ASK THE EDD ATTORNEY – HOW TO EFFECTIVELY FIGHT THE EDD’S WORKER INFORMATION RETURN PENALTIES
By Robert S. Schriebman
January 14, 2015
I am getting more and more calls from the business community as well as tax professionals concerning two penalties issued by the EDD as part of the assessment process. The two penalties are CUIC Sections 13052 and 13052.5. These are known as worker information return penalties. They are usually listed at the end of a typical EDD Notice of Assessment following a lengthy list of tax assessments and other penalties. There is a huge relative number difference between each penalty. For example, a typical 13052 penalty can be $1500 while a 13052.5 penalty for the same transgression can be close to $50,000.
What are these penalties? Why are these penalties so burdensome? How can you fight them? This article will discuss both penalties, why they are extremely burdensome and bordering on unfairness, and what is the best method of fighting these penalties before you have to pay them.
THE BURDEN OF CUIC SECTION 13052
If you are an employer required to issue W-2s and/or 1099s and you fail to do so you will be penalized at the rate of $50 per W-2 or 1099. This penalty shall be assessed and collected in the same manner as any tax. You must pay this penalty first before you have any right to challenge it before the CUIAB or in court. The real burden of this penalty is that it piggy-backs onto its sister penalty CUIC Section 13052.5 discussed below. These two penalties travel together. If one is assessed the other will be assessed as well.
THE BURDEN OF CUIC SECTION 13052.5
Most standard EDD penalties have one thing in common – basic due process procedures. If you disagree with the auditor’s position you may file an administrative appeal without first having to pay the penalty. After you file your appeal you can try to resolve most penalties through the EDD’s Settlement Office or take the matter before an administrative law judge. You have a bundle of prepayment due process rights and procedures.
Not so with CUIC Section 13052.5. You have absolutely no prepayment appeal rights at all! The penalty, once assessed, can not be waived. To attempt to waive most EDD penalties the taxpayer or his or her representative must submit a written request that explains why good cause or reasonable cause exists and the reason(s) for his or her noncompliance. The terms “good cause” and “reasonable cause” are used interchangeably and are based on normal business care and prudence. However, you can not use “good cause” or “reasonable cause” to abate this penalty.
The penalty under CUIC Section 13052.5 can not be waived once assessed. One’s only recourse is to first pay the penalty and thereafter file a formal written claim for refund. If the claim is denied, and it usually is, one must go through an expensive and lengthy administrative appeal process. When administrative remedies are exhausted without success one may have his or her day in the Superior Court. All of this is prohibitively expensive and much money has to be at stake to make this laborious process worthwhile. The bottom line – the EDD may keep your penalty money leaving you to the motto, “There is not enough justice to go around.”
HOW MUCH DOES CUIC SECTION 13052.5 COST?
The amount of the penalty is not set forth in Section 13052.5. It is found by reference to R&T Code Section 17041. Under the R&T Code, the amount of the penalty is determined based upon the unreported remuneration for personal services, multiplied by graduated rates with the maximum rate of about 12% adjusted for inflation. This can be a lot of money! This is especially burdensome and troubling because you have no prepayment appeal rights and the penalty can not be waived. Also, the penalty is usually not imposed during the initial audit assessment; the one you may appeal before the Board. It is brought to your attention afterwards either by a supplemental assessment or issued by the agent during settlement negotiations. This comes as a most unpleasant surprise to both the EDD Settlement Officer and the representative. Here is the problem you and your client are facing: You can not appeal this penalty – you can not contest its merits before an Administrative Law Judge (ALJ). You are essentially “dead in the water” as far as your basic due process in concerned. When the penalty is proposed during settlement negotiations, it may be a real deal killer.
HOW TO FIGHT BACK
My motto is “Do not be passive when it comes to penalties – Fight Back!” Here are a few suggestions on how to fight the EDD’s proposed CUIC Sections 13052 and 13052.5 penalties:
Earlier in this article I stated that these two penalties can not be waived or abated for reasonable cause. However, they can be reduced or even eliminated. Let us take a look at how this can be accomplished.
First: Focus on the Big Picture.
Remember what the penalty is all about – the failure to furnish either a W-2 or a 1099 form to a person who performed personal services. Therefore, you must be prepared to prove W-2s or 1099s were issued. Here you must be very careful. EDD auditors tend to issue blanket gross assessments of this penalty without breaking it down to apply only to workers who did not receive either a W-2 or a 1099. If you can prove that your client had 100 workers but issued W-2s or 1099s to 90 workers, the penalty should only apply to those 10 workers who did not receive the required year-end compliance. In our example reducing the penalty by 90% may not be the best result. The ten workers who did not receive 1099s may prove to be a greater reduction than 10%.
Second: Get a Copy of the IRS’ Publication on the Requirements of Filing 1099 Forms.
Go on the IRS’ web site www.irs.gov. Click on the tab that says “Forms and Publications.” Find Publication 1179. This is a how-to booklet that tells you all about the requirements of issuing all of the various IRS 1099 forms together with form 1096. EDD audits always deal with past events. Therefore, you can not issue 1099s today when you should have issued them within the time period covered by the audit. However, you can determine if the EDD has penalized you for failing to issue a 1099 that you were not required to issue.
Third: Demand of the EDD a Specific Breakdown.
Demand of the EDD a specific breakdown as to how and to whom the penalty was computed. This will help you “do the math” and make certain the penalty is accurate and as low as possible. If the EDD auditor is doing a proper job you will be penalized only for the failure to issue W-2s or 1099s to individuals whom the EDD believes were your employees. For example, it is proper for the EDD to issue a penalty for failing to issue a 1099 to John Smith, an individual. However, you should not be penalized for failing to issue a 1099 to Acme Electric Inc.
I actually had a case with the EDD where the auditor issued 13052 and 13052.5 because my client failed to issue a 1099 to “Konika Minolta.” Konika Minolta seems to me to be equivalent to assessing the same penalty for failure to issue a 1099 to Mercedes Benz! There is a lesson here. You must carefully review all of the names in the EDD worksheets to determine if a similar mistake has been made in your case. Finding errors like these can save your client much money.
Fourth: It is Never Too Late to Convince the EDD That They are Wrong.
In my practice I find that EDD audits are never completed. What I mean by this is that an audit is always open and subject to correction. I find that most taxpayers who are on the receiving end of these two tough penalties are taxpayers who are non responsive when the EDD attempts to do its job. When it comes to a non responsive taxpayer the EDD auditor can only issue an estimated assessment. If the taxpayer fails to supply W-2s, 1096s, and 1099s the EDD assumes they were never issued and accordingly assesses the 13052 and 13052.5 penalties. It is never too late to gather up this documentation and send it to the EDD auditor or to the auditor’s supervisor. Upon receipt of the W-2s, etc., the EDD will reopen the audit and reduce or even eliminate completely these penalties. This can be done even if a Final Notice of Assessment has been issued, and the matter is pending before the CUIAB. If the taxpayer fails to file a timely petition and the case is in the hands of an EDD collector the documentation can still be sent to the EDD with a request that the assessment be reduced accordingly.
Fifth: Take Advantage of the Pre-Assessment Conference Offered by the EDD.
During an audit the EDD usually issues a “Proposed Notice of Assessment” offering you and your client a conference prior to issuing a final Notice of Assessment. The “Proposed Notice” is issued several weeks before the “Final Notice.” The proposed notice offers an informal conference with the auditor and his or her supervisor. This may be a good time to discuss the merits of the assessment as well as to determine what penalties will be assessed along with the taxes. There will (usually) be penalties attached to the assessment. Will CUIC Section 13052.5 penalties be assessed as well? If so, the informal conference may be the ideal time to convince the EDD that the penalty is improper or should be withdrawn. You may also be able to resolve the entire proposed assessment during this conference. At this conference you may elect to bring your client’s W-2s and 1099s to show compliance with both CUIC Section 13052.5 and IRS 1041(A).
An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD lawyer, Robert S. Schriebman 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 152