ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE EDD’S CORPORATE INFORMATION QUESTIONNAIRE – BEWARE! PART 1
By Robert S. Schriebman
The EDD’s Corporation Information Questionnaire is potentially dangerous. Not only is the Questionnaire used by the EDD to assess personal liability for unpaid corporation and LLC payroll taxes, but the Questionnaire may also be used by other taxing agencies to find personal liability. Since the beginning of the year, I have seen at least two decisions from the Office of Tax Appeals (OTA) where the judge used the EDD’s Questionnaire as a confession in finding owners of small corporations personally liable for unpaid sales taxes. The IRS and the EDD have information sharing agreements and it may be only a matter of time before the IRS uses the EDD’s Questionnaire in an effort to assess the Trust Fund Recovery Penalty (TFRP) against targeted individual officers and other employees. I personally look at the Questionnaire as tinkering with an unexploded bomb!
This article will discuss how the EDD goes about assessing personal liability for unpaid corporation and LLC level payroll taxes. I will show you how the EDD gathers information for potential assessments. I will also go through the Questionnaire line-by-line to show you hidden traps and dangers that may lead to financial ruin.
CUIC § 1735, What You Need to Know
The operative statute that allows the EDD to disregard the protections and insulations afforded by laws governing corporations and LLCs is CUIC § 1735. In a nutshell, Section 1735 of the California Unemployment Code provides that any person having charge of the affairs of a corporate or limited liability company who willfully fails to pay the required tax contributions or withholdings as required by the CUIC, shall be personally liable for the amounts due, plus applicable penalty and interest charges.
In order to assess personal liability under CUIC §1735, the EDD must prove that the targeted individual was personally responsible for payroll tax compliance and that the failure to comply was willful. The EDD has the burden of proof, but that burden is not all that demanding. The smallest showing is enough to convince most administrative law judges that the targeted person should be assessed. There are several new OTA sales tax cases that deeply get into the elements of responsibility and willfulness. You can read them on my website. It will not be a quantum leap for the EDD to use the reasoning in these cases and apply them for payroll tax assessment purposes.
How the EDD Goes About Gathering Information
The assessment of personal level liability under CUIC § 1735, is primarily left to EDD collectors rather than EDD auditors. When an auditor completes his/her examination, an Audit Report (AR) is usually prepared. Portions of the AR ask the auditor to make a preliminary finding. The section of the AR, entitled, “Financial Data” lists several questions relating to potential liability, such as the following:
- Responsible corporate officer/individual liability during the audit period.
- Who managed and directed entity operations?
- Who determined what bills would be paid?
- What business expenses, including rent, utilities or wages were paid with corporate/business funds?
- Who authorized these payments?
- Who signed these checks?
- What documents were reviewed to obtain this information?
- Who was interviewed to obtain this information?
Most of the time auditors leave the responses to these questions blank. They do not bother with them. They leave it up to the collector. Some of these questions are actually answered in the Pre-Audit Questionnaire before the audit even starts.
Enter the EDD Collector
The EDD collector is primarily responsible for determining who should be targeted and assessed under CUIC § 1735. The collector goes about this in a couple of ways. Corporate and LLC employers seeking installment payment arrangements must negotiate with the collector. As part of the initial negotiation process, the collector will send the employer several documents to complete. The most common documents are a Business Financial Statement – EDD Form DE 926C and a Corporate Information Questionnaire – EDD Form DE 204. If you refuse to complete and submit the Questionnaire, the collector may refuse to negotiate with you and instead will begin enforced collection action.
In the event that EDD records show a corporate or LLC deficiency, and the employer has not contacted the collector, the collector will consider assessing personal liability. This is done by sending the targeted individual a form letter, DE 1733. The letter is addressed solely to the individual and states that the EDD is conducting an investigation into the affairs of the corporation or LLC and states that the initial investigation shows that the target held the position of MEMBER with the entity. The letter sets forth the elements of Section 1735 together with the amount of the unpaid liability.
The letter states that if full payment is not received, the EDD will continue its investigation which may result in a Notice of Assessment being issued holding the named target personally liable for the amount due. The letter also encloses the Corporate Information Questionnaire with a request that it be completed and returned to the collector. Finally, the collector requests that he/she be contacted. The letter concludes with a statement that it is not a Notice of Assessment and does not carry any appeal rights.
What to Do?
If you receive a 1733 letter, you are in a difficult spot – you are on the horns of a dilemma. There is no law requiring you to respond to the collector. If you do not respond, you protect yourself from giving any information, and you may also protect yourself from potential criminal exposure. It does not happen very often, but responsible persons are occasionally criminally prosecuted for payroll tax non-compliance. If you do not respond, the collector may ignore your matter, or the collector may issue the Notice of Assessment. If you do respond, be careful. Do not labor under the myth that you can talk the collector out of coming after you. If you do respond and submit the Questionnaire, you have certainly gone onto the EDD’s radar and the probability of being personally assessed is there.
In this Part 1, I have presented the basics of how the EDD goes about issuing a CUIC § 1735 assessment. In Part 2, we will look at the Questionnaire line-by-line.
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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