ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – YOU CAN BE CHARGED WITH TAX FRAUD FOR PAYROLL TAX VIOLATIONS
By Robert S. Schriebman
The failure to pay corporation or LLC payroll taxes usually exposes officers, shareholders, and other key employees to civil penalties with both IRS and the EDD. IRS exposure is provided in Internal Revenue Code section 6672 and EDD section 1735 of the CUIC.
The penalties for violating payroll tax compliance are civil penalties. Historically both the IRS and EDD have held off on assessing fraud punishment. However the patience of both the IRS and EDD in holding off on fraud assessments are coming to an end. To quote a line out of a Bob Dylan song, “The times they are a- changin.”
On June 15, 2021, the U.S. Tax Court issued its decision in Bell Capital Management, Inc.) (TC Memo. 2021-74, Dec. 61,884 M). Fraud penalties were sustained against the employer.
This article will discuss the Bell case and will also discuss fraud exposure from the EDD’s point of view.
The Bell Capital Management, Inc. Case (Bell)
The management of Bell must have thought they where going to pull a fast one on the IRS. They hired an offshore employee leasing operation (OEL) in to order to avoid their responsibility for all that normally falls upon an employer. The name of the OEL company was not given in the decision. Apparently the OEL failed to pay federal and state payroll taxes. Bell deliberately underreported and underpaid many quarters of payroll taxes. Bell was held liable for fraud penalties under Code § 6663 and failure to deposit tax penalties under Code § 6656. In addition Bell filed false and fraudulent payroll tax forms with IRS. The IRS found that Bell’s officers intentionally omitted payments for employee benefits with the purpose of invading taxes.
The fraud penalties where initially leveled against Bell as a corporation. This is as far as the Tax Court decision went. But you can be sure that the same fraud charges will be issued against Bell’s officers and shareholders in addition to the Trust Fund Recovery Penalty (TFRP) assessed pursuant to IRC § 6672.
EDD fraud Exposure
Like the IRS, the EDD also has tough treatment for those who think they can out wit the system. First the EDD will assess payroll taxes to the corporation or LLC. The EDD will not stop there. They will assess individual level taxes against responsible persons. While the IRS assess individuals for about 60% of what the entity owes, EDD will assess 100% of every dime owed by the corporation of LLC. These assessments are made pursuing to CUIC § 1735.
In addition to CUIC § 1735 assessments the EDD may also level fraud assessments pursuing to CUIC § 1128. This section provides for two separate fraud penalties, each at the rate of 50% of the tax. Sub § (a) provides for a 50% fraud penalty for the failure to file timely payroll tax returns. Sub § (b) provides for an additional 50% penalty if the employer paid wages and intentionally failed in its payroll tax compliance.
The EDD will not hesitate to issue both fraud penalties at the same time against the same employer
Traditionally and historically both the IRS and EDD have issued fraud penalties only on rare occasions. This may be about to change. Fraud penalties are being assessed with increasing frequency. Businesses struggling to survive in this current pandemic economy may have elected to cut corners, pay their workers in cash and file understated payroll tax returns or no returns at all. EDD auditors are back at their desks and they are overloaded with new audits.
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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