ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHEN DEALING WITH IRS AUDITORS AND COLLECTORS BE AWARE OF THE TEN DEADLY SINS
By Robert S. Schriebman
Failing to cooperate during an EDD audit is never a wise move. The auditor holds most of the cards and has enormous power to the point of causing potential economic ruin. Administrative law judges do not enjoy reading the file and hearing that the employer refused to cooperate. This stacks the deck against the employer when seeking a CUIAB hearing on the merits. Most judges will recommend to both sides that they resume the audit process in good faith to arrive at an accurate assessment based upon a true examination. Failure to cooperate with your assigned EDD auditor often leads to a large estimated Notice of Assessment (NA) having no basis in reality. An estimated assessment cannot be settled through the normal EDD settlement process.
What options are available to a taxpayer-employer refusing to cooperate with the assigned auditor? Let’s look at a real-life scenario where only the names have been changed to protect the guilty.
Planet Earth Oy, Inc. (Oy) was formed to manage and conserve large parcels of underdeveloped land, owned by Gevalt, LLC. Gevalt, LLC is wholly owned by Sam Levy. Oy has been around since 2012 and periodically and irregularly filed EDD payroll tax returns until 2015. For the past several years it had only a caretaker who was treated as an independent contractor. Levy also owns several other businesses either by himself alone, or with partners. In 2019 Sam received notice of the EDD audit of Oy, he did not take it seriously and adopted the position that Oy had no employees and no relevant records to give to the EDD. Sam strongly believed that the EDD had no right to audit Oy because it did not have employees since 2015. The EDD auditor tried many times to contact Sam both by phone and mail, without success. After several months of attempting to work with Sam, the auditor issued a $300,000 estimated NA in early 2021. Sam filed a timely petition with the CUIAB and eventually will be given a judge hearing on the merits.
What Are Oy’s and Sam’s Option?
Option #1: Let the Estimated Assessment Remain Outstanding
Oy currently has an outstanding EDD estimated assessment over $300,000 with accruing interest. According to Sam, Oy has no tangible assets, no bank account, and owns no land. The EDD auditor has suggested undergoing a reexamination with a view to lowering the estimated assessment. However, there is risk to Sam in any reexamination process of the audit expanding and involving Gevalt LLC and one or more of Sam’s businesses. This is known as a horizontal audit. If Oy has no reachable assets, there is nothing available for the EDD to collect.
Option #2: Judge Hearing
Eventually Oy’s case is going to be calendared for a judge hearing on the merits. It is important to be prepared for this hearing. Sam cannot simply appear before a judge and tell the judge that the assessment is incorrect or improper because Oy had no business activity. Sam is going to have to prove the negative – produce evidence proving that Oy was not in business. The judge is also going to know that Sam did not cooperate in the audit process and this may bias the judge against both Sam and Oy. The judge may order Sam to go back to the auditor and work in good faith for an assessment based upon a true examination. If Sam is reluctant to do this, he may lose the case and have the judge affirm the assessment with accruing interest. In this event, the EDD will have the right to undertake collection action against Oy as well as filing a Notice of Tax Lien.
Option #3: Reexamination
A reexamination is always tainted by the original events causing the initial estimated assessment. Oy has been offered an opportunity to submit documentation and information in order to establish that since 2015 Oy has remained essentially inactive. Oy and Sam have the burden of convincing the auditor that Oy had no employees and no payroll. Included in this burden is proof that Sam did not take any compensation for himself over the years. Prior to 2015, there was plenty of evidence to show an active trade or business. As mentioned above, there is also risk that the audit of Oy may become a horizontal examination that will include other businesses wholly or jointly owned by Sam.
Option #4: Sam Levy’s Personal Exposure
Pursuant to CUIC § 1735 Sam does have personal exposure for every dime that Oy now owes or will continue to owe including accruing interest. This exposure exists now, and is not impacted by Oy’s original filing of its petition with the CUIAB. The only way to lower Sam’s exposure is to undergo the reexamination process. This is a 2021 assessment against Oy and the EDD has three years to consider assessing Sam individually.
One is never in a good place when one does not cooperate in the examination process.
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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