ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE NIGHTMARE OF EDD AND IRS PENALTIES AND INTEREST ON UNPAID TAXES
By Robert S. Schriebman
I am often asked to intervene in EDD matters when a distraught prospective client calls and tells me that he or she does not understand how and why they owe the EDD a huge amount of money on what was originally a relatively small tax debt amounting to a few thousand dollars. They are perplexed and express their consternation when they get a call from an EDD collector demanding the immediate payment of $60,000 for an old tax debt that was originally about 10% of the current liability. They ask me, “How can I owe the EDD $60,000?” The fact pattern is always the same. They tell me, “I owed the EDD about $6,000 in 1998 but I did not pay the bill. Now they want me to pay $60,000 – where am I going to get the money? How did this happen to me?”
As a rule of thumb, accruing penalties and interest can amount to well over 40% of an initial tax deficiency. At that time the tax debt is perhaps 2 years old. As time progresses the gap between the unpaid tax portion and the accruing interest on penalties and daily compounding interest grows at an unbelievable rate. With the IRS, there may be light at the end of the tunnel when the 10-year statute of limitations for collection expires. But the EDD accruing deficiency has no true ending statute of limitations. The only relief is provided in the California Constitution allowing relief after 30 years.
On August 31, 2018 the US District Court in Texas issued a decision in the Armstrong case illustrating the horror of accruing interest on taxes and penalties. Under federal law daily compounding interest accrues on the unpaid tax portion, the unpaid penalty portion, and the unpaid interest portion. The State of California also adopted this methodology – so you have daily compounding interest accruing on what is owed to the EDD. The Armstrong case is shocking!
United States of America v. Ronald W. Armstrong, et al., Defendants., U.S. District Court, S.D. Texas, 2018-2 U.S.T.C. ¶50,399, (Aug. 31, 2018)
In this article we will examine the facts in the Armstrong case and then discuss ways of lowering as taxpayer’s exposure from the results in Armstrong.
The Armstrong Case
Ronald Armstrong filed his 2003 and 2004 federal income tax returns late. In 2007 he filed his 2003 return owing $74,000. In 2007 he also filed his 2004 federal income tax return owing approximately $165,000. Over the next 10 years or so Armstrong paid about $73,000 on his 2003 return, and $160,000 on his 2004 return. He thought that he only owed the IRS a relatively small amount of money but was surprised to learn that the IRS demanded over $328,000 in unpaid penalties and accruing interest! There were issues in the case centering around the nature of the release of federal tax liens, but in the end, a federal judge ruled in favor of the IRS – the $328,000, mostly representing penalties and accruing interest was a valid debt owed to the Treasury.
EDD past due deficiencies can run up big bills. You cannot hide behind any statute of limitations for collection. In this respect, debts owed to the EDD may be a bigger nightmare than debts owed to the IRS.
Abating or Reducing Accruing Tax Deficiencies
Both the IRS and the EDD have procedures that allow a taxpayer relief of penalties if that relief is based upon “reasonable cause.” The IRS manual and regulations also have provisions abating accruing interest under very limited and narrow circumstances. Reasonable cause is a vague term but it generally means that penalties may be reduced or eliminated if the taxpayer can show his or her actions were done in a prudent business-like manner. The rules are found in Chapter 20 of the Internal Revenue Manual available on-line at the IRS website. See also IRS Regulation § 301.6651-1 (The exercise of ordinary business care and prudence.)
The EDD will also consider the categories of reasonable cause set forth in the IRS Manual and the regulations. Let’s look at them.
- Death, serious illness or unavoidable absence.
- Fire, casualty, natural disaster or other disturbance.
- Inability to obtain necessary records.
- Lack of funds.
- Ignorance of the law.
- Error or forgetfulness on the part of the taxpayer or a subordinate.
- Reliance by taxpayer on the advice of a competent tax advisor.
- Receipt by taxpayer of erroneous oral advice from the IRS or EDD.
- Receipt by taxpayer of erroneous written advice from the IRS or EDD.
For those of you who have the unfortunate situation that Mr. Armstrong faced, I suggest you read Article 259 on this website. It may offer you a solution and perhaps a way out of your situation. An unpaid EDD or IRS tax deficiency is nothing to be ignored. Acting like an ostrich with your head in the sand, can be a financial disaster.
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.
Web Site Article 350