ASK THE EDD ATTORNEY – HOW TO AVOID PHONY EDD MYTHS AND BAD ADVICE
By Robert S. Schriebman
I enjoy helping my fellow tax practitioners especially when it comes to the proper handling of an EDD audit. This article is being written as a result of a disturbing call I received recently from a CPA who was handling an EDD audit matter for the first time. He had called other so-called experts and was disturbed by the advice they had given him. He was smart to go with his gut and not listen to them.
His client’s audit was completed and the EDD issued a Notice of Assessment. He felt he was caught between the proverbial “Rock and a Hard Place” due to what the so-called experts had advised him. Frankly I was shocked at what he was told. If he would have acted on their advice, both he and his client would be in a world of hurt.
In this article I will set forth the poor recommendations and myths presented to this inexperienced CPA, and tell you why their “advice” was flat wrong.
How to Avoid Phony EDD Myths and Bad Advice
My CPA friend consulted several so-called “experienced” practitioners. Here is what they told him and here are my opinions that differ strongly from theirs.
Myth # 1: It never pays to fight the EDD. There is no question that California taxing agencies including the EDD are large and powerful. This does not mean they are right all the time. Yes, there is a myth that you can’t fight city hall, but when it comes to tax assessments, it’s not always true. Whether we are talking about the EDD, FTB, BOE or the IRS, there is a common legal presumption that the findings of the auditor are correct and it is the taxpayer’s job to prove the EDD wrong. It is very much like “guilty until proven innocent.”
I am in the “tax controversy” business. I have been fighting the IRS, EDD and other agencies for almost 5 decades. In that time I have learned that it is indeed wise and profitable for my clients to challenge tax audits. Auditors are only human. They make plenty of mistakes and false assumptions.
Myth #2: Don’t file a petition with the CUIAB. Rather pay the assessment and file a claim for refund – then take the EDD to court. So-called EDD experts who give this advice are doing a great disservice and do not understand the very nature of the EDD audit process. For example, you cannot simply pay the assessment and go to Superior Court. The Court has no jurisdiction unless and until you exhaust your administrative remedies. This means that a CUIAB proceeding must come first. Going to court is expensive, much more so than an administrative proceeding. Courts are jammed and the current waiting time approaches 5 years. Superior Court judges are, on the whole, not tax experts. Most of them dislike hearing tax cases.
Myth # 3: If the Assessment is against a corporation or an LLC, don’t file a petition with the CUIAB. Instead, just dissolve the corporation or LLC and wait for the EDD to issue a personal assessment against corporate officers and shareholders. Why? It is going to be very hard for the EDD to prove willfulness against the so-called responsible persons.
This may be the worst myth of all! Please read my article 313 in conjunction with reading this article. Unlike IRS Appeals personnel and US Tax Court judges, administrative law judges may not be as knowledgeable in this area as you may think. In order to hold an officer and/or shareholder liable personally under CUIC § 1735, the EDD has to show two things: (1) the individual was in a position of fiscal responsibility in the organization and had control over the day-to-day fiscal affairs of the company; (2) the failure to pay the assessment was willful. In a small corporation or LLC proving these two elements is a slam dunk for the EDD. The decision to dissolve the corporation or LLC alone shows both elements. There is also a legal hurdle. The Secretary of State and Franchise Tax Board may not recognize the dissolution if state taxes are owed. If the officers of the company paid the rent, utilities, or employees before they paid the EDD assessment, that alone is enough to establish willfulness.
The standards for admission of a professional, and even a non-professional, to represent a client before the EDD, are almost non-existent. Virtually anyone can represent an employer before the EDD. That means that they are out there – the so-called experts, who are clueless as to the proper and effective representation before the EDD. It usually pays to get a second opinion or even a third before you spend your hard earned money for competent EDD representation.
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.
Web Site Article 314