ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHAT ARE THE RISKS OF REJECTING YOUR EDD SETTLEMENT OFFER?
By Robert S. Schriebman
All things considered, my clients and I have been pleased with the results of the EDD’s settlement process. If you are a frequent visitor to this website, you will have noticed several articles discussing the EDD’s settlement process. There are, however, rare occasions when the EDD’s settlement offer is disappointing. The settlement amount may be higher than anticipated or the monthly payments required too steep. What are the risks involved to the employer if one elects to reject the settlement offer from the EDD.
One way to lower monthly payments is to make a substantial initial payment. When paying an EDD settlement in installments, the law requires that a 15% late payment penalty be added to the unpaid settlement amount. There is also interest accruing on the unpaid balance, similar to a bank loan, at the rate of 3%. A substantial down payment reduces proportionately the 15% penalty and, of course, the 3% interest will accrue on a smaller outstanding balance.
Risks When You Totally Reject the Settlement Offer
When an assessment matter is in settlement status, the CUIAB takes the case off its hearing calendar. A rejected settlement offer requires the EDD to notify the CUIAB to place the matter of the assessment back on the hearing calendar. Eventually, the matter will be set for a hearing on the merits with an administrative law judge (ALJ). If you plan on being represented at the hearing by an attorney or other professional, you will be required to pay a substantial fee for that representation. If you lose your hearing, you will be required to pay the full EDD assessment plus interest that has accrued from the original date of the assessment.
With the new ABC Test, now applicable to all tax periods from 2020 forward, the risk of loss in an ALJ hearing is, in my opinion, greater than the risks faced under the old Borello tests. There are also few if any precedent decisions you can cite that are California-based. You would have to research other states that have had the ABC Test in effect, and even those cases are few and far between.
One of the primary advantages of an EDD settlement is that the results and negotiations are not reported to the IRS. The risk of an IRS “Me Too” audit is incredibly small. Other the other hand, if you lose your ALJ hearing, the file is available to the IRS. An IRS assessment is many times higher than the corresponding EDD assessment for the same periods in issue – as much as 5 times the amount! You can think of an EDD settlement payment almost like paying an insurance premium to avoid IRS exposure.
If you do business as a corporation or LLC, and you lose your ALJ hearing, the entity will have total exposure to the assessment and accruing interest; so will you personally. Under CUIC § 1735, the EDD has the right and the ability to ignore the corporate or LLC entity and hold responsible persons within the organization personally liable for every dime owed by the entity.
Sometimes we cannot always get what we want. The Rolling Stones lyric comes into play in the EDD settlement process. You may be disappointed with the settlement offer, but that offer is a lot more beneficial than rejecting that offer and facing a judge hearing on the merits in the new uncertain ABC Test climate. Settlements are beneficial at many levels and they all need to be taken into account and weighted on a scale that will balance the rewards with the risks.
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.
Web Site Article 709