ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE EDD’S PERSONAL LIABILITY ASSESSMENT – TRAP FOR THE UNWARY
By Robert S. Schriebman
CUIC § 1735 states in substance that if a corporation, LLP or LLC fails to pay its employment and withholding taxes, including those assessed by way of audit, individuals within the company can be held personally liable for every dime owed by the entity. There are many articles on this website that discuss 1735 in detail.
EDD auditors conduct audits but do not usually undertake any thorough investigation concerning personal liability for corporate, LLP and/or LLC level assessed taxes. This job is traditionally left to EDD collectors. There is a difference in how business is done by the EDD when compared to IRS assessments of the Trust Fund Recovery Penalty (TFRP). IRS revenue officers conduct thorough investigations including the examination of bank records and witness interviews. A multi-page IRS Form 4180 is also prepared after conducting an interview with the targeted individual. EDD collectors don’t have the luxury of time to complete a thorough investigation. Rather, they shoot from the hip. They adopt a shotgun approach naming several potential responsible persons as targets.
EDD Targets Hang Themselves
In reality, EDD collectors rely upon potential targets to hang themselves. How is this done? First and traditionally, the collector sends out several letters to potential targets asking them to contact the collector for a “friendly chat.” Unsuspecting and naïve targets will call the EDD upon receipt of a contact letter, and try to explain why they are not responsible. Unfortunately, this approach does not work. The collector is not your friend. Once the contact is made, it is too late. The collector has what he/she needs to issue a CUIC § 1735 assessment. This assessment arrives by certified mail and a petition must be filed with the CUIAB promptly to prevent the proposed assessment from becoming final and subject to collection.
A second method used by collectors, and a recent practice, is to call the potential target and require the target to file documents and make payments for corporate-level back taxes. The collector will then email the potential target putting everything in writing and explaining what 1735 is all about. If the potential target complies with the requests in the email, that target has effectively made several damaging admissions of responsibility. Here is an example:
I recently received a call from a potential client informing me of a telephone conference he had with an EDD collector. The collector told him that the call concerned a potential 1735 assessment. The poor chap was ignorant about 1735 and had not read any of the articles on my website addressing the subject. The collector sent an email requiring this poor fellow to do the following:
- Register for eServices for Businesses
- Provide the most recently filed corporate federal tax return (EDD cannot legally require this).
- File missing quarterly payroll tax returns for several designated quarters.
- Pay the taxes owed per the filed returns.
At the end of the email, the collector set forth verbatim CUIC § 1735. The email was signed “Regards,” your friendly EDD collector.
I certainly cannot advise you about handling a contact from an EDD collector. Each case is unique, and stands on its own. I can only tell you that my experience shows that people who respond to government requests for contact wind up on the short end of the stick. Take my observation for what it is worth.
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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