ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHAT CONSTITUTES “GOOD CAUSE” FOR THE EDD TO WAIVE A PENALTY?
By Robert S. Schriebman
There are several articles on this website that discuss the abatement of penalties, but from an IRS perspective. The EDD often uses IRS standards and tests in the audit process. Most EDD audits will contain one or more penalties that are available in the EDD’s arsenal of penalties. The EDD has many more audit-related penalties than the IRS. I have often used, and recommended to my readers, the IRS guidelines for the abatement of penalties set forth in Chapter 20 of the Internal Revenue Manual.
This article will compare IRS standards of penalty abatement to the EDD standards for “waiver” of penalties. There is very little, if any, difference in the real world definitions of abatement and waiver.
IRS Standards for Penalty Abatements
The IRS guidelines for the abatement of penalties are set forth in Chapter 20 of the Internal Revenue Manual. There are nine (9) basic guidelines, the most popular of which are the following:
- Death, serious illness or unavoidable absence.
- Fire, casualty, natural disaster or other disturbance.
- Lack of funds
- Ignorance of the law
- Reliance on the advice of a competent tax advisor.
Behind all of the above is the standard of “reasonable cause” for the abatement of the specific penalty. The standard of reasonable cause was established by the US Supreme Court in Boyle v. US, 469 241 (1985). Reasonable cause means reasonable conduct. Abatement should be determined based on the events or parties involved and whether or not the taxpayer exercised ordinary business care and prudence.” This does not require superhuman conduct or analysis. Would an ordinary business person, under the facts and circumstances of the particular matter, act in the way that the taxpayer did?
Is there a difference in the standard used by the IRS and that used by the EDD? Let’s take a look.
Current EDD Guidelines for Penalty Waivers
Put Your Request in Writing
The first thing the EDD will tell you is that all requests for penalty waivers must be in writing. They can be submitted to the assigned auditor, assigned collector, or the following address in Sacramento: Employment Development Dept., PO BOX 826215, MIC 3A, Sacramento, CA 94230-6215.
You Have To Pay The EDD Penalty First
The second important thing to keep in mind is that the EDD requires that you pay the penalty first and then request a waiver. The IRS does not require prepayment of any penalty. If the IRS turns you down, you can file an administrative appeal. If the EDD turns you down you have to go through a time consuming and expensive refund claim process. (Most of the time this discourages the taxpayer from taking on the EDD.)
EDD Good Cause Guidelines
There is no real difference in terminology between the IRS use of “abatement,” and the EDD use of “waiver.” The EDD standard for waiver is “good cause.” The IRS version is “reasonable cause.” Again, there is no substantive difference.
The real difference between IRS and EDD standards for penalty removal are the guidelines used by the EDD as compared to the structured guidelines used by the IRS set forth above.
I have defined the IRS standard of reasonable cause above, vis-à-vis the Supreme Court Boyle decision. Good cause by EDD standards is as follows.
“Good cause exists where the circumstances causing the delay are clearly beyond the control of the employer or where the delay is due to a mistake or inadvertence under circumstances not reasonably foreseeable by the employer. In other words, the delay is not attributable to the employer’s fault.” (DE 231J)
To establish good cause, employers must meet the following standards (DE 6720):
- They acted in good faith (demonstrated a history of timely payment and reporting).
- They acted in a diligent, timely, and prudent manner.
- The circumstances could not have been reasonably foreseen.
The CUIAB has issued two Precedent Decisions that are helpful in determining good cause. In reality there is little difference in their standard as compared to the IRS standard. The Precedent Decisions are P-T-23 and P-T-449. P-T-23 uses the IRS’ “ordinary care and prudence” standards.
Let’s look at P-T-449. This matter involved the delay in the filing of payroll tax returns and payment of taxes. The job of the CUIAB was to determine if good cause existed for the waiver of late filing and late payment penalties.
Here is what the Board had to say: “Good cause imports something more than mere excuse. It must be a substantial reason that affords a legal excuse accompanied by that degree of diligence which men of ordinary prudence would have used under similar circumstances.”
P-T-449 goes on to state that good cause will be found where the circumstances causing the assessment of the penalty are beyond the control of the employer or where the matter is not reasonably foreseeable by the employer. Put another way, good cause exists where the delay is not attributable to the employer’s fault. Good cause can encompass situations where the employer has taken all the necessary precautions to ensure timely filing of tax returns but an isolated unforeseen breakdown caused a delay.
I have always advocated that an employer should never take a penalty lying down. Get up and fight back! The EDD assesses penalties too freely in my opinion and without taking into consideration the employer’s point of view. Both the IRS and the EDD know very well that if they put enough road blocks in the path of penalty relief, the employer will pay the penalty and walk away. True, most penalties are relatively small, but over a period of time the penalties and daily compounding interest really add up. I have also found that it pays to fight back because eventually the EDD may concede the issue or even issue a partial refund. If you don’t ask – you don’t get.
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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