ASK THE EDD ATTORNEY – HOW TO AVOID MAKING MAJOR MISTAKES DURING YOUR EDD AUDIT AND COLLECTION PROCESSES – PART 2
By Robert S. Schriebman
November 20, 2015
In Part 1, we discussed the major mistakes that are made early-on in the EDD examination process. Many of the mistakes are fear-based. Business owners as well as their professional advisors bury the audit notice or the Notice of Assessment under a stack of papers and conveniently go into a state of denial that can lead to disastrous results. We learned that failure to respond to an audit notice can lead to an assessment based upon pure speculation on the part of the EDD. The EDD auditor is not obligated to “take back” the audit and reopen the case. An audit is not a game of “hide the ball.” On the other extreme an EDD audit is not a capitulation; it is not a surrender of your right to privacy or due process.
In Part 2, we will look at additional major mistakes made during an audit. In addition we will look at the EDD collection process and discuss serious errors made when dealing with an EDD collector, especially when you are attempting to negotiate an installment payment agreement for the EDD deficiency.
Major Mistakes Made During an EDD Audit – Part 2
Failure to challenge penalties. The EDD loves to assess penalties. There are at least 13 categories of penalties in the EDD’s arsenal. Most penalties are assessed for failure to file accurate returns, failure to timely pay, and negligence. Many of these penalties can be bargained away in the post-petition settlement process.
There are however, two very stiff penalties known as Worker Information Return Penalties assessed pursuant to CUIC § 13052 and 13052.5. These penalties are assessed for the failure to timely issue W2s or 1099s. They may also be assessed if W2s and 1099s were issued but they were not accurate and did not reflect either additional compensation stated in the books and records, or assessed by the EDD during the audit. I have several articles on the website that discuss these penalties at length. Please review those articles. These penalties are being assessed at an ever increasing rate. The best time to challenge Worker Information Return Penalties is before the final NA is issued.
I firmly believe in challenging any and all penalties. In my opinion both the IRS and the EDD assert penalties without giving much thought to their impact on the business owner. The best time to challenge penalties is before the final NA is issued.
Failure to timely file a Petition with the CUIAB
Once the EDD issues the final NA, the auditor washes his or her hands of the audit. The ball is now squarely in your court. You have only 30 days from the date of the NA to file a Petition with CUIAB. That is what the law says. However, there are usually 2 dates on the NA – the date it was issued and the date it was mailed to you. The law does not state which day is the day you start counting! In my opinion the earlier date governs. On rare occasions the CUIAB will extend the filing date for an additional 30 days. (See Title 22 Regulation Section 5000 et seq.)
The NA is usually sent by certified mail. If you receive notice from the post office that a certified letter is waiting for you – get it fast! Failure to timely pick up a certified letter is no excuse for failure to timely file your Petition.
Failure to order the audit files. After an EDD audit is completed, you will have the right to request a complete copy of your audit files. This will include the all important Audit Report (AR). There is no charge for these records. I am surprised by how many so-called professional representatives fail to request copies of these files. The AR will give you a complete explanation of the position taken by the auditor in the examination process. Many times there are statements in the AR that are untrue primarily due to a lack of communication from the business owner or the representative. There can be a lot of “misunderstandings” in the AR that are incumbent on you to challenge.
Failure to take advantage of the EDD settlement process. Most EDD audits are fact driven and should be settled instead of brought before an ALJ. The EDD has a small but effective “Settlement Office.” After a Petition is filed you are welcome to contact them for a resolution of your matter. It can take the better part of one year after you submit your Settlement Proposal before you hear back on the possibility of settlement. The Settlement Office can also give you a monthly payment arrangement that is set forth in the Settlement Agreement. Most settlements must be approved by the Attorney General’s Office before they become final.
If you are unhappy with the EDD settlement offer you are welcome to bring your matter before an ALJ. Shopping at the Settlement Office first does not preclude you from a judge hearing.
Mistakes Made During the Collection Process
Failure to communicate with your assigned EDD collector. Many people are unaware or do not appreciate the power of a tax collector. Whether we are talking about an EDD or IRS collector, these people have unlimited power. A tax collector doing his or her job properly cannot be stopped by the Chief Justice of the U.S. Supreme Court.
The EDD collector loves money. They want to be paid and are willing to work out a monthly payment plan providing you cooperate by timely completing the EDD financial statement form and submitting your most current 6 months of bank statements.
All tax collectors expect you to promptly communicate with them by returning their call and giving them the information and documentation necessary for them to do their job. If you are an in-business taxpayer with an in place installment agreement, you must keep current. This means you must timely file your quarterly and annual payroll tax returns and timely pay your taxes in full. Failure to keep current will result in the default of your installment agreement. And a default can lead to enforced collection action such as continuous bank account levies.
Ignoring a CUIC §1735 assessment. CUIC § 1735 allows the EDD to assess responsible individuals for corporate level unpaid assessments. This is a 100% exposure – every penny owed by the corporation may be collected from a responsible officer or employee having direction and control over the day-to-day fiscal matters of the corporation.
Most people get into trouble with this type of assessment because they either ignore the EDD collector or fail to timely file a CUIAB Petition that assesses them directly. A full discussion of CUIC § 1735 is beyond the scope of this article.
Parts 1 and 2 have discussed the major mistakes made in the EDD audit and collection processes. Most of these mistakes are made on account of fear and denial. Many are made by ignorance on the part of the business owner and his or her representative. In my youth my favorite newspaper comic strip character was Pogo. Pogo had a very famous and true saying, “We have met the enemy and they is us.” Pogo must have worked for the EDD.
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.
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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