss the matter. Most individuals responding to these letters wind up with a 1735 assessment against them. Is there a lesson here?
The second way the assessment may be issued is when the corporation or LLC requests an installment payment arrangement. The collector requests the usual financial disclosures but also sends out a Corporate Information Questionnaire. In reality the Questionnaire is a confession of both responsibility for unpaid payroll taxes and willfulness in not paying those taxes. Responsibility and willfulness are the two key elements required for a 1735 assessment to be valid. The Questionnaire may also be given to other taxing agencies such as the sales tax people and used for personal level sales tax assessments. There are articles on this website that clearly illustrate how the CDTFA uses the EDD’s Questionnaire to affix their version of personal level liability.
The sad reality is that the EDD collector may not grant an installment payment arrangement at the employing unit level unless and until the Questionnaire is completed and signed under penalty of perjury. Is there duress here? You bet!
What to Do If You Are Issued a 1735 Assessment?
- Don’t call the EDD: CUIC 1735 assessments are sent by certified mail. Unfortunately, the most common reaction to the receipt of the assessment is to ignore it. Some people believe they can call the EDD and talk them out it. I have had cases where the caller is told by the EDD not to pay attention to the assessment and the collector will look into the matter and get back to the caller. This is fatal! Most likely you will not hear from the collector at all. Because you have only 30 days to file a petition with the CUIAB, that time goes by quickly. The assessment becomes final and subject to collection. It must be paid first before you can file a Claim for Refund to dispute or challenge the assessment. The EDD collector is not your friend.
- File a timely petition: You only have 30 days from the date of the assessment to file a petition with the CUIAB. Timely filing will protect your appeal rights and you do not have to pay the proposed assessed until your matter is resolved. There is no special preprinted form for the petition. Send the petition by certified mail and get your USPS receipt round-stamped. You may also use carriers such as FedEx or UPS. These methods assure that you will have a tracking receipt in case the petition gets lost. Timely mailing is deemed timely filing.
- Consider a settlement: Settlements may be entertained by the EDD Settlement Unit after a petition is timely filed. Because 1735 assessments and issues are fact-driven, there is always room for both sides to argue their respective cases. Settlements are not reported to the IRS.
- Consider a judge hearing: After you file a timely petition, you have the right to bring your case before the CUIAB and a judge. These types of hearings are always risky especially for corporate and LLC officers. Make sure you have witnesses who will testify in your favor. These types of matters many times come down to a finger-pointing contest between targets. If this is all you have to present to the judge, you are better off with a settlement.
In this article I have given you the basics of the 1735 assessment process and the avenues available to you to contest the proposed assessment. Having said all this, the best advice is to never allow yourself to become a 1735 target.
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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